**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

** **
| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                    |
| **For  the quarterly period ended September 30, 2007** |
| ** **                                             | ** ** | ** **                                                                                    |
| **Or**                                                 |
| ** **                                             | ** ** | ** **                                                                                    |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number   333-109686**

 

**RockwoodSpecialties Group, Inc.**

(Exact name of Registrantas specified in its charter)

 

| **Delaware**                     | ** ** | **52-2277390**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 
| **100  Overlook Center, Princeton, New Jersey 08540**      |
|------------------------------------------------------------|
| (Address of principal  executive offices) (Zip Code)       |
| ** **                                                 |
| **(609)  514-0300**                                        |
| (Registrant’s telephone  number, including area code) |

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days.     x  Yes     o  No

 

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

 
| Large  accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer  x |
|---------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the Registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).     o  Yes  x  No

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

The registrant’s common stock, par value $0.01 per share, is notpublicly traded. As of November 8, 2007, there were outstanding 382,000 sharesof common stock of the Registrant, all of which is held by our parent companyRockwood Specialties International, Inc.

 

 

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**TABLE OFCONTENTS**

 

**FORM10-Q**

 
|    | PART I-  FINANCIAL INFORMATION                                                                                    |   |
|---------|-------------------------------------------------------------------------------------------------------------------|--------|
| Item 1  | Financial  Statements (Unaudited)                                                                                 |   |
|    | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2007 and 2006 |   |
|    | Condensed  Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006                             |   |
|    | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2007 and 2006           |   |
|    | Notes to  Condensed Consolidated Financial Statements                                                             |   |
| Item 2  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |   |
| Item 3  | Quantitative  and Qualitative Disclosures about Market Risk                                                       |   |
| Item 4  | Controls and  Procedures                                                                                          |   |
|    |                                                                                                              |   |
|    | PART II- OTHER  INFORMATION                                                                                       |   |
| Item 1  | Legal Proceedings                                                                                                 |   |
| Item 1A | Risk Factors                                                                                                      |   |
| Item 2  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      |   |
| Item 3  | Defaults  Upon Senior Securities                                                                                  |   |
| Item 4  | Submission  of Matters to a Vote of Security Holders                                                              |   |
| Item 5  | Other Information                                                                                                 |   |
| Item 6  | Exhibits                                                                                                          |   |
|    |                                                                                                              |   |
|    | Signatures                                                                                                        |   |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**Item 1.Financial Statements (Unaudited).**

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                            | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                                             |       | $                                | 829.6      |                            | $          | 739.8 |   | $ | 2,476.4 |   | $ | 2,235.4 |   |
| Cost of products  sold                                                |       | 574.3                            |       | 510.1                           |       | 1,691.4 |   | 1,537.0 |   |
| Gross profit                                                          |       | 255.3                            |       | 229.7                           |       | 785.0 |   | 698.4 |   |
| Selling, general  and administrative expenses                         |       | 159.6                            |       | 147.8                           |       | 474.6 |   | 436.7 |   |
| Restructuring  charges, net                                           |       | 2.9                              |       | 1.7                             |       | 8.9 |   | 3.9 |   |
| Gain on sale of  assets                                               |       | (0.1                             | )          | —                          |       | (5.3 | ) | (0.4 | ) |
| Operating income                                                      |       | 92.9                             |       | 80.2                            |       | 306.8 |   | 258.2 |   |
| Other income  (expenses):                                             |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                      |       | (57.0                            | )          | (60.6                           | )          | (158.7 | ) | (148.1 | ) |
| Interest income                                                       |       | 1.9                              |       | 1.1                             |       | 11.0 |   | 3.6 |   |
| Loss on early  extinguishment of debt                                 |       | —                           |       | —                          |       | (19.4 | ) | — |   |
| Refinancing  expenses                                                 |       | —                           |       | —                          |       | (0.9 | ) | — |   |
| Foreign exchange  gain, net                                           |       | 7.6                              |       | 4.8                             |       | 11.3 |   | 7.0 |   |
| Other, net                                                            |       | —                           |       | 0.3                             |       | (0.1 | ) | 2.1 |   |
| Other income  (expenses), net                                         |       | (47.5                            | )          | (54.4                           | )          | (156.8 | ) | (135.4 | ) |
| Income from  continuing operations before taxes and minority interest |       | 45.4                             |       | 25.8                            |       | 150.0 |   | 122.8 |   |
| Income tax  provision                                                 |       | 17.9                             |       | 9.7                             |       | 61.9 |   | 50.0 |   |
| Income from  continuing operations before minority interest           |       | 27.5                             |       | 16.1                            |       | 88.1 |   | 72.8 |   |
| Minority  interest in continuing operations                           |       | (2.8                             | )          | —                          |       | (6.2 | ) | — |   |
| Net income from  continuing operations                                |       | 24.7                             |       | 16.1                            |       | 81.9 |   | 72.8 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | 1.9                             |       | 0.5 |   | 26.5 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                          |       | 115.7 |   | — |   |
| Minority  interest in discontinued operations                         |       | —                           |       | 3.4                             |       | (0.1 | ) | (0.8 | ) |
| Net income                                                            |       | $                                | 24.7       |                            | $          | 21.4 |   | $ | 198.0 |   | $ | 98.5 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts)**

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                           |       |                   |       |                  |       |
| Current assets:                                                                                      |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                           |       | $                      | 101.6      |                  | $          | 25.9 |   |
| Accounts  receivable, net                                                                            |       | 548.3                  |       | 463.4                 |       |
| Inventories                                                                                          |       | 511.6                  |       | 445.4                 |       |
| Deferred income  taxes                                                                               |       | 16.1                   |       | 15.1                  |       |
| Prepaid expenses  and other current assets                                                           |       | 68.1                   |       | 40.8                  |       |
| Assets of  discontinued operations                                                                   |       | —                 |       | 490.6                 |       |
| Total current  assets                                                                                |       | 1,245.7                |       | 1,481.2               |       |
| Property, plant  and equipment, net                                                                  |       | 1,531.6                |       | 1,374.9               |       |
| Goodwill                                                                                             |       | 1,826.3                |       | 1,717.7               |       |
| Other intangible  assets, net                                                                        |       | 672.2                  |       | 539.6                 |       |
| Deferred debt  issuance costs, net of accumulated amortization of $28.4 and $25.4,  respectively     |       | 42.6                   |       | 51.6                  |       |
| Deferred income  taxes                                                                               |       | 21.8                   |       | —                |       |
| Other assets                                                                                         |       | 41.2                   |       | 56.1                  |       |
| Total assets                                                                                         |       | $                      | 5,381.4    |                  | $          | 5,221.1 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                                       |       |                   |       |                  |       |
| Current  liabilities:                                                                                |       |                   |       |                  |       |
| Accounts payable                                                                                     |       | $                      | 271.2      |                  | $          | 290.3 |   |
| Income taxes  payable                                                                                |       | 7.6                    |       | 0.2                   |       |
| Accrued  compensation                                                                                |       | 91.8                   |       | 85.9                  |       |
| Restructuring  liability                                                                             |       | 13.8                   |       | 8.5                   |       |
| Accrued expenses  and other current liabilities                                                      |       | 211.2                  |       | 178.5                 |       |
| Deferred income  taxes                                                                               |       | 4.6                    |       | —                |       |
| Senior secured  revolving credit facility                                                            |       | —                 |       | 37.0                  |       |
| Long-term debt,  current portion                                                                     |       | 107.3                  |       | 80.8                  |       |
| Liabilities of  discontinued operations                                                              |       | —                 |       | 171.1                 |       |
| Total current  liabilities                                                                           |       | 707.5                  |       | 852.3                 |       |
| Long-term debt                                                                                       |       | 2,447.7                |       | 2,720.9               |       |
| Pension and  related liabilities                                                                     |       | 382.3                  |       | 353.0                 |       |
| Deferred income  taxes                                                                               |       | 84.6                   |       | 48.5                  |       |
| Other  liabilities                                                                                   |       | 160.0                  |       | 94.2                  |       |
| Total  liabilities                                                                                   |       | 3,782.1                |       | 4,068.9               |       |
| Minority  interest                                                                                   |       | 180.8                  |       | 33.6                  |       |
|                                                                                                 |       |                   |       |                  |       |
| Stockholder’s  equity:                                                                          |       |                   |       |                  |       |
| Common stock  ($0.01 par value, 1,000,000 shares authorized, 382,000 shares issued and  outstanding) |       | —                 |       | —                |       |
| Paid-in capital                                                                                      |       | 1,005.4                |       | 1,005.4               |       |
| Accumulated  other comprehensive income                                                              |       | 346.0                  |       | 236.7                 |       |
| Retained  earnings (deficit)                                                                         |       | 67.1                   |       | (123.5                | )          |
| Total  stockholder’s equity                                                                     |       | 1,418.5                |       | 1,118.6               |       |
| Total  liabilities and stockholder’s equity                                                     |       | $                      | 5,381.4    |                  | $          | 5,221.1 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                                                                                                | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                                | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                |       |                            |       |   |   |
| Net income                                                                                                                                                                |       | $                               | 198.0      |   | $ | 98.5 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                                                                        |       |                            |       |   |   |
| Income from  discontinued operations, net of tax                                                                                                                          |       | (0.5                            | )          | (26.5 | ) |
| Gain on sale of  discontinued operations, net of tax                                                                                                                      |       | (115.7                          | )          | — |   |
| Minority  interest in discontinued operations                                                                                                                             |       | 0.1                             |       | 0.8 |   |
| Depreciation and  amortization                                                                                                                                            |       | 165.3                           |       | 140.9 |   |
| Deferred financing  costs amortization                                                                                                                                    |       | 6.9                             |       | 7.2 |   |
| Loss on early  extinguishment of debt (including $4.9 million of noncash write-offs on deferred  financing costs)                                                         |       | 19.4                            |       | — |   |
| Foreign exchange  gain                                                                                                                                                    |       | (11.3                           | )          | (7.0 | ) |
| Fair value  adjustment of derivatives                                                                                                                                     |       | 15.4                            |       | (6.2 | ) |
| Bad debt  provision                                                                                                                                                       |       | 1.5                             |       | 1.9 |   |
| Stock-based  compensation                                                                                                                                                 |       | 2.4                             |       | — |   |
| Deferred income  taxes                                                                                                                                                    |       | 24.2                            |       | 29.4 |   |
| Gain on sale of  assets                                                                                                                                                   |       | (5.3                            | )          | (0.4 | ) |
| Minority  interest in continuing operations                                                                                                                               |       | 6.2                             |       | — |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                                  |       |                            |       |   |   |
| Accounts  receivable                                                                                                                                                      |       | (26.0                           | )          | (31.6 | ) |
| Inventories,  including inventory write-up reversal                                                                                                                       |       | (2.8                            | )          | (16.5 | ) |
| Prepaid expenses  and other assets                                                                                                                                        |       | (5.5                            | )          | 20.6 |   |
| Accounts payable                                                                                                                                                          |       | (26.1                           | )          | (22.4 | ) |
| Income taxes  payable                                                                                                                                                     |       | 6.3                             |       | 8.1 |   |
| Accrued expenses  and other liabilities (including intercompany transactions with discontinued  operations of $45.0 million for the nine months ended September 30, 2006) |       | 37.8                            |       | (22.4 | ) |
| Net cash  provided by operating activities of continuing operations                                                                                                       |       | 290.3                           |       | 174.4 |   |
| Net cash  provided by operating activities of discontinued operations                                                                                                     |       | 1.6                             |       | 72.2 |   |
| **Net  cash provided by operating activities**                                                                                                                            |       | 291.9                           |       | 246.6 |   |
| ** **                                                                                                                                                                |       |                            |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                |       |                            |       |   |   |
| Acquisitions, including  transaction fees paid, net of cash acquired                                                                                                      |       | (168.4                          | )          | (13.4 | ) |
| Capital  expenditures, excluding capital leases                                                                                                                           |       | (140.2                          | )          | (119.2 | ) |
| Proceeds from  formation of Viance joint venture, net                                                                                                                     |       | 73.0                            |       | — |   |
| Proceeds on sale  of assets                                                                                                                                               |       | 13.7                            |       | 3.9 |   |
| Net cash used in  investing activities of continuing operations                                                                                                           |       | (221.9                          | )          | (128.7 | ) |
| Net cash  provided by (used in) investing activities of discontinued operations                                                                                           |       | 421.1                           |       | (27.1 | ) |
| **Net  cash provided by (used in) investing activities**                                                                                                                  |       | 199.2                           |       | (155.8 | ) |
| ** **                                                                                                                                                                |       |                            |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                |       |                            |       |   |   |
| Proceeds from  senior secured credit facilities                                                                                                                           |       | —                          |       | 170.2 |   |
| Repayment of  2011 Notes                                                                                                                                                  |       | (273.4                          | )          | — |   |
| Repayment of  senior secured credit facilities                                                                                                                            |       | (94.1                           | )          | (242.7 | ) |
| Payments on  other long-term debt                                                                                                                                         |       | (22.2                           | )          | (4.3 | ) |
| Payments related  to early extinguishment of debt                                                                                                                         |       | (14.5                           | )          | — |   |
| Net cash used in  financing activities of continuing operations                                                                                                           |       | (404.2                          | )          | (76.8 | ) |
| Net cash used in  financing activities of discontinued operations                                                                                                         |       | —                          |       | (43.9 | ) |
| **Net  cash used in financing activities**                                                                                                                                |       | (404.2                          | )          | (120.7 | ) |
| ** **                                                                                                                                                                |       |                            |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                                                                             |       | (9.6                            | )          | (2.4 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                                                                                     |       | 77.3                            |       | (32.3 | ) |
| Less increase in  cash and cash equivalents from discontinued operations, net of sale proceeds                                                                            |       | (1.6                            | )          | (1.3 | ) |
| Increase  (decrease) in cash and cash equivalents from continuing operations                                                                                              |       | 75.7                            |       | (33.6 | ) |
| Cash and cash  equivalents of continuing operations, beginning of period                                                                                                  |       | 25.9                            |       | 96.4 |   |
| Cash and cash  equivalents of continuing operations, end of period                                                                                                        |       | $                               | 101.6      |   | $ | 62.8 |   |
|                                                                                                                                                                      |       |                            |       |   |   |
| Supplemental  disclosures of cash flow information:                                                                                                                       |       |                            |       |   |   |
| Interest paid,  net                                                                                                                                                       |       | $                               | 118.4      |   | $ | 114.4 |   |
| Income taxes  paid, net of refunds                                                                                                                                        |       | $                               | 31.4       |   | $ | 17.4 |   |
| Non-cash  investing activities:                                                                                                                                           |       |                            |       |   |   |
| Acquisition of  equipment under capital leases                                                                                                                            |       | $                               | 0.6        |   | $ | 0.2 |   |
| Decrease in  liabilities for property, plant and equipment                                                                                                                |       | $                               | (15.6      | ) | $ | (12.6 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**Notes To Condensed Consolidated Financial Statements(Unaudited)**

** **

**1.****      DESCRIPTION OF BUSINESS ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

** **

***BusinessDescription, Background***— Rockwood Specialties Group, Inc.and Subsidiaries (“Rockwood” or the “Company”) is a global developer,manufacturer and marketer of high value-added specialty chemicals and advancedmaterials used for industrial and commercial purposes.

 

Rockwood was formed in connection with an acquisition of certainassets, stock and businesses from Laporte plc (“Laporte”) on November 20, 2000(the “KKR Acquisition”) by affiliates of Kohlberg Kravis Roberts & Co. L.P.(“KKR”). The businesses acquired focused on specialty compounds, iron-oxidepigments, timber-treatment chemicals, clay-based additives, pool and spachemicals, and electronic chemicals in semiconductors and printed circuitboards. The Company is an indirect wholly-owned subsidiary of RockwoodHoldings, Inc. (“Holdings”). As discussed in Note 16, “Subsequent Event,” theCompany entered into a definitive agreement on October 7, 2007 to sell itselectronics business, excluding its French electronics business and its waferreclaim business. The French electronics business is subject to a put optionexercisable by the Company.

 

On July 31, 2004, the Company completed the acquisition of certainbusinesses of Dynamit Nobel from mg technologies ag, now known as GEA GroupAktiengesellschaft. The businesses acquired are focused on highly specializedmarkets and consist of: titanium dioxide pigments; surface treatment andlithium chemicals; and advanced ceramics.

 

On January 9, 2007, the Company completed the sale of its GroupeNovasep subsidiary which represented one of its reportable segments. As a result,the condensed consolidated financial statements have been reclassified toreflect the former Groupe Novasep segment as a discontinued operation for allperiods presented. See Note 3, “Discontinued Operations,” for further details.

 

***Basis of Presentation***—Theaccompanying condensed financial statements of Rockwood are presented on aconsolidated basis. All significant intercompany accounts and transactions havebeen eliminated in consolidation. Certain prior year amounts have beenreclassified to conform to current-year classification.

 

The interim financial statements included herein are unaudited. Thecondensed consolidated financial statements are presented based upon accountingprinciples generally accepted in the United States of America (“U.S. GAAP”),except that certain information and footnote disclosures, normally included infinancial statements prepared in accordance with U.S. GAAP, have been condensedor omitted. The accompanying condensed consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and the notesthereto contained in the Company’s 2006 Form 10-K. In the opinion ofmanagement, this information contains all adjustments necessary, consisting ofnormal and recurring accruals, for a fair presentation of the results for theperiods presented.

 

The results of operations for the interim periods are not necessarilyindicative of the results of operations for the full year.

 

The Company’s minority interest in continuing operations represents thetotal of the minority party’s interest in certain investments (principallyViance, LLC) that are consolidated but less than 100% owned.  See Note 4, “Viance,LLC Joint Venture,” for further details.  In the condensed consolidatedbalance sheet, the minority interest balance as of December 31, 2006 relates tothe former Groupe Novasep segment that was sold in January 2007.

 

***Nature ofOperations/Segment Reporting***—The Company is a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials. The Company currently operates in various businesslines within its six reportable segments consisting of: (1) SpecialtyChemicals, which includes lithium compounds and chemicals, metal surfacetreatment chemicals, and synthetic metal sulfides, (2) Performance Additives,which includes color pigments and services, timber treatment chemicals,clay-based additives, and water treatment chemicals, (3) Titanium DioxidePigments, which consists of titanium dioxide pigments, and zinc- andbarium-based compounds, (4) Advanced Ceramics, which includesceramic-on-ceramic ball head and liner components used in hip-joint prosthesessystems, ceramic cutting tools and a range of other ceramic components, (5)Specialty Compounds, which consists of plastic compounds and (6) Electronics,which consists of electronic chemicals and photomasks, although the Companywill no longer operate its Electronics segment upon the closing of the sale ofthis segment, which is expected to occur in the fourth quarter of 2007, subjectto regulatory approval (see Note 16, “Subsequent Event,” for more details).

 

The basis for determining an enterprise’s operating segments is themanner in which financial information is used internally by the enterprise’schief operating decision maker, the Company’s Chief Executive Officer. See Note5, “Segment Information,” for further segment reporting information.

 

***Use of Estimates***—Thepreparation of financial statements and related disclosures in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements, and revenue and expenses during the 

 

6

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periods reported. These estimates include, among other things,assessing the collectibility of accounts receivable, the use and recoverabilityof inventory, the valuation of deferred tax assets, the measurement of theaccrual for uncertain tax benefits, impairment of goodwill as well as property,plant and equipment and other intangible assets, the accrual of environmentaland legal reserves and the useful lives of tangible and intangible assets,among others. Actual results could differ from those estimates. Suchestimates also include the fair value of assets acquired and liabilitiesassumed allocated to the purchase price of business combinations consummated.

 

***Risks Associatedwith International Operations and Currency Risk***—TheCompany’s international operations are subject to risks normally associatedwith foreign operations, including, but not limited to, the disruption ofmarkets, changes in export or import laws, restrictions on currency exchangesand the modification or introduction of other governmental policies withpotentially adverse effects. A majority of the Company’s sales and expenses aredenominated in currencies other than U.S. dollars. Changes in exchange ratesmay have a material effect on the Company’s reported results of operations andfinancial position. In addition, a significant portion of the Company’sindebtedness is denominated in euros.

 

***Related PartyTransactions***—Rockwood has engaged in transactions withcertain related parties including KKR and DLJ Merchant Banking Partners III,L.P. (“DLJMB”) and affiliates of each. Information concerning certaintransactions is included in the Rockwood Holdings, Inc. 2006 Form 10-K in Item13, “Certain Relationships and Related Transactions, and Director Independence.”There have been no significant changes to our related party transactions forthe period ended September 30, 2007.

 

***Revenue Recognition***—TheCompany recognizes revenue when the earnings process is complete. Product salesare recognized when products are shipped to the customer in accordance with theterms of the contract of sale, title and risk of loss have been transferred,collectibility is reasonably assured, and pricing is fixed or determinable.Accruals are made for sales returns and other allowances based on the Company’sexperience. Revenue under service agreements, which was less than 1% ofconsolidated revenues in 2006, is realized when the service is performed.

 

***Foreign CurrencyTranslation***—The functional currency of each of theCompany’s foreign subsidiaries is primarily the respective local currency.Balance sheet accounts of the foreign operations are translated into U.S.dollars at period-end exchange rates and income and expense accounts aretranslated at average exchange rates during the period. Translation gains andlosses related to net assets located outside the U.S. are shown as a componentof accumulated other comprehensive income. Gains and losses resulting fromforeign currency transactions (transactions denominated in a currency otherthan the entity’s functional currency) are included in determining net incomefor the period in which exchange rates change, except for gains or losses oneuro-denominated debt that is designated as a net investment hedge of theCompany’s euro-denominated investments and gains or losses on certainintercompany loans that are of a long-term nature for which settlement is notplanned or anticipated in the foreseeable future which are reported and accumulatedin the same manner as translation adjustments. These loans are all relatedto intercompany debt arrangements. As of September 30, 2007, intercompany debtarrangements deemed to be of a long-term investment nature for which settlementis not planned or anticipated in the foreseeable future is predominantlyrelated to €519.4 million ($741.0 million using the Friday, September 28,2007 exchange rate of €1.00 = $1.4267) of intercompany loans.

 

***Derivatives***—TheCompany accounts for derivatives based on Statement of Financial AccountingStandards (“SFAS”) 133,*Accounting forDerivative Instruments and Hedging Activities*, as amended andinterpreted. SFAS 133 requires that all derivatives be recognized as eitherassets or liabilities at fair value. Changes in the fair value of derivativesnot designated as hedging instruments are recognized currently in earningswhile changes in the fair value of derivatives that are designated as hedginginstruments are recognized as a component of comprehensive income. The Companyuses derivative instruments to manage its exposure to market risks associatedwith fluctuations in interest rates and foreign currency exchange rates. See “ComprehensiveIncome” section of Note 1 for the impact of the Company’s net investmenthedges. The Company does not enter into derivative contracts for trading purposesnor does it use leveraged or complex instruments.

 

***Pension,Postemployment and Postretirement Costs***—Defined benefitcosts and liabilities have been determined in accordance with SFAS 87,*Employers’ Accounting for Pensions* andSFAS 158,*Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132 (R)*. Other postretirement benefit costs andliabilities have been determined in accordance with SFAS 106,*Employers’ Accounting for Postretirement BenefitsOther Than Pensions* and SFAS 158,*Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R).*Postemployment benefit costs and liabilities have been determined in accordancewith SFAS 112,*Employers’ Accounting forPostemployment Benefits.*

* *

***Income Taxes***—Incometaxes are determined in accordance with SFAS 109,*Accounting for Income Taxes* and FinancialAccounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes—AnInterpretation of FASB Statement No. 109*. Deferred tax assets andliabilities are recognized for future tax consequences attributable todifferences between the financial statement carrying amounts and thecorresponding tax carrying amounts of assets and liabilities. Deferred taxassets are also recognized for tax loss and tax credit carryforwards. Avaluation allowance is recorded to reduce deferred tax assets when it is morelikely than not that a tax benefit will not be realized based on availableevidence weighted toward evidence that is objectively 

 

7

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verifiable. Deferred taxes are not provided on the undistributedearnings of subsidiaries as such amounts are considered to be permanentlyinvested or could be distributed to the parent company in a tax free manner.

 

***ComprehensiveIncome***—Comprehensive income includes net income and theother comprehensive income components which include unrealized gains and lossesfrom foreign currency translation and from certain intercompany foreigncurrency loan transactions that are of a long-term investment nature as well asminimum pension liability adjustments that are recorded directly into aseparate section of stockholder’s equity in the balance sheets. Also includedare the net investment hedges discussed below. Foreign currency translationamounts are not adjusted for income taxes since they relate to indefinitelength investments in non-U.S. subsidiaries and certain intercompany debt.

 

Comprehensive income is summarized as follows:

 
| ** **                                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                    | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                       |       | $                                | 24.7       |                            | $          | 21.4 |   | $ | 198.0 |   | $ | 98.5 |   |
| Pension related  adjustments, net of tax         |       | (0.8                             | )          | —                          |       | (0.7 | ) | 4.6 |   |
| Foreign currency  translation                    |       | 77.9                             |       | (4.8                            | )          | 139.3 |   | 79.3 |   |
| Intercompany  foreign currency loan transactions |       | 38.3                             |       | (12.0                           | )          | 49.9 |   | 89.4 |   |
| Net investment  hedge, net of tax                |       | (54.8                            | )          | 12.5                            |       | (79.2 | ) | (70.7 | ) |
| Total  comprehensive income                      |       | $                                | 85.3       |                            | $          | 17.1 |   | $ | 307.3 |   | $ | 201.1 |   |

 

In November 2004, the Company completed the sale of€375.0 million aggregate principal amount of 7.625% senior subordinatednotes and $200.0 million aggregate principal amount of 7.500% seniorsubordinated notes, both due in 2014 (“2014 Notes”). In connection with the2014 Notes, the Company entered into a cross-currency swap with a five-yearterm and a notional amount of €155.6 million that effectively convertedthe U.S. dollar fixed-rate debt in respect of the dollar notes sold into eurofixed-rate debt. The Company has designated this contract as a hedge of theforeign currency exposure of its net investment in its euro-denominatedoperations. There was no ineffective portion of the net investment hedge as ofSeptember 30, 2007. The Company does not expect any of the loss on the net investmenthedge residing in comprehensive income at September 30, 2007 to be reclassifiedinto earnings during the subsequent twelve months.

 

In addition, we designated the remaining portion of oureuro-denominated debt that is recorded on our U.S. books as a net investmenthedge of our euro-denominated investments as of October 1, 2005(euro-denominated debt of €680.9 million or $971.4 million based on the Friday,September 28, 2007 exchange rate of €1.00 = $1.4267).  As a result, effective October 1, 2005, anyforeign currency gains and losses resulting from the euro-denominated debtdiscussed above are accounted for as a component of accumulated othercomprehensive income. There was no ineffective portion of the net investmenthedge as of September 30, 2007. The Company does not expect any of the loss onthe net investment hedge residing in comprehensive income at September 30, 2007to be reclassified into earnings during the subsequent twelve months.

 

***Accounting forEnvironmental Liabilities***—In the ordinary course ofbusiness, Rockwood is subject to extensive and changing federal, state, localand foreign environmental laws and regulations, and has made provisions for theestimated financial impact of environmental cleanup related costs. Rockwood’spolicy has been to accrue costs of a non-capital nature related toenvironmental clean-up when those costs are believed to be probable and can bereasonably estimated. If the aggregate amount of the obligation and the amountand timing of the cash payments for a site are fixed or reliably determinable,the liability is discounted. Expenditures that extend the life of the relatedproperty or mitigate or prevent future environmental contamination arecapitalized and expenditures related to existing conditions resulting from pastor present operations and from which no current or future benefit isdiscernible are immediately expensed. The quantification of environmentalexposures requires an assessment of many factors, including changing laws andregulations, advancements in environmental technologies, the quality ofinformation available related to specific sites, the assessment stage of eachsite investigation and the length of time involved in remediation orsettlement. In some matters, Rockwood may share costs with other parties.Rockwood does not include anticipated recoveries from insurance carriers orother third parties in its accruals for environmental liabilities.

 

***Cash and CashEquivalents***—All highly liquid instruments and moneymarket funds with an original maturity of three months or less are consideredto be cash equivalents. The carrying amount approximates fair value because ofthe short maturities of these instruments.

 

***Stock-BasedCompensation***—Holdings has in place the 2005 Amended andRestated Stock Purchase and Option Plan of Rockwood Holdings, Inc. andSubsidiaries (the “Plan”). Under the Plan, Holdings may grant stock options,restricted stock and other stock-based awards to the Company’s employees anddirectors and allow employees and directors to purchase shares of its commonstock. There are 10,000,000 authorized shares available for grant under thePlan. Effective January 1, 2006, the Company adopted SFAS No. 123R,**

 

8

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*Share-Based Payment*,and related interpretations and began expensing the grant-date fair value ofstock options.

 

The Company adopted SFAS No. 123R using the modified prospectiveapproach and therefore has not restated prior periods. In accordance with SFASNo. 123R, beginning in the first quarter of 2006, the Company recordedcompensation cost for the unvested portion of awards issued after February2005, which is the date Holdings first filed its registration statement withthe Securities and Exchange Commission (“SEC”). The compensation cost for stockoptions and restricted stock units recorded under the Plan caused income fromcontinuing operations before taxes and minority interest to decrease by $1.5million and less than $0.1 million for the three months ended September 30,2007 and 2006, respectively, and to decrease by $2.2 million and $0.1 millionfor the nine months ended September 30, 2007 and 2006, respectively.

 

As discussed in Note 11, “Stock-Based Compensation,” Holdings grantedadditional stock options and performance restricted stock units in the secondquarter of 2007 to certain employees of Rockwood Corporate Headquarters and itsbusiness units. The performance restricted stock units contain a provision inwhich the units shall immediately vest and become converted into the right toreceive a cash payment upon a change in control as defined in the equityagreement. As the provisions for redemption are outside the control of theCompany, the fair value of these units as of September 30, 2007 have beenrecorded as mezzanine equity (outside of permanent equity) in the CondensedConsolidated Balance Sheets of Holdings.

 

***Recent AccountingPronouncements***—The Company adopted the following in thefirst quarter of 2007:

 

In June 2006, a final consensus was reached on Emerging Issues TaskForce (“EITF”) Issue No. 06-3,*How TaxesCollected From Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross Versus Net Presentation).*  The scope of this Issue includes any taxassessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer and may include,but is not limited to, sales, use, value added, and some excise taxes. ThisIssue affirms that the presentation of taxes in the income statement should beon either a gross (included in revenues and costs) or a net (excluded fromrevenues) basis and that this is an accounting policy decision that should bedisclosed pursuant to APB Opinion No. 22. In addition, if such taxes are significantand reported on a gross basis, the amounts of those taxes should be disclosedin interim and annual financial statements. The Company adopted this EITF inthe first quarter of 2007 and has adopted an accounting policy that requirestaxes collected from customers and remitted to governmental authorities to bereported on a net basis (excluded from revenues). The adoption of this EITF didnot have a material impact on the Company’s financial statements.

 

In July 2006, FIN 48,*Accounting forUncertainty in Income Taxes*—*AnInterpretation of FASB Statement No. 109*, was issued. FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109.FIN 48 also prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The provisions of FIN 48 are effectivefor fiscal years beginning after December 15, 2006. In May 2007, the FASBissued Staff Position (“FSP”) FIN 48-1,*Definition of Settlement in FASB Interpretation No. 48.* This FSPamends FIN 48 to provide guidance on how an enterprise should determine whethera tax provision is effectively settled for the purpose of recognizingpreviously unrecognized tax benefits. See Note 10, “Income Taxes,” for further details on the impact ofadopting FIN 48.

 

In September 2006, the FASB issued FSP No. AUG AIR-1,*Accounting for Planned Major Maintenance Activities*.This FSP prohibits the use of the accrue-in-advance method of accounting forplanned major maintenance activities in annual and interim financial reportingperiods. It continues to permit the application of three alternative methods ofaccounting for planned maintenance activities: direct expense,built-in-overhaul and deferral methods. In addition, this FSP requiresdisclosure of the method of accounting for planned maintenance activitiesselected. The Company adopted this FSP in the first quarter of 2007 and hasadopted an accounting policy that requires planned major maintenance activitiesto be accounted for under the direct-expense method. The adoption of this FSPdid not have a material impact on the Company’s financial statements.

 

The Company will adopt the following standards on January 1, 2008:

 

In September 2006, SFAS No. 157,*Fair Value Measurements*, was issued. This statement defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles (“GAAP”), and expands disclosures about fair valuemeasurements. This statement does not require any new fair value measurements.This statement is effective for the Company as of January 1, 2008. The Companyis currently evaluating the impact this statement will have on its financialstatements.

 

In February 2007, SFAS No. 159,*TheFair Value Option for Financial Assets and Financial Liabilities*—*Including an Amendment of FASB Statement No. 115*was issued. This standard permits an entity to choose to measure many financialinstruments and certain other items at fair value and permits all entities tochoose to measure eligible items at fair value at specified election dates.This statement is effective for the Company as of January 1, 2008. The Companyis currently evaluating the impact this statement will have on its financialstatements.

 

9

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**2.****      ACQUISITIONS:**

** **

On August 31, 2007, the Company completed theacquisition of the global color pigments business of Elementis plc for apurchase price of approximately $140 million. This acquisition includesfacilities in North America, Europe and China and will be integrated into theColor Pigments and Services business, which is part of the PerformanceAdditives segment. The financial position of the business acquired is includedin the condensed consolidated balance sheet as of September 30, 2007. Theresults of operations and cash flows of the business acquired for the periodsafter August 31, 2007 are included for the three and nine months endedSeptember 30, 2007. The excess of the total purchase price over the estimatedfair value of the net assets acquired at closing has been allocated togoodwill, estimated to be $8.7 million as of September 30, 2007. The allocationof the purchase price to the identifiable assets acquired is preliminary and isexpected to be completed no later than the third quarter of 2008. Theacquisitions completed in 2007, individually and in the aggregate, are notmaterial to the Company’s operations, financial position and cash flows.

 

**3.****      DISCONTINUED OPERATIONS:**

** **

On January 9, 2007, the Company completed the sale of its GroupeNovasep subsidiary. The transaction was valued at approximately €425 million,which included the repayment of third party and intercompany indebtedness. Asof December 31, 2006, the Company met the criteria for reporting the pendingsale of its Groupe Novasep subsidiary as an asset held for sale anddiscontinued operations pursuant to SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*. The Company’s financial statementsreflect the Groupe Novasep subsidiary as a discontinued operation for allperiods presented.

 

Operating results of the discontinued operations are as follows:

 
| ** **                                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                 | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                     |       | $                                | —     |                            | $          | 87.2 |   | $ | 8.9 |   | $ | 260.0 |   |
| Cost of products  sold                        |       | —                           |       | 69.6                            |       | 7.0 |   | 192.5 |   |
| Gross profit                                  |       | —                           |       | 17.6                            |       | 1.9 |   | 67.5 |   |
| Selling, general  and administrative expenses |       | —                           |       | 11.7                            |       | 1.0 |   | 42.1 |   |
| (Gain) loss on  sale of business/assets       |       | —                           |       | —                          |       | (117.7 | ) | 11.9 |   |
| Operating income                              |       | —                           |       | 5.9                             |       | 118.6 |   | 13.5 |   |
| Other income  (expenses):                     |       |                             |       |                            |       |   |   |   |   |
| Interest  expense, net                        |       | —                           |       | (1.3                            | )          | (0.3 | ) | (3.2 | ) |
| Foreign exchange  gain, net                   |       | —                           |       | —                          |       | — |   | 0.7 |   |
| Other income  (expenses), net                 |       | —                           |       | (1.3                            | )          | (0.3 | ) | (2.5 | ) |
| Income before  taxes and minority interest    |       | —                           |       | 4.6                             |       | 118.3 |   | 11.0 |   |
| Income tax  provision (benefit)               |       | —                           |       | 2.7                             |       | 2.1 |   | (15.5 | ) |
| Net income  before minority interest          |       | —                           |       | 1.9                             |       | 116.2 |   | 26.5 |   |
| Minority  interest                            |       | —                           |       | 3.4                             |       | (0.1 | ) | (0.8 | ) |
| Net income                                    |       | $                                | —     |                            | $          | 5.3 |   | $ | 116.1 |   | $ | 25.7 |   |

 

The Company received net cash proceeds of $421.1 million in 2007 fromthe sale of Groupe Novasep. These proceeds were reported as net cash providedby investing activities of discontinued operations for the nine months endedSeptember 30, 2007 in the Company’s Condensed Consolidated Statements of CashFlows. The net gain on the sale recorded in the first quarter of 2007 was$115.7 million (net of $2.0 million of German taxes).

 

In connection with the sale of Rohner AG, a subsidiary in the Company’sformer Groupe Novasep segment, the Company recorded a pre-tax loss of $12.1million in the first quarter of 2006, representing consideration given less theremaining net liabilities of Rohner, which were transferred to the purchaser.

 

In connection with thedownsizing of Rohner AG, the Company had recorded a minority interest charge of$13.9 million for the year ended December 31, 2005 related to a guarantee of upto €55.0 million made by one of the Company’s wholly-owned subsidiaries thatwas the 78.6% owner of Groupe Novasep SAS of loans made by a Groupe Novasep SASsubsidiary to Rohner. At the time of the guarantee in May 2005, the Companyconcluded the likelihood of having to fulfill this guarantee obligation wasremote based on the limited term of the guarantee, the fact that the Companyindirectly controlled the subsidiary receiving the guarantee and theexpectation of continuing operations at Rohner. However, in connectionwith the preparation of the Company’s 2005 financial statements, the Companyconcluded that it was probable that it would have to fulfill this guaranteeobligation. Accordingly, the Company recorded the minority interest charge,based on the 21.4% minority interest in Groupe Novasep SAS not held by theCompany. In October 2006, this guarantee obligation was settled for €35.0million. As a result, minority interest income of 

 

10

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approximately $3.3million ($5.5 million before taxes) was recorded in the third quarter of 2006as the final negotiated guarantee settlement was less than the amount that wasoriginally contractually agreed upon.

 

**4.****      VIANCE, LLC JOINT VENTURE:**

** **

On January 2, 2007, Chemical Specialties, Inc. (“CSI”), a wholly-ownedsubsidiary of the Company within the Timber Treatment Chemicals business of thePerformance Additives segment, and Rohm and Haas Company completed theformation of Viance, LLC, a joint venture company that provides an extensiverange of advanced wood treatment technologies and services to the global woodtreatment industry. Viance is jointly-owned by CSI and Rohm and Haas and wasformed through the contribution by CSI and its related subsidiaries of theirwood protection chemicals business and the contribution by Rohm and Haas of itswood biocides business and net cash of $73.0 million. The assets contributed byRohm and Haas were recorded at fair values whereas the assets contributed byCSI were recorded at book value.  Inaccordance with the consolidation principles of FIN 46 (R),*Consolidation of Variable Interest Entities—AnInterpretation of ARB No. 51,* the Company has concluded thatRockwood is the primary beneficiary of the joint venture and as such hasconsolidated the joint venture.

 

At September 30, 2007, the joint venture had no third party debtoutstanding, no consolidated assets of the Company were pledged as collateralfor any joint venture obligations and the general creditors of the jointventure had no recourse to the general credit of the Company.  The minority interest in the consolidatedsubsidiary reflected in the Company’s condensed consolidated balance sheetsreflects Rohm and Haas’ share of the net assets of the joint venture.  All intercompany accounts, balances andtransactions have been eliminated.

 

**5.****      SEGMENT INFORMATION:**

** **

Rockwood currently operates in six reportable segments according to thenature and economic characteristics of its products and services as well as themanner in which the information is used internally by the Company’s keydecision maker, the Company’s Chief Executive Officer. The six segments are:(1) Specialty Chemicals, which consists of the surface treatment and finechemicals business lines; (2) Performance Additives, which consists of colorpigments and services, timber treatment chemicals (including Viance, LLC), clay-basedadditives and water treatment chemicals business lines; (3) Titanium DioxidePigments; (4) Advanced Ceramics; (5) Specialty Compounds; and (6) Electronics,which consists of electronic chemicals and photomasks business lines, althoughthe Company will no longer operate its Electronics segment upon the closing ofthe sale of this segment, which is expected to occur in the fourth quarter of2007, subject to regulatory approval.

 

Items that cannot be readily attributed to individual segments havebeen classified as “Corporate.” The corporate operating loss primarilyrepresents payroll, professional fees and other operating expenses ofcentralized functions such as treasury, legal, internal audit and consolidationaccounting as well as the cost of operating our central offices (including somecosts maintained based on legal or tax considerations). The primary componentsof corporate loss, in addition to operating loss, are interest expense onexternal debt (including the amortization of deferred financing costs), foreignexchange losses or gains, and mark-to-market gains or losses on derivatives.

 

Major corporate components within the reconciliation of income (loss)from continuing operations before taxes and minority interest  (describedmore fully below) include systems/organization establishment expenses such asoutside consulting costs for Sarbanes-Oxley initial documentation and feesrelating to the implementation of a new consolidation software system, interestexpense on external debt, interest income, foreign exchange losses or gains andrefinancing expenses related to external debt. Corporate identifiable assetsprimarily represent deferred financing costs that have been capitalized inconnection with corporate external debt financing, deferred income tax assetsand cash balances maintained in accordance with centralized cash managementtechniques. The corporate classification also includes the results ofoperations, assets (primarily real estate) and liabilities (including pensionand environmental) of legacy businesses formerly belonging to Dynamit Nobel.These operations are substantially unrelated by nature to businesses currentlywithin the Company’s operating segments.

 

Summarized financial information for each of the reportable segments isprovided in the following table:

 

11

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| ** **                                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|---------------------------|------------|
| ** **                                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                | ** ** |
| **($ in millions)**              | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated (a)** | ** ** |
| **Three  months ended September 30, 2007** |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                                  |       | $             | 261.4      |            | $          | 210.4        |       | $            | 122.8      |          | $          | 111.7           |       | $             | 69.8       |                      | $          | 53.5 |   | $ | — |   | $ | 829.6 |   |
| Total Adjusted  EBITDA                     |       | 58.2          |       | 40.9            |       | 23.9         |       | 30.7         |       | 7.8           |       | 9.7             |       | (13.9         | )          | 157.3                     |       |
| **Three  months ended September 30, 2006** |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                                  |       | $             | 225.5      |            | $          | 192.4        |       | $            | 111.2      |          | $          | 95.6            |       | $             | 62.1       |                      | $          | 53.0 |   | $ | — |   | $ | 739.8 |   |
| Total Adjusted  EBITDA                     |       | 49.0          |       | 31.3            |       | 23.2         |       | 25.8         |       | 8.2           |       | 9.6             |       | (13.4         | )          | 133.7                     |       |
| **Nine  months ended September 30, 2007**  |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                                  |       | $             | 800.2      |            | $          | 611.4        |       | $            | 362.2      |          | $          | 335.8           |       | $             | 210.2      |                      | $          | 156.6 |   | $ | — |   | $ | 2,476.4 |   |
| Total Adjusted  EBITDA                     |       | 192.8         |       | 119.0           |       | 67.3         |       | 92.2         |       | 25.4          |       | 27.8            |       | (42.0         | )          | 482.5                     |       |
| **Nine  months ended September 30, 2006**  |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                                  |       | $             | 685.6      |            | $          | 587.7        |       | $            | 330.4      |          | $          | 286.3           |       | $             | 191.4      |                      | $          | 154.0 |   | $ | — |   | $ | 2,235.4 |   |
| Total Adjusted  EBITDA                     |       | 151.1         |       | 107.4           |       | 65.9         |       | 75.0         |       | 24.1          |       | 27.9            |       | (38.5         | )          | 412.9                     |       |
|                                       |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |                      |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated (d)** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |            |       |                   |       |                      |       |                      |       |
| September 30,  2007         |       | $             | 1,788.3    |            | $          | 1,400.9      |       | $            | 767.2      |          | $          | 839.2           |       | $                      | 290.2      |                      | $          | 288.7                     |       | $ | 186.8 |   | $ | (179.9 | ) | $ | 5,381.4 |   |
| December 31, 2006           |       | 1,624.8       |       | 1,041.8         |       | 738.2        |       | 749.5        |       | 272.2         |       | 306.3           |       | 134.3                  |       | (136.6                    | )          | 4,730.5                   |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |                 |            |                        |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |

 

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(a)   This amount does not include $13.9 million for thethree months ended September 30, 2006 and $1.8 million and $49.6 million forthe nine months ended September 30, 2007 and 2006, respectively, of AdjustedEBITDA from the former Groupe Novasep segment which was sold on January 9,2007.

 

(b)   This amount includes $44.6 million and $41.0 million ofassets from the legacy businesses formerly belonging to Dynamit Nobel atSeptember 30, 2007 and December 31, 2006, respectively.

 

(c)   Amounts contained in the “Eliminations” columnrepresent the individual subsidiaries’ retained interest in their cumulativenet cash balance (deposits less withdrawals) included in the corporatecentralized cash system and within the identifiable assets of the respectivesegment. These amounts are eliminated as the corporate centralized cash systemis included in the Corporate segment’s identifiable assets.

 

(d)   This amount does not include $490.6 million ofidentifiable assets at December 31, 2006 from the former Groupe Novasep segmentwhich was sold on January 9, 2007. Total identifiable assets including thisamount were $5,221.1 million at December 31, 2006.

 

Geographic information regarding net sales based on seller’s locationand long-lived assets are described in Note 4, “Segment Information,” in theCompany’s 2006 Form 10-K.

 

On a segment basis, the Company defines Adjusted EBITDA as operatingincome excluding depreciation and amortization, certain non-cash gains andcharges, certain other special gains and charges deemed by our seniormanagement to be non-recurring gains and charges and certain items deemed bysenior management to have little or no bearing on the day-to-day operatingperformance of its business segments and reporting units. The adjustments madeto operating income directly correlate with the adjustments to net income incalculating Adjusted EBITDA on a consolidated basis pursuant to the seniorsecured credit agreement, which reflects management’s interpretations thereof.The indentures governing the 2011 Notes (which was terminated when the 2011Notes were redeemed in May 2007) and the 2014 Notes exclude certain adjustmentspermitted under the senior credit agreement. Senior management uses AdjustedEBITDA on a segment basis as the primary measure to evaluate the ongoingperformance of the Company’s business segments and reporting units. See Note 9,“Long-term Debt,” for information regarding the redemption of the 2011 Notes.

 

The Company uses Adjusted EBITDA on a segment basis to assess itsoperating performance. Because the Company views Adjusted EBITDA on a segmentbasis as an operating performance measure, the Company uses income (loss) fromcontinuing operations before taxes and minority interest as the most comparableGAAP measure.

 

 

12

----

 

The following table presents a reconciliation of income (loss) fromcontinuing operations before taxes and minority interest to Adjusted EBITDA ona segment GAAP basis:

 
| ** **                                                                   | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**                                                | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three  months ended September 30, 2007**                                   |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 34.9       |            | $          | 15.5         |       | $            | 4.9        |          | $          | 11.4            |       | $             | 3.0        |             | $          | 6.4 |   | $ | (30.7 | ) | $ | 45.4 |   |
| Interest expense  (a)                                                        |       | 11.5          |       | 7.5             |       | 8.0          |       | 8.6          |       | 2.3           |       | (0.9            | )          | 20.0          |       | 57.0             |       |
| Interest income                                                              |       | (1.2          | )          | (0.1            | )          | 0.1          |       | (0.1         | )          | (0.3          | )          | (0.4            | )          | 0.1           |       | (1.9             | )          |
| Depreciation and  amortization                                               |       | 13.5          |       | 14.1            |       | 10.8         |       | 10.1         |       | 2.9           |       | 4.1             |       | 1.4           |       | 56.9             |       |
| Restructuring  charges, net                                                  |       | 1.4           |       | 0.7             |       | —       |       | 0.7          |       | —        |       | —          |       | 0.1           |       | 2.9              |       |
| CCA litigation  defense costs                                                |       | —        |       | 0.1             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.1              |       |
| Systems/organization  establishment expenses                                 |       | —        |       | 0.4             |       | —       |       | 0.3          |       | (0.1          | )          | —          |       | —        |       | 0.6              |       |
| Cancelled  acquisition and disposal costs                                    |       | (0.1          | )          | —          |       | 0.4          |       | —       |       | —        |       | 0.3             |       | 1.7           |       | 2.3              |       |
| Inventory  write-up reversal                                                 |       | 0.1           |       | 2.6             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 2.7              |       |
| (Gain) loss on  sale of assets                                               |       | (0.4          | )          | 0.2             |       | 0.1          |       | —       |       | —        |       | —          |       | —        |       | (0.1             | )          |
| Foreign exchange  (gain) loss, net                                           |       | (0.6          | )          | (0.2            | )          | (0.4         | )          | (0.3         | )          | —        |       | 0.2             |       | (6.3          | )          | (7.6             | )          |
| Other                                                                        |       | (0.9          | )          | 0.1             |       | —       |       | —       |       | —        |       | —          |       | (0.2          | )          | (1.0             | )          |
| Total Adjusted  EBITDA                                                       |       | $             | 58.2       |            | $          | 40.9         |       | $            | 23.9       |          | $          | 30.7            |       | $             | 7.8        |             | $          | 9.7 |   | $ | (13.9 | ) | $ | 157.3 |   |
| **Three  months ended September 30, 2006**                                   |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 26.6       |            | $          | 14.4         |       | $            | 6.5        |          | $          | 8.9             |       | $             | (1.1       | )                | $          | 6.1 |   | $ | (35.6 | ) | $ | 25.8 |   |
| Interest expense  (a)                                                        |       | 12.1          |       | 3.6             |       | 7.4          |       | 7.8          |       | 7.2           |       | 0.7             |       | 21.8          |       | 60.6             |       |
| Interest income                                                              |       | (2.4          | )          | 0.1             |       | (0.1         | )          | —       |       | (0.1          | )          | (0.6            | )          | 2.0           |       | (1.1             | )          |
| Depreciation and  amortization                                               |       | 11.7          |       | 11.8            |       | 9.5          |       | 8.3          |       | 1.9           |       | 3.7             |       | 1.0           |       | 47.9             |       |
| Restructuring  charges, net                                                  |       | 0.6           |       | 0.3             |       | —       |       | 0.6          |       | —        |       | 0.2             |       | —        |       | 1.7              |       |
| CCA litigation  defense costs                                                |       | —        |       | 0.3             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.3              |       |
| Systems/organization  establishment expenses                                 |       | (0.2          | )          | 0.6             |       | —       |       | 0.4          |       | 0.3           |       | —          |       | 2.1           |       | 3.2              |       |
| Cancelled  acquisition and disposal costs                                    |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —          |       | 0.3           |       | 0.4              |       |
| Loss (gain) on  sale of assets                                               |       | 0.3           |       | 0.1             |       | —       |       | (0.1         | )          | —        |       | —          |       | (0.3          | )          | —           |       |
| Foreign exchange  loss (gain), net                                           |       | 0.2           |       | —          |       | —       |       | —       |       | —        |       | (0.5            | )          | (4.5          | )          | (4.8             | )          |
| Other                                                                        |       | —        |       | 0.1             |       | (0.1         | )          | (0.1         | )          | —        |       | —          |       | (0.2          | )          | (0.3             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 49.0       |            | $          | 31.3         |       | $            | 23.2       |          | $          | 25.8            |       | $             | 8.2        |             | $          | 9.6 |   | $ | (13.4 | ) | $ | 133.7 |   |
| **Nine  months ended September 30, 2007**                                    |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 125.6      |            | $          | 59.3         |       | $            | 11.0       |          | $          | 35.3            |       | $             | 9.0        |             | $          | 18.0 |   | $ | (108.2 | ) | $ | 150.0 |   |
| Interest expense  (a)                                                        |       | 30.5          |       | 13.7            |       | 23.9         |       | 25.2         |       | 7.0           |       | (0.8            | )          | 59.2          |       | 158.7            |       |
| Interest income                                                              |       | (2.9          | )          | (0.6            | )          | —       |       | (0.1         | )          | (0.5          | )          | (1.1            | )          | (5.8          | )          | (11.0            | )          |
| Depreciation and  amortization                                               |       | 39.9          |       | 39.6            |       | 31.6         |       | 29.8         |       | 8.4           |       | 12.1            |       | 3.9           |       | 165.3            |       |
| Restructuring  charges, net                                                  |       | 1.9           |       | 1.0             |       | —       |       | 1.4          |       | —        |       | 3.7             |       | 0.9           |       | 8.9              |       |
| CCA litigation  defense costs                                                |       | —        |       | 0.4             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.4              |       |
| Systems/organization  establishment expenses                                 |       | (0.4          | )          | 0.9             |       | —       |       | 0.9          |       | 0.4           |       | —          |       | —        |       | 1.8              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | —          |       | 1.1          |       | —       |       | —        |       | 0.3             |       | 1.7           |       | 3.1              |       |
| Inventory  write-up reversal                                                 |       | 0.1           |       | 2.6             |       | —       |       | 0.1          |       | —        |       | —          |       | —        |       | 2.8              |       |
| Refinancing  expenses                                                        |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | 0.9           |       | 0.9              |       |
| Loss on early  extinguishment of debt                                        |       | —        |       | 1.9             |       | —       |       | —       |       | 1.1           |       | 0.3             |       | 16.1          |       | 19.4             |       |
| (Gain) loss on  sale of assets                                               |       | (0.4          | )          | 0.3             |       | 0.1          |       | —       |       | —        |       | (4.7            | )          | (0.6          | )          | (5.3             | )          |
| Foreign exchange  gain, net                                                  |       | (0.3          | )          | (0.2            | )          | (0.4         | )          | (0.4         | )          | —        |       | —          |       | (10.0         | )          | (11.3            | )          |
| Other                                                                        |       | (1.2          | )          | 0.1             |       | —       |       | —       |       | —        |       | —          |       | (0.1          | )          | (1.2             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 192.8      |            | $          | 119.0        |       | $            | 67.3       |          | $          | 92.2            |       | $             | 25.4       |             | $          | 27.8 |   | $ | (42.0 | ) | $ | 482.5 |   |
| **Nine  months ended September 30, 2006**                                    |       |          |       |            |       |         |       |         |       |          |       |            |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 81.8       |            | $          | 60.2         |       | $            | 18.3       |          | $          | 25.3            |       | $             | 10.6       |             | $          | 13.8 |   | $ | (87.2 | ) | $ | 122.8 |   |
| Interest expense  (a)                                                        |       | 37.7          |       | 11.2            |       | 21.7         |       | 23.4         |       | 7.2           |       | 2.6             |       | 44.3          |       | 148.1            |       |
| Interest income                                                              |       | (5.6          | )          | 0.1             |       | (0.2         | )          | (0.1         | )          | (0.2          | )          | (1.7            | )          | 4.1           |       | (3.6             | )          |
| Depreciation and  amortization                                               |       | 34.8          |       | 32.1            |       | 27.8         |       | 24.7         |       | 6.2           |       | 12.3            |       | 3.0           |       | 140.9            |       |
| Restructuring  charges, net                                                  |       | 1.1           |       | 1.1             |       | —       |       | 0.6          |       | —        |       | 1.1             |       | —        |       | 3.9              |       |
| CCA litigation  defense costs                                                |       | —        |       | 0.8             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.8              |       |
| Systems/organization  establishment expenses                                 |       | (0.1          | )          | 1.0             |       | —       |       | 0.7          |       | 0.3           |       | —          |       | 5.4           |       | 7.3              |       |
| Cancelled  acquisition and disposal costs                                    |       | 1.0           |       | —          |       | —       |       | —       |       | —        |       | —          |       | 0.3           |       | 1.3              |       |
| Inventory write-up  reversal                                                 |       | —        |       | 0.8             |       | —       |       | 0.1          |       | —        |       | —          |       | —        |       | 0.9              |       |
| Loss (gain) on  sale of assets                                               |       | 0.3           |       | —          |       | —       |       | —       |       | —        |       | —          |       | (0.7          | )          | (0.4             | )          |
| Foreign exchange  loss (gain), net                                           |       | 0.4           |       | 0.1             |       | —       |       | —       |       | —        |       | (0.2            | )          | (7.3          | )          | (7.0             | )          |
| Other                                                                        |       | (0.3          | )          | —          |       | (1.7         | )          | 0.3          |       | —        |       | —          |       | (0.4          | )          | (2.1             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 151.1      |            | $          | 107.4        |       | $            | 65.9       |          | $          | 75.0            |       | $             | 24.1       |             | $          | 27.9 |   | $ | (38.5 | ) | $ | 412.9 |   |

 

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(a)   Includes losses of $13.4million and $9.1 million for the three months ended September 30, 2007 and2006, respectively, and losses of $15.4 million and gains of $6.2 million forthe nine months ended September 30, 2007 and 2006, respectively, representingthe movement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

 

(b)   This amount does not include$13.9 million for the three months ended September 30, 2006 and $1.8 millionand $49.6 million for the nine months ended September 30, 2007 and 2006,respectively, of Adjusted EBITDA from the former Groupe Novasep 

 

13

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segment which was sold onJanuary 9, 2007.

 

The summary of segment information above includes “Adjusted EBITDA,” afinancial measure used by the Company’s chief decision maker and seniormanagement to evaluate the operating performance of each segment.

 

*Items excluded from Adjusted EBITDA*

* *

The process of refocusing and restructuring the businesses acquired inthe KKR Acquisition and establishing the post-acquisition corporate entity,along with the impact of the Dynamit Nobel Acquisition and Holdings’ initialpublic offering, resulted in a number of charges that have affected Rockwood’shistorical results. These charges, along with certain other items, are added toor subtracted from income (loss) from continuing operations before taxes andminority interest to derive Adjusted EBITDA, as defined below. These itemsinclude the following:

 

•       *Restructuring and related charges*:  Restructuringcharges of $2.9 million and $1.7 million were recorded in the three monthsended September 30, 2007 and 2006, respectively, while $8.9 million and $3.9million were recorded in the nine months ended September 30, 2007 and 2006,respectively, for miscellaneous restructuring activities, including headcountreductions and facility closures (see Note 13, “Restructuring Liability,” forfurther details).

 

•       *Chromated copper arsenate* (*CCA)litigation defense costs*:  Costs of $0.1 million and $0.3million were recorded in the three months ended September 30, 2007 and 2006,respectively, while $0.4 million and $0.8 million were recorded in the ninemonths ended September 30, 2007 and 2006, respectively, primarily for attorneyfees related to the Company’s Timber Treatment Chemicals business line of thePerformance Additives segment.

 

•       *Systems/organization establishment expenses*:  For thethree and nine months ended September 30, 2007, expenses of $0.6 million and$1.8 million, respectively, were recorded. In the Performance Additives andAdvanced Ceramics segments, expenses were incurred related to the integrationof businesses acquired in 2007. In the Performance Additives segment, expenseswere incurred primarily related to the integration of the global color pigments business of Elementisplc acquired in the third quarter of 2007. For the three and nine monthsended September 30, 2006, expenses of $3.2 million and $7.3 million,respectively, were recorded related to professional fees incurred regardingsystems and internal control documentation required in connection with Holdings’compliance with the Sarbanes-Oxley Act of 2002 and fees relating to theimplementation of a new consolidation software system.

 

•       *Cancelled acquisition and disposal costs*:  Costs of$2.3 million and $0.4 million were recorded for the three months endedSeptember 30, 2007 and 2006, respectively, and $3.1 million and $1.3 millionwere recorded for the nine months ended September 30, 2007 and 2006,respectively, in connection with non-consummated acquisitions anddispositions.  Approximately $1.6 millionof costs were incurred in 2007 related to the expected sale of the electronicsbusinesses.

 

•       *Loss on early extinguishment of debt:*  In the secondquarter of 2007, the Company paid a redemption premium of $14.5 million andwrote off $4.9 million of deferred financing costs associated with the redemptionof the 2011 Notes on May 15, 2007 (see Note 9, “Long-Term Debt,” for furtherdetails).

 

•       *Refinancing expenses*:  In March 2007, the Companyexpensed $0.9 million related to the fourth amendment of the senior securedcredit agreement to refinance all outstanding borrowings under the tranche Fterm loans with new tranche G term loans (see Note 9, “Long-Term Debt,” forfurther details).

 

•       *Inventory write-up reversal*:  Under SFAS 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withacquisitions, the Company allocated a portion of the total purchase price toinventory to reflect manufacturing profit in inventory at the date of theacquisitions.  This resulted in aconsequential reduction in gross profit, including currency effects, of $2.7million and $2.8 million, respectively, primarily related to the acquisition ofthe Elementis plc businesses in the third quarter of 2007 for the three andnine months ended September 30, 2007; and $0.9 million primarily related to theacquisition of the Süd-Chemie businesses in 2005 in the nine months endedSeptember 30, 2006 as the inventory was sold in the normal course of business.

 

•       *Gain on sale of assets*:  The Company recorded gainsrelated to the sale of assets of $0.1 million for the three months endedSeptember 30, 2007 and $5.3 million and $0.4 million for the nine months endedSeptember 30, 2007 and 2006, respectively. The gain recorded in the nine months ended September 30, 2007 primarilyrelates to the sale of the U.S. Wafer Reclaim business in the Electronicssegment.

 

•       *Foreign exchange gain (loss), net*:  During the periodspresented, the Company recorded foreign exchange gains and (losses) related toour long-term debt and other non-operating transactions. These amountsprimarily reflect the non-cash translation impact on our euro-denominated debtresulting from the strengthening or weakening of the euro against the U.S.dollar and/or the British pound. For the three months ended September 30,2007 and 2006, gains of $7.6 million and $4.8 million, 

 

14

----

 

respectively, wererecorded. For the nine months ended September 30, 2007 and 2006, gains of$11.3 million and $7.0 million, respectively, were recorded.

 

•       *Other*:  In the three and nine months ended September30, 2007, the Company recorded income of $1.0 million and $1.2 million,respectively, primarily related to the reversal of a pension reserve in theSpecialty Chemicals segment due to the expiration of the period for whichcertain claims could be made. In the nine months ended September 30, 2006, theCompany recorded $1.6 million of income related to the correction of animmaterial error reported in the first quarter of 2006 related to a previouslyunrecorded asset in the Titanium Dioxide Pigments segment.

 

**6.****      INVENTORIES:**

** **

Inventories are comprised of the following:

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Raw materials            |       | $                      | 161.1      |                  | $          | 160.1 |   |
| Work-in-process               |       | 60.2                   |       | 53.3                  |       |
| Finished goods                |       | 283.1                  |       | 226.4                 |       |
| Packaging  materials          |       | 7.2                    |       | 5.6                   |       |
|                          |       | $                      | 511.6      |                  | $          | 445.4 |   |

 

The increase since December 31, 2006 isprimarily related to inventory acquired from Elementis plc in August 2007 andthe impact of currency changes.

 

**7.****      GOODWILL:**

** **

Below are goodwill balances and activity by segment:

 
| ** **                      | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** ** | ** ** |
| **($ in millions)**   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2006     |       | $             | 597.6      |            | $          | 480.8        |       | $            | 172.6      |          | $          | 223.2           |       | $          | 118.5      |   | $ | 125.0 |   | $ | 1,717.7 |   |
| Acquisitions                    |       | 1.2           |       | 8.7             |       | —       |       | 14.4         |       | —        |       | —          |       | 24.3       |       |
| FIN 48 tax  adjustments (a)     |       | (6.1          | )          | —          |       | (1.6         | )          | (2.2         | )          | —        |       | —          |       | (9.9       | )          |
| Other tax  adjustments          |       | (4.5          | )          | —          |       | —       |       | —       |       | (1.5          | )          | —          |       | (6.0       | )          |
| Foreign exchange  and other (b) |       | 46.4          |       | 12.7            |       | 13.8         |       | 19.5         |       | 5.8           |       | 2.0             |       | 100.2      |       |
| Balance,  September 30, 2007    |       | $             | 634.6      |            | $          | 502.2        |       | $            | 184.8      |          | $          | 254.9           |       | $          | 122.8      |   | $ | 127.0 |   | $ | 1,826.3 |   |

 

----

(a)     See Note 10, “Income Taxes,”for details regarding the adoption of FIN 48.

 

(b)     Consists primarily of foreigncurrency changes. In the Performance Additives segment, the amount includesgoodwill of $1.4 million related to the Viance, LLC joint venture formed inJanuary 2007.

 

**8.****      OTHER INTANGIBLE ASSETS:**

** **

Other intangible assets, net consist of:

 
| ** **                               | ** ** | **As of September 30, 2007** | ** ** | **As of December 31, 2006** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                     | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount (a)**                              | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                                | 393.3      |                                            | $          | (108.2 | ) | $ | 285.1 |   | $ | 311.1 |   | $ | (82.0 | ) | $ | 229.1 |   |
| Trade names and  trademarks              |       | 143.3                                            |       | (21.0                                           | )          | 122.3 |   | 132.7 |   | (15.2 | ) | 117.5 |   |
| Customer  relationships                  |       | 264.3                                            |       | (51.4                                           | )          | 212.9 |   | 191.3 |   | (32.6 | ) | 158.7 |   |
| Supply agreements                        |       | 28.9                                             |       | (2.3                                            | )          | 26.6 |   | 6.5 |   | (0.6 | ) | 5.9 |   |
| Other                                    |       | 49.5                                             |       | (24.2                                           | )          | 25.3 |   | 46.4 |   | (18.0 | ) | 28.4 |   |
| Total                                    |       | $                                                | 879.3      |                                            | $          | (207.1 | ) | $ | 672.2 |   | $ | 688.0 |   | $ | (148.4 | ) | $ | 539.6 |   |

 

----

(a)     The increase since December31, 2006 is primarily related to other intangible assets acquired in the Viancejoint venture completed in January 2007, other intangible assets acquired fromElementis plc in August 2007 and the impact of currency 

 

15

----

 

changes.

 

Amortization of other intangible assets was $16.6 million and $14.7million for the three months ended September 30, 2007 and 2006, respectivelyand $48.0 million and $38.9 million for the nine months ended September 30,2007 and 2006, respectively. Estimated aggregate amortization expense foreach of the five succeeding years is as follows:

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|-------------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2007                          |       | $                | 65.5       |   |
| 2008                          |       | 63.7             |       |
| 2009                          |       | 58.5             |       |
| 2010                          |       | 57.0             |       |
| 2011                          |       | 55.5             |       |
|                               |            |                  |            |  |

 

**9.****      LONG-TERM DEBT**

** **

Long-term debt and loans payable are summarized as follows:

 
| ** **                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ , € and £ in millions)**                      | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Senior secured  credit facilities:                                                         |       |                   |       |                  |       |
| Tranche A-1 term  loans (€29.3 and €35.2, respectively)                          |       | $                      | 41.9       |                  | $          | 46.5 |   |
| Tranche A-2 term  loans (€127.8 and €153.4, respectively)                        |       | 182.3                  |       | 202.4                 |       |
| Tranche E term  loans                                                                      |       | 1,116.3                |       | 1,127.8               |       |
| Tranche F term  loans (€270.7 as of December 31, 2006) (refinanced March 23, 2007)    |       | —                 |       | 357.3                 |       |
| Tranche G term  loans (€267.9 as of September 30, 2007)                               |       | 382.3                  |       | —                |       |
| Revolving  short-term loans                                                                |       | —                 |       | 37.0                  |       |
| 2011 Notes  (repaid May 15, 2007)                                                          |       | —                 |       | 273.4                 |       |
| 2014 Notes  (€375.0 and $200.0 as of September 30, 2007 and December 31, 2006)        |       | 735.0                  |       | 695.0                 |       |
| Other term loan  facilities                                                                |       | 24.4                   |       | 12.9                  |       |
| Capitalized  lease obligations (€33.8 and €35.3, respectively)                   |       | 48.2                   |       | 46.6                  |       |
| Preferred stock  of subsidiary (£12.0 as of September 30, 2007 and December 31, 2006) |       | 24.6                   |       | 23.5                  |       |
| Other (€12.4 as  of December 31, 2006)                                                |       | —                 |       | 16.3                  |       |
|                                                                                       |       | 2,555.0                |       | 2,838.7               |       |
| Less current  maturities                                                                   |       | (107.3                 | )          | (117.8                | )          |
|                                                                                       |       | $                      | 2,447.7    |                  | $          | 2,720.9 |   |

 

In the first quarter of 2007, the Company entered into the fourthamendment (the “Fourth Credit Amendment”) to the senior secured creditagreement, dated as of July 30, 2004 (as amended by the First Amendment, datedas of October 8, 2004, by the Second Amendment dated as of December 10, 2004,and by the Third Amendment, dated as of December 13, 2005, the “CreditAgreement”). The Fourth Credit Amendment, among other things, (i) provides forapproximately €269.3 million of new tranche G loans, the proceeds of which wereused to repay in full the outstanding borrowings under the tranche F termloans, (ii) permits the Company to repay its outstanding 10 5/8% SeniorSubordinated Notes due 2011 (“2011 Notes”) any time on or after May 15, 2007without a corresponding repayment of term loans under the Credit Agreement, and(iii) resets substantially all of the baskets contained in the restrictivecovenants and elsewhere in the Credit Agreement. The refinancing of the trancheF loans with the new tranche G loans effectively reduced the interest rate onthe tranche G term loans by 50 basis points. The Company did not incur anyadditional borrowings under the Fourth Credit Amendment. In March 2007,the Company expensed $0.9 million related to the fourth amendment of thesenior secured credit agreement.

 

On May 15, 2007, the Company redeemed its outstanding 10 5/8% SeniorSubordinated Notes due 2011 in the aggregate principal amount of $273.4million. In connection with this debt repayment, redemption premiums of $14.5million were paid and deferred financing costs of $4.9 million were written offin the second quarter of 2007. These amounts are reported in “loss on earlyextinguishment of debt” in the Condensed Consolidated Statements of Operations.

 

In the normal course of business, the Company incurs obligations whichinclude guarantees related to contract completion, regulatory compliance andproduct performance. Under certain circumstances, these obligations are supportedthrough the issuance of letters of credit and other bank guarantees. As ofSeptember 30, 2007, the Company had approximately $59.6 million of letters ofcredit and other bank guarantees, of which $6.1 million will expire in lessthan one year, $6.9 million will expire in 2-3 years, $12.2 million will

 

16

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expire in 4-5 years and $34.4 million will expire after five years.This amount includes outstanding letters of credit of $28.0 million that reducedour availability under the senior secured credit facility. In the opinion ofmanagement, such obligations will not significantly affect the Company’sfinancial position, results of operations or cash flows as the Companyanticipates fulfilling its performance obligations.

 

**10.****    INCOME TAXES:**

** **

Income tax expense has been computed based on the projected effectivetax rate for the year. The effective tax rate for the first nine months of 2007and 2006 was 41.3% and 40.7%, respectively. The 2007 effective tax rate isprimarily a function of the impact of the valuation allowance on domesticearnings and foreign rate differentials. During the first nine months of 2007,a tax provision of $61.9 million was recorded related to pre-tax book income of$150.0 million. The Company recorded an income tax provision of $50.0 millionin the first nine months of 2006 on a pre-tax book income of$122.8 million.

 

In the nine months ended September 30, 2007, the Company increased itsworldwide valuation allowances by $34.2 million related to U.S. net deferredtax assets. The change in the valuation allowance for the first nine months of2007 impacted the total income tax provision by $7.2 million. The followingtable reflects the activity in the valuation allowance for worldwide netoperating losses (“NOLs”) and other deferred income tax assets:

 

 
| ** **                                           | ** ** | **Valuation** | ** ** |
|------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                        | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2006                     |       | $             | 64.1       |   |
| Increase as  reflected in income tax expense         |       | 7.2           |       |
| Decrease due to  reversal of net operating loss      |       | (1.0          | )          |
| Increase as  reflected in other comprehensive income |       | 27.7          |       |
| Other                                                |       | 0.3           |       |
| Balance as of  September 30, 2007                    |       | $             | 98.3       |   |

 

In the first nine months of 2007, based on the Company’s policy andsteady-state analysis, it was determined that there was not sufficient positiveevidence of future taxable income in order to release the U.S. valuationallowance that has been recorded. It is the Company’s policy that the valuationallowance is reversed in the period management determines it is more likelythan not that the deferred tax assets, or a portion thereof, will be realized.

 

On July 13, 2006, the FASB issued FIN No. 48,*Accounting for Uncertainty in Income Taxes*—*An Interpretation of FASB Statement No. 109*.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan entity’s financial statements in accordance with FASB Statement No. 109,*Accounting for Income Taxes* andprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that ismore-likely-than-not to not be sustained upon audit by the relevant authority.An uncertain income tax position will not be recognized if it has less than a50% likelihood of being sustained. Additionally, FIN 48 provides guidance onderecognizing, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.

 

The Company adopted the provisions of FIN 48 on January 1, 2007. Thetotal amount of unrecognized tax benefits as of the date of adoption was $44.1million. In conjunction with the adoption of FIN 48, we have classifieduncertain tax positions as non-current income tax liabilities (otherliabilities) unless expected to be paid in one year. Previously, accrued incometax liabilities were classified as current liabilities. As of September 30,2007, the total amount of unrecognized tax benefits was $45.5 million. As aresult of the initial implementation of FIN 48, the Company recognized a $1.0million increase in the liability for unrecognized tax benefits which wasaccounted for as follows:

 
| **($ in millions)**                        | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Increase in  accumulated deficit (cumulative effect) |       | $          | 7.4        |   |
| Additional  deferred tax assets                      |       | 3.5        |       |
| Reduction in  goodwill                               |       | (9.9       | )          |
| Increase in  liability                               |       | $          | 1.0        |   |

 

Included in the balance of unrecognized tax benefits at January 1, 2007are $27.7 million of tax benefits that, if recognized, would affect theeffective tax rate. Also included in the balance of unrecognized tax benefitsat January 1, 2007, are $13.1 million of tax benefits that if recognized, wouldresult in a decrease to goodwill recorded in purchase business combinations,and $3.5 million of tax benefits that, if recognized, would result in anadjustment to other tax accounts.

 

17

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The Company recognizes interest and penalties related to unrecognizedtax benefits in its income tax provision. The Company had accrued $2.4 millionfor interest and penalties at December 31, 2006. Upon adoption of FIN 48 onJanuary 1, 2007, the Company increased its accrual for interest and penaltiesby $0.9 million. For the three and nine months ended September 30, 2007, theaccrual for interest and penalties was increased by $0.2 million. As ofSeptember 30, 2007, the Company had accrued a total of $3.5 million.

 

During the next twelve months it is reasonably possible that resolutionof uncertain tax liabilities could result in a benefit of up to $3.0 million ora cost of up to $5.0 million. Audit outcomes and the timing of auditsettlements are subject to significant uncertainty.

 

The Company is subject to taxation in the U.S., various states, andforeign jurisdictions. The Company’s tax filings in major jurisdictions areopen to investigation by tax authorities; in the U.S. from 2000, in the U.K.from 2003, and in Germany from 2000.

 

In the second quarter of 2007, the Company reclassified noncurrentdeferred tax assets in certain jurisdictions previously netted in noncurrentdeferred tax liabilities and reclassified current deferred tax liabilities incertain jurisdictions previously netted in current deferred tax assets. As ofSeptember 30, 2007, the noncurrent deferred tax reclassification relates todeferred tax assets in the U.K. of $21.8 million and the current deferred taxreclassifications relate to deferred tax liabilities in Germany and Italyaggregating $4.6 million. As of December 31, 2006, noncurrent deferred taxassets in certain jurisdictions of $20.9 million were incorrectly netted withnoncurrent liabilities and current deferred tax liabilities in certainjurisdictions of $3.4 million were incorrectly netted with current deferred taxassets.  The effect of this to the Company’s Condensed ConsolidatedBalance Sheets as of December 31, 2006 was not material.

 

Tax law changes were enacted in Germany and the U.K. in the thirdquarter of 2007. The change in law and tax rates had an impact on the existingdeferred tax assets and liabilities recorded in those jurisdictions. The impactof the change in the law and tax rates was recorded as a discrete tax benefitin the income tax provision for the three and nine months ended September 30,2007. If the tax law changes had not occurred, the effective tax rate wouldhave been 42.8% and 42.3% for the three and nine months ended September 30,2007.

 

**11.****       STOCK-BASED COMPENSATION:**

 

Holdings has in place the 2005 Amended and Restated Stock Purchase andOption Plan of Rockwood Holdings, Inc. and Subsidiaries (the “Plan”). Under thePlan, Holdings may grant stock options, restricted stock and other stock-basedawards to the Company’s employees and directors and allow employees anddirectors to purchase shares of its common stock. There are 10,000,000authorized shares available for grant under the Plan.

 

***Restricted Stock***—Holdingsmay grant restricted stock with or without payment of consideration withrestrictions on the recipient’s right to transfer or sell the stock. In thesecond quarter of 2007, Holdings granted 225,208 performance restricted stockunits to management and key employees. These performance restricted stock unitswill vest on December 31, 2009 as long as the employee continues to be employedby the Company on this date and upon the achievement of certain performancetargets as approved by the Compensation Committee. The number of shares ofHoldings’ common stock ultimately awarded upon vesting is determined based onHoldings’ achievement of specified performance criteria. Certain employees have“company-wide performance targets,” for which vesting is  based on theachievement of specified annualized Adjusted EBITDA and earnings per sharegrowth levels, while others have “divisional performance targets” for whichvesting is based on a particular division’s achievement of annualized AdjustedEBITDA growth. Holdings granted a “target amount” of performance restrictedstock units, whereby if the specified performance target is met, such shares ofHoldings’ common stock would be awarded upon vesting of these units. However,these awards provide the employee with the possibility of vesting from 0% to200% of the share targeted units granted based upon performance versus thetarget. The compensation cost related to restricted stock units of Holdingscaused net income and income from continuing operations before taxes andminority interest to decrease by $0.8 million and $1.1 million for the threeand nine months ended September 30, 2007, respectively. The weighted averagegrant date fair value of the restricted shares granted in the second quarter of2007 was $31.94 per stock unit. As of September 30, 2007, there was $6.4million of unrecognized compensation cost related to restricted stock unitsdetermined in accordance with SFAS No. 123R, which is expected to be recognizedover a weighted-average period of approximately 2.3 years.

 

***Stock Purchase***—Eligibleemployees and directors can purchase shares of Holdings’ common stock at pricesas determined by its board of directors.

 

***Board of DirectorsStock Options***—Stock options granted to directors underthis Plan shall have an exercise price at least equal to the fair market valueof Holdings’ common stock on the date of grant. Upon joining the Company, theCompany granted each of its independent directors stock options, which have alife of ten years from the date of grant and vest in three equal annualinstallments on each of the first three anniversaries of the grant date. In thesecond quarter of 2007, Holdings granted 7,878 stock options to a new directorunder this Plan.

 

***Stock Options***—Stockoptions granted to employees under the Plan shall have an exercise price atleast equal to the fair market value of Holdings’ common stock on the date ofgrant. Holdings has granted two types of options under the Plan—time andperformance 

 

18

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options.

 

•                  Time-Based StockOptions - Time options granted prior to 2004 have a life of ten years from thedate of grant and vest as follows: 10% in year one, 10% in year two, 25% inyear three, 25% in year four and 30% in year five. Time options granted in 2004have a life of ten years from the date of grant and vest in installments of 20%on each of the first five anniversaries of the grant date. Time options grantedin 2007 have a life of seven years and vest in three annual installments oneach of the first three anniversaries of December 31, 2006. In the secondquarter of 2007, Holdings granted 515,819 time-based stock options tomanagement and key employees under the Plan.

 

•                  Performance-BasedStock Options - Performance options have a life of ten years and becomeexercisable with respect to 20% of the total performance options granted uponthe achievement of certain performance targets. Performance options becomeexercisable on the eighth anniversary of the grant date to the extent that theoptions have not become otherwise exercisable or have not been terminated. Certainoption holders have “company-wide performance targets,” for which targets arebased on the achievement by Holdings of certain implied equity values. Otheroption holders have “divisional performance targets,” for which targets arebased on a particular division’s achievement of annual or cumulative AdjustedEBITDA.

 

The compensation cost related to stock options of Holdings causedincome from continuing operations before taxes and minority interest todecrease by $0.7 million and less than $0.1 million in the three months endedSeptember 30, 2007 and 2006, respectively. For the three months endedSeptember 30, 2007, a tax benefit of $0.2 million was recorded. Thecompensation cost related to stock options of Holdings caused income fromcontinuing operations before taxes and minority interest to decrease by $1.1million and $0.1 million in the nine months ended September 30, 2007 and 2006,respectively.  For the nine months ended September 30, 2007, a tax benefitof $0.3 million was recorded. As noted in Note 1, “Description of Business andSummary of Significant Accounting Policies,” the Company is recordingcompensation cost for the unvested portion of awards issued after February2005, which is the date Holdings first filed a registration statement with theSEC.

 

The fair value of stock options granted in the three and nine monthsended September 30, 2007 and 2006 were estimated on the date of grant using theBlack-Scholes option pricing model that used the assumptions noted in thefollowing table:

 
| ** **                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected term  (in years) |       | N/A                                                  |       | 7.2                                                 |       | 4.5 |   | 6.8 |   |
| Expected  volatility      |       | N/A                                                  |       | 35                                                  | %          | 30 | % | 35 | % |
| Risk-free rate            |       | N/A                                                  |       | 4.8                                                 | %          | 4.7 | % | 4.8 | % |
| Expected  dividends       |       | N/A                                                  |       | N/A                                                 |       | N/A |   | N/A |   |

 

The expected term represents the period of time that options grantedare expected to be outstanding based on the simplified method for determiningexpected term of an employee share option (in accordance with SAB No. 107). AsHoldings became a public company in August 2005, there is not a long period ofhistory of its share price. As a result, Holdings expected volatility is basedon the expected volatilities of comparable peer companies that are publiclytraded. The risk-free rate is based on the U.S. Treasury yield curve in effectat the time of grant. Expected dividends are not applicable as Holdingscurrently does not pay and does not expect to pay a dividend on its shares.

 

As of September 30, 2007, there was $4.5 million of unrecognizedcompensation cost related to nonvested stock options determined in accordancewith SFAS No. 123R, which is expected to be recognized over a weighted-averageperiod of approximately 2.3 years. As of September 30, 2007 and December 31,2006, the number of nonvested stock options determined in accordance with SFASNo. 123R was 558,017 and 47,814, respectively, and the weighted-average grantdate fair value of nonvested stock options was $10.56 and $8.88, respectively.

 

The total intrinsic value of stock options exercised during the ninemonths ended September 30, 2007 was $0.8 million. Cash received from optionexercises during the nine months ended September 30, 2007 was $0.6 million. Thetotal fair value of shares vested during the three and nine months endedSeptember 30, 2007 was $0.1 million and $0.2 million, respectively.

 

A summary of the status of Holdings’ options granted pursuant to thePlan at September 30, 2007 and changes during the period ended on that date ispresented below:

 

19

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| ** **                                                               | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **                    | ** ** |
|--------------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                               | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **                    | ** ** |
| ** **                                                               | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**                 | ** ** |
| ** **                                                               | ** ** | ** **      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**                 | ** ** |
| ** **                                                               | ** ** | **Shares**      | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**                     | ** ** |
| ** **                                                               | ** ** | **(‘000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **($ in millions)** | ** ** |
| Outstanding at  December 31, 2006                                        |       | 3,838           |       | $            | 14.69      |            |       |                          |       |   |
| Granted                                                                  |       | 524             |       | 31.94        |       |            |       |                          |       |
| Exercised                                                                |       | (43             | )          | 14.61        |       |            |       |                          |       |
| Forfeited                                                                |       | (30             | )          | 14.61        |       |            |       |                          |       |
| Outstanding at  September 30, 2007                                       |       | 4,289           |       | $            | 16.79      |            | 5.61       |                          | $          | 81.6 |   |
|                                                                     |       |            |       |         |       |            |       |                          |       |
| Options vested  at September 30, 2007 and expected to vest in the future |       | 4,108           |       | $            | 16.78      |            | 5.59       |                          | $          | 78.3 |   |
|                                                                     |       |            |       |         |       |            |       |                          |       |
| Options vested  at September 30, 2007                                    |       | 2,049           |       | $            | 14.66      |            | 5.03       |                          | $          | 43.4 |   |
|                                                                     |       |            |       |         |       |            |       |                          |       |
| Weighted-average  fair value of options granted during the year          |       | $               | 10.67      |         |       |            |       |                          |       |   |
|                                                                          |            |                 |            |              |            |                 |            |                               |            |  |  |  |

 

**12.     EMPLOYEEBENEFIT PLANS:**

 

The following table represents the net periodic benefit costs andrelated components in accordance with SFAS 158,*Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,an amendment of FASB Statements No. 87, 88, 106 and 132 (R)* :

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                          |       | $                                | 2.1        |                            | $          | 2.3 |   | $ | 6.4 |   | $ | 6.8 |   |
| Interest cost                         |       | 6.2                              |       | 5.5                             |       | 18.3 |   | 16.2 |   |
| Expected return  on assets            |       | (2.5                             | )          | (2.0                            | )          | (7.3 | ) | (5.9 | ) |
| Net amortization  of actuarial losses |       | 0.2                              |       | 0.6                             |       | 0.5 |   | 1.8 |   |
| Net periodic  benefit cost            |       | 6.0                              |       | 6.4                             |       | 17.9 |   | 18.9 |   |
| Impact of  curtailment/settlement     |       | —                           |       | 0.5                             |       | — |   | 0.5 |   |
| Total pension  cost                   |       | $                                | 6.0        |                            | $          | 6.9 |   | $ | 17.9 |   | $ | 19.4 |   |

 

**13.    RESTRUCTURING LIABILITY:**

 

The Company recorded restructuring charges of $2.9 million and $1.7million for the three months ended September 30, 2007 and 2006, respectivelyand $8.9 million and $3.9 million of restructuring charges for the nine monthsended September 30, 2007 and 2006, respectively.  The Company recordsrestructuring liabilities from time to time that represent charges incurred inconnection with consolidations and cessations of certain of its operations,including operations from acquisitions, as well as headcount reductionprograms. These charges consist primarily of write-offs of assets and severancecosts. Severance charges are based on various factors including the employee’slength of service, contract provisions, salary levels and local governmentallegislation. At the time a related charge is recorded, the Company calculatesits best estimate based upon detailed analysis. Although significant changesare not expected, actual costs may differ from these estimates.

 

During the nine months ended September 30, 2007, the Company expensed$8.9 million of restructuring charges. In the Electronics segment, facilityclosure and severance costs of $3.7 million were recorded related to therestructuring of the Wafer Reclaim business.  In addition, $1.9 millionwas recorded in the Specialty Chemicals segment, $1.4 million was recorded inthe Advanced Ceramics segment, $1.0 million was recorded in the PerformanceAdditives segment and $0.9 million was recorded in Corporate for miscellaneousheadcount reductions and facility closures.

 

During the nine months ended September 30, 2006, the Company expensed$3.9 million of restructuring charges for miscellaneous restructuring actions,including $1.1 million for the announced restructuring of the Wafer Reclaimbusiness in the Electronics segment. The Company recorded severance and relatedcosts for employees in connection with the closure of two Wafer Reclaimfacilities (one each in the U.K. and U.S.). The Wafer Reclaim operatingfacility in the U.K. was closed in January 2006 and one of the 

 

20

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facilities in the U.S. was closed in March 2006. In addition, $1.1million was recorded in the Specialty Chemicals segment and $0.6 million wasrecorded in the Advanced Ceramics segment for miscellaneous headcountreductions. In the Performance Additives segment, $1.1 million was recorded formiscellaneous headcount reductions and the announced closure of the Baulking,United Kingdom facility for the Clay-based Additives business.

 

In 2005, the Company recorded restructuring charges for miscellaneousrestructuring actions, including the announced closure of the Baulking, UnitedKingdom facility in the Clay-based Additives business and the announcedrestructuring of the Wafer Reclaim business. The Company recorded severance andrelated costs for employees in connection with the closure of the Wafer Reclaimfacilities (one each in the U.K. and U.S.). In addition, miscellaneousheadcount reductions were recorded in the Specialty Chemicals, PerformanceAdditives and Advanced Ceramics segments. Costs were also incurred in theAdvanced Ceramics segment related to the closure of a facility in Italy.

 

In 2004, upon the acquisition of the Dynamit Nobel businesses, theCompany began to assess and formulate specific plans to involuntarily terminateor relocate certain employees and/or exit certain activities of thesebusinesses. For example, the Company closed the former corporate office ofDynamit Nobel located in Troisdorf, Germany in the fourth quarter of 2004. Therelated restructuring provision included severance costs for general andadministrative personnel, the closure costs for this building and therelocation costs for the remaining employees who were relocated to the Company’snew Frankfurt, Germany location. Also in 2004, as part of the acquisition ofthe Pigments and Dispersions business of Johnson Matthey, the Company initiateda restructuring program and incurred severance costs for selling, general andadministrative personnel.

 

Selected information for the 2007 restructuring actions follows:

 
| ** **                             | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**          | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **2007**                               | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2006  |       | $             | —     |         | $          | —         |       | $          | —     |   | $ | — |   |
| Acquisitions (a)                       |       | 3.3           |       | —       |       | —         |       | 3.3        |       |
| Restructuring  charge in 2007          |       | 3.2           |       | 1.3          |       | 0.2            |       | 4.7        |       |
| Utilized                               |       | (1.6          | )          | (1.2         | )          | (0.2           | )          | (3.0       | )          |
| Liability  balance, September 30, 2007 |       | $             | 4.9        |         | $          | 0.1            |       | $          | —     |   | $ | 5.0 |   |

 

----

(a)                Relates to theacquisition of the global color pigments business of Elementis plc. The amountis preliminary as of September 30, 2007 and is expected to be finalized nolater than the third quarter of 2008. See Note 2, “Acquisitions,” for furtherdetails.

 

Except for the actions relating to the color pigments acquisition notedabove which are expected to be completed during 2008 and 2009, all otheractions are expected to be completed by the end of 2007.

 

Selected information for the 2006 restructuring actions follows:

 
| ** **                             | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**          | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **2006**                               | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2006  |       | $             | 4.4        |         | $          | 0.7            |       | $          | 0.7        |   | $ | 5.8 |   |
| Restructuring  charge in 2007          |       | 1.1           |       | 3.1          |       | —         |       | 4.2        |       |
| Utilized                               |       | (2.2          | )          | (1.0         | )          | —         |       | (3.2       | )          |
| Foreign exchange  and other            |       | 0.2           |       | 0.2          |       | —         |       | 0.4        |       |
| Liability  balance, September 30, 2007 |       | $             | 3.5        |         | $          | 3.0            |       | $          | 0.7        |   | $ | 7.2 |   |

 

The majority of the severance and relocation costs from thisrestructuring action consist of costs related to the consolidation in 2007 ofseveral U.K. facilities resulting from an acquisition in 2006 by the SpecialtyCompounds segment. The severance and relocation costs related to this actionare expected to be completed during 2008. The facility closure costs from thisaction primarily relate to the restructuring of the Wafer Reclaim business andthe closure of two Wafer Reclaim facilities.  The facility closure costsrelated to this action are expected to be completed when the lease expires in2018.

 

Selected information for the 2005 restructuring actions follows:

 

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| ** **                             | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** |   |   |   |
|----------------------------------------|------------|---------------|------------|--------------|------------|------------|--------|--------|--------|
| **($ in millions)**          | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** |   |   |   |
| **2005**                               | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  |   |   |   |
| Liability  balance, December 31, 2006  |       | $             | 0.2        |         | $          | 0.5        |   | $      | 0.7    |   |   |   |
| Utilized                               |       | —        |       | (0.2         | )          | (0.2       | )      |   |   |
| Foreign exchange  and other            |       | —        |       | (0.1         | )          | (0.1       | )      |   |   |
| Liability  balance, September 30, 2007 |       | $             | 0.2        |         | $          | 0.2        |   | $      | 0.4    |   |   |   |

 

These actions are expected to be completed by the end of 2007.

 

Selected information for the 2004 restructuring actions follows:

 
| ** **                             | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**          | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **2004**                               | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2006  |       | $             | 1.6        |         | $          | 0.1            |       | $          | 0.3        |   | $ | 2.0 |   |
| Utilized                               |       | (0.9          | )          | (0.1         | )          | —         |       | (1.0       | )          |
| Foreign exchange  and other            |       | 0.1           |       | —       |       | 0.1            |       | 0.2        |       |
| Liability  balance, September 30, 2007 |       | $             | 0.8        |         | $          | —         |       | $          | 0.4        |   | $ | 1.2 |   |

 

These actions are expected to be substantially completed by the end of2007.

 

Restructuring reserves by segment are as follows:

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Specialty  Chemicals          |       | $                      | 2.3        |                  | $          | 1.9 |   |
| Performance  Additives        |       | 4.2                    |       | 0.6                   |       |
| Advanced  Ceramics            |       | 0.5                    |       | 0.7                   |       |
| Specialty  Compounds          |       | 3.6                    |       | 4.9                   |       |
| Electronics                   |       | 2.7                    |       | 0.1                   |       |
| Corporate                     |       | 0.5                    |       | 0.3                   |       |
|                          |       | $                      | 13.8       |                  | $          | 8.5 |   |

 

**14.     COMMITMENTSAND CONTINGENCIES:**

 

***Legal Proceedings***—TheCompany is involved in various legal proceedings, including commercial,intellectual property, product liability and environmental matters of a natureconsidered normal to its business. It is the Company’s policy to accrue foramounts related to these matters in accordance with SFAS No. 5,*Accounting for Contingencies*, if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.

 

In April 2005, Hospira Incorporated filed suit in Mecklenburg County,North Carolina Superior Court against one of the Company’s wholly-ownedsubsidiaries in its Specialty Compounds segment alleging claims for negligence,negligent misrepresentation, estoppel, fraud, third party beneficiary breach ofcontract and unfair trade practices as a result of the subsidiary providing PVCcompound to its customer. Hospira is seeking damages of approximately $16.0million for costs allegedly related to its recall and destruction ofintravenous administration kits that incorporated components made with thiscompound, and further seeks treble damages of approximately $48.0 million, plusattorneys’ fees and interest, under the North Carolina unfair trade practicestatute. The Court has dismissed Hospira’s negligence and estoppel claims, butdenied the subsidiary’s motion to dismiss the other claims. Followingdiscovery, the Company’s subsidiary filed a motion for summary judgment todismiss the remaining claims. On November 9, 2007, the trial court granted theCompany's motion for summary judgment dismissing all of the plaintiff's claims.The Company cannot predict whether the plaintiff will appeal this decision orhow this decision will impact the ultimate resolution of the case; however, theCompany will continue to vigorously defend this matter. While the Companybelieves its subsidiary has meritorious defenses against Hospira’s claims anddoes not believe that resolution of this matter will have a material adverseeffect on its business or financial condition, the Company cannot predict the ultimateoutcome of this litigation and resolution of this claim may have a materialadverse effect on its results of operations or cash flows in any quarterly orannual reporting period.

 

Although the Company expects to continue to pay legal fees inconnection with certain legal actions related to chromated copper 

 

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arsenate and other product liability matters, based on currentlyavailable facts, the Company does not believe that these actions will have amaterial effect on the financial condition, results of operations or liquidityof the Company, except as discussed above. Reserves in connection with suchproduct liability matters do not individually exceed $3.0 million and in theaggregate $5.5 million. The Company’s reserve estimates are based on availablefacts, including damage claims and input from its internal and external legalcounsel, past experience, and, in some instances where defense costs are beingpaid by its insurer, known insurance recoveries. The Company is unable toestimate the amount or range of any potential incremental charges should factsand circumstances change and may in the future revise its estimates based onnew information becoming available. Further, the Company cannot predict theoutcome of any litigation or the potential for future litigation.

 

***Indemnity Matters***—Underthe terms of the Business and Share Sale and Purchase Agreement, the Deed ofTax Covenant and the Environmental Deed entered into in connection with the KKRAcquisition, Degussa U.K. Holdings Ltd., as successor to Laporte Plc, isobligated to indemnify the Company for certain legal, tax and environmentalliabilities and obligations that relate to the period prior to the closing ofthe KKR Acquisition. Under the terms of the Sale and Purchase Agreement with mgtechnologies ag (now known as GEA Group Aktiengesellschaft (“GEA Group”)) andits subsidiary MG North America Holdings, Inc. (now known as GEA North AmericaInc. (“GEA North America”)), GEA Group is obligated to indemnify the Companyfor certain legal, tax and environmental liabilities and obligations thatrelate to the period prior to the closing, subject to certain limits andexclusions. Pursuant to these agreements, the Company has various claims forindemnification with Degussa and GEA Group. In addition, the Company may besubject to indemnity claims relating to properties or businesses it divested.For example, as discussed below, the Company is required to indemnify thebuyers of the Groupe Novasep subsidiary for certain known and unknownenvironmental actions which may arise in the future that relate to the periodprior to the closing. In the opinion of management, and based upon informationcurrently available, the ultimate resolution of any indemnification obligationsowed to the Company or by the Company will not have a material effect on theCompany’s financial condition, results of operations or cash flows.

 

**Safety, Health and EnvironmentalMatters**

 

***General***

 

The Company is subject to extensive environmental, health and safetylaws in the United States, the European Union (“EU”) and elsewhere at theinternational, national, state, and local levels. Many of these laws imposerequirements relating to clean-up of contamination, and impose liability in theevent of damage to human beings, natural resources or property, and provide forsubstantial fines, injunctions and potential criminal sanctions for violations.The products, including the raw materials handled, are also subject to rigorousindustrial hygiene regulations and investigation. The nature of the Company’soperations exposes it to risks of liability for breaches of these laws andregulations as a result of the production, storage, transportation and sale ofmaterials that can cause contamination or personal injury when released intothe environment. Environmental laws are subject to change and have tended tobecome stricter over time. Such changes in environmental laws, or the enactmentof new environmental laws, could result in materially increased capital,operating and compliance costs.

 

***Safety, Health andEnvironmental Management Systems***

 

The Company is committed to achieving and maintaining compliance withall applicable safety, health and environmental (“SHE”) legal requirements, andthe Company’s subsidiaries have developed policies and management systems thatare intended to identify the SHE legal requirements applicable to theiroperations, enhance compliance with such requirements, ensure the safety of theCompany’s employees, contractors, community neighbors and customers andminimize the production and emission of wastes and other pollutants. AlthoughSHE legal requirements are constantly changing, these SHE management systemsare designed to assist the Company in meeting its compliance goals andminimizing overall risk.

 

***SHE CapitalExpenditures***

 

The Company may incur future costs for capital improvements and generalcompliance under SHE laws. For the year ended December 31, 2006, thecapital expenditures for SHE matters totaled approximately $35.3 million,excluding costs to maintain and repair pollution control equipment. For 2007,the Company estimates capital expenditures for compliance with SHE laws to beat similar levels; however, because capital expenditures for these matters aresubject to changes in existing and new SHE laws, the Company cannot provide assurancethat its recent expenditures will be indicative of future amounts required tocomply with these laws.

 

***RegulatoryDevelopments***

 

In June 2007, the United States Department of Homeland Security Agency’sregulation on Chemical Plant Security became effective. This rule seeks toregulate security at facilities that store certain listed substances. TheCompany believes that 12 of its facilities in the United States may be requiredto provide information necessary to complete the first step known as the TopScreen. After gathering information during the Top Screen process, HomelandSecurity will develop four tiers of risk with Tier 1 being the highest risksites and Tier 4 representing the lowest. For national security reasons,the Department will not publish the ranking criteria. The Company 

 

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believes that following Top Screen, six of the Company’s locations mayreceive a ranking and be asked to undertake the second step of the regulation,which is to prepare a Site Vulnerability Analysis (which includesidentification of critical assets, threat assessments, identification ofpotential security vulnerabilities and analysis of countermeasures to aterrorist attack) and a Site Security Plan (which describes the securitymeasures that will address each identified vulnerability). Each SiteVulnerability Analysis and Site Security Plan must be reviewed and approved bythe Department of Homeland Security. Although some security improvements may berequired at certain of the Company’s facilities, the Company does not expectcompliance with this regulation to have a material impact on its cash flows orresults of operations.

 

On June 1, 2007 the Registration, Evaluation and Authorization ofChemicals (“REACH”) legislation became effective in the EU. REACH requiresmanufacturers and importers of certain chemicals to register those chemicals,perform health and environmental risk analyses of those chemicals, and incertain instances, obtain authorizations for the use of the chemicals. Coveredsubstances must be registered by December 31, 2008. Currently, REACH isexpected to be implemented in three phases over the next eleven years based onknown product hazards and/or volume of product in commerce. Under REACH, where warrantedby a risk assessment, specified uses of some hazardous substances may berestricted. As a specialty chemicals company, it is possible that the Companyis the only manufacturer of one or more substances to be regulated under REACHand thus could potentially bear the full cost of compliance with REACH for someor all of the Company’s products. The Company estimates it has approximately350 products that might be subject to REACH. The Company is taking steps tocomply with REACH and is evaluating the potential costs of compliance which itbelieves to be approximately $3.0 million per year over the next eleven years,although the Company may incur additional costs depending on the safetyassessments required. In addition, it is possible that REACH may affect rawmaterial supply, customer demand for certain products and the Company’sdecision to continue to manufacture and sell certain products.

 

Under the European Union Integrated Pollution Prevention and ControlDirective (“IPPC”), EU member governments are to adopt rules and implement across-media (air, water and waste) environmental permitting program forindividual facilities. IPPC requires a consistent application of Best AvailableTechniques throughout the EU. While the EU countries are at varying stages intheir respective implementation of the IPPC permit program, the Company hassubmitted all necessary IPPC permit applications required to date, and in somecases received completed permits from the applicable government agency. TheCompany expects to submit all other IPPC applications and related documents ona timely basis as the various countries implement the IPPC permit program.Although it is not known with certainty what each IPPC permit will require, theCompany believes, based upon its experience with the permits received to date,that the costs of compliance with the IPPC permit program will not be materialto its results of operations, financial position or liquidity.

 

The Kyoto Protocol is an amendment to an international treaty on globalwarming. The Protocol establishes significant emission reduction targets forsix gases considered to have global warming potential, referred to asgreenhouse gases. The Protocol was adopted in 1997 and became effective inFebruary 2005 in over 140 countries that have ratified it. The EU, includingGermany and other countries where the Company has interests, ratified the KyotoProtocol in 2002 and, in doing so, have enacted regulations that reduce theemission of greenhouse gases and have established a trading system coveringcarbon dioxide emissions, which became effective at the start of 2005. Theregulations directly affect the Company’s power plants at the Duisburg andLangelsheim sites in Germany, as well as the power plant being operated by athird party on one of the Company’s sites. Rockwood and such third party arerequired to purchase carbon dioxide credits, which could result in increasedoperating costs, and may be required to develop additional cost-effectivemethods to reduce carbon dioxide emissions, which could result in increasedcapital expenditures. The new regulation indirectly affects the Company’s otheroperations in the EU, which may experience higher energy costs from third partyproviders. The Company continues to evaluate options in order to comply withthe Protocol. However, the Company does not expect this to have a materialimpact on its cash flow or results of operations.

 

***RemediationLiabilities***

 

Environmental laws have a significant effect on the nature and scope ofany clean-up of contamination at current and former operating facilities, thecosts of transportation and storage of chemicals and finished products and thecosts of the storage and disposal of wastes. In addition, “Superfund” statutesin the United States as well as statutes in other jurisdictions impose strict,joint and several liability for clean-up costs on the entities that generatedwaste and/or arranged for its disposal at contaminated third party sites, aswell as the past and present owners and operators of contaminated sites. Allresponsible parties may be required to bear some or all clean-up costsregardless of fault, legality of the original disposal or ownership of thedisposal site.

 

Environmental contamination is known to exist at certain of the Company’spresent and former facilities, including its facilities located in Turin,Italy; St. Fromond, St. Cheron and Sens, France; Hainhausen, Troisdorf,Stadeln, Duisburg, Plochingen, Marktredwitz, Ronnenberg-Empelde andLangelsheim, Germany; Oss, The Netherlands; Kidsgrove, Sudbury and Barrow,U.K.; Boksburg East, South Africa and in the United States, in Valdosta,Georgia, Beltsville, Maryland, Louisville, Kentucky, New Johnsonville,Tennessee, Harrisburg, North Carolina, Laurens, South Carolina, Silver Peak,Nevada, Easton, Pennsylvania, Middletown, New York and La Mirada, California.Soil contamination is also known to exist at the Company’s facilities atFreeport, Texas, Sudbury, U.K., Sens, France, Dueneberg, Germany and Sumperk inCzech Republic; however, no further regulatory remedial actions are currentlyrequired for these facilities and any liabilities arising from suchcontamination is covered by indemnity 

 

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obligations or the previous owners of these facilities with theexception of Freeport, Dueneberg and Sens. The Company is currently operatinggroundwater remediation systems at its Hainhausen, Stadeln, Oss, Valdosta, andSilver Peak facilities. The Company also operates groundwater remediation and/ormonitoring systems at its Plochingen, Marktredwitz, Stadeln, Troisdorf, NewJohnsonville and Laurens facilities, for which prior owners or insurers haveassumed responsibility. The Company also continues to monitor groundwater atthe Beltsville and St. Cheron facilities, which were previously the subject ofa soil removal action. Groundwater is also monitored at the St. Fromond, Eastonand Barrow facilities due to prior spills and at the Harrisburg facility due toa landfill closure. The Company believes that additional environmental studies,and possibly environmental remediations, will be required at the Harrisburgfacility. The Company is also in the process of determining appropriateremedial actions with the regulatory authorities at the following locations:Duisburg, Langelsheim, Troisdorf, Turin, Louisville and La Mirada. Furthermore,as a result of facility closings, divestitures and offsite disposal activities,the Company is responsible for the following other matters: contaminationbeneath divested portions of the manufacturing facility in Troisdorf; a formerdisposal site in Laurel, Maryland; contamination at a closed SpecialtyChemicals facility in Houston, Texas; groundwater contamination at a formerlyowned manufacturing facility in Middletown, New York; contamination at a formerSpecialty Chemicals facility in Sunbright, Virginia; groundwater remediation atStadeln; and former sites operated by Dynamit Nobel’s previously divestedexplosives business. The Company is also a*de minimis* participant in several Superfund matters.

 

Although the Company cannot provide assurances in this regard, theCompany does not believe that these issues will have a material adverse effecton its business or financial condition, but may have a material adverse effecton the results of operations or cash flows in any given quarterly or annualreporting period. Nonetheless, the discovery of contamination arising frompresent or historical industrial operations at some of the Company’s and theCompany’s predecessor’s former and present properties and/or at sites theCompany and its predecessor disposed wastes could expose the Company to cleanupobligations and other damages in the future.

 

***GovernmentEnforcement Proceedings and Civil Litigation***

 

During the course of the Company’s business, the Company may receivenotices of violation, enforcement and other complaints from regulatory agenciesalleging non-compliance with applicable SHE laws. Currently, the Company is aparty to a consent order with the Metropolitan Sewer District (“MSD”) in St.Louis, Missouri to reduce ammonia concentrations in wastewater discharge to acity treatment plant. MSD’s new National Pollution Discharge Elimination System(“NPDES”) permit requires the Company to reduce the facility’s ammonia dischargeby an average of 50% by December 31, 2008. The Company is evaluating variousoptions to reduce the amount of ammonia discharge. The Company will be requiredto make capital expenditures of approximately $3.0 million in connection withthis matter.

 

***EnvironmentalIndemnity Obligations***

 

Pursuant to the share purchase agreement entered into in connectionwith the sale of the Groupe Novasep subsidiary, the Company agreed to indemnifythe buyers for certain known and unknown environmental actions which may arisein the future related to periods prior to closing of the sale. Theseobligations expire three years after the closing; however, the Company’sliability for such obligations is reduced from 90 percent of any qualifyingenvironmental liability claim to 70 percent of such claims 15 months after theclosing. In addition, the Company is required to indemnify the purchaser of theCompany’s U.S. Wafer Reclaim business for six years for any unknownenvironmental actions attributable to the conduct of such business prior to theclosing of the transaction in February 2007. The business purchase agreementprovides that the Company must indemnify the buyer for 100% of claims relatedto contamination of the business’ site or the migration of any hazardous substancesfrom such site if notice of any such claim is given within four years of theclosing of the transaction in February 2007, and 50% of such claims if noticeis given after the fourth but before the sixth anniversary of the closing.

 

Likewise, pursuant to the stock purchase agreement entered into inconnection with the sale of our electronics business upon the closing of thetransaction, the Company agreed to indemnify the buyer for certain known andunknown environmental actions which may arise in the future related to periodsprior to the closing of the sale. The obligation to indemnify the buyer forenvironmental liabilities arising at the electronics business’ current sitesexpires five years after the closing, while the obligation to indemnify for off-sitematters survives for a period of seven years following the closing. The Companyalso agreed to indemnify the buyer for any environmental actions at sitesformerly owned or operated by the business resulting from the business’ prioractivities. All indemnification obligations remain subject to the close of thetransaction, which, subject to regulatory approval, is expected in the fourthquarter of 2007.

 

***EnvironmentalIndemnities***

 

Pursuant to the environmental deed entered into in connection with theKKR Acquisition, Degussa, as successor to Laporte, is required to indemnify usand our subsidiaries for certain environmental matters that relate to thebusiness as conducted prior to the closing of the KKR Acquisition. Theenvironmental deed provides that Degussa will indemnify the Company and itssubsidiaries for claims for which notice is given within a period of two yearsfor breaches of representations and warranties, which expired in 2002, and fiveyears, which expired in September 2005, for claims related to the contaminationof the Company’s properties or the Company’s subsidiaries’ properties(inclusive of contamination which leaks or escapes from the Company’sproperties or the 

 

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Company’s subsidiaries’ properties). These indemnity obligations aresubject to a minimum per matter loss of $0.2 million and are further subject toa $5.0 million deductible for the indemnity to be available. In addition, theenvironmental deed provides that Degussa will indemnify the Company and itssubsidiaries for claims relating to properties that were formerly owned,occupied or used as of November 20, 2000, as well as properties owned by thirdparties (inclusive of disposal of waste and certain other identified issuesprior to November 20, 2000). The environmental deed provides that in thisinstance, Degussa will be responsible for reasonable costs and expensesincurred.

 

In addition, pursuant to the sale and purchase agreement entered intoin connection with the Dynamit Nobel Acquisition in April 2004, GEA Group andits subsidiary, GEA North America, are required to indemnify the Company andits subsidiaries for 50% of the excess amount of losses over the amount of therelated reserves (in the case of known claims) and 50% of claims (in the caseof unknown claims) related to the contamination of the Company or itssubsidiaries’ properties, if notified within ten years. If GEA Group’s and GEANorth America’s responsibility for contamination matters cannot be proven, a slidingscale reduces the percentage further for each year during the five-year periodfrom year six to ten. GEA Group and GEA North America are also obligated toindemnify us for 85% of claims related to legacy site matters, such asenvironmental matters relating to properties or businesses owned or operated byDynamit Nobel prior to, but not on, the closing of Dynamit Nobel Acquisition,if notified within ten years from closing (which occurred on July 31, 2004). Inaddition, GEA Group and GEA North America are obligated to indemnify theCompany for 50% of the excess amount of losses over the amount of the relatedreserves for operational compliance matters, if notified by December 31, 2006,and 50% of the excess amount of losses over the amount of the related reserves(in the case of known claims) and 50% of claims (in the case of unknown claims)related to certain environmental damage claims unknown at the time of theclosing of the Dynamit Nobel Acquisition, if notified within ten years. All ofthese indemnity obligations are subject to different minimum per claimthresholds depending on whether the matter was disclosed or not, and on thesubject matter, ranging between €100,000 and €750,000 ($142,670 and $1,070,025using the Friday, September 28, 2007 exchange rate of €1.00 = $1.4267)depending on the type of claim. The indemnity obligations are further subjectto certain deductibles, exclusions and limitations. Furthermore, GEA Group andGEA North America are obligated to indemnify the Company for certain environmentalrisks arising from certain “shared site” structures for a duration of ten yearsfrom closing. This indemnity obligation is not subject to the percentages,*de minimis* exclusions, deductibles andthresholds described above, and it is not subject to most of the generallimitations.

 

Although the Company has no reason to believe that the financialcondition of those parties who may have indemnification obligations to theCompany is other than sound, in the event the Company seeks indemnity under anyof these agreements or through other means, there can be no assurance that GEAGroup, GEA North America, Degussa or any other party who may have obligationsto indemnify the Company will adhere to their obligations and the Company mayhave to resort to legal action to enforce its rights under the indemnities. Incases where the Company’s indemnification claims to third parties areuncontested, the Company expects to realize recoveries within the short term.In addition, the Company may be required to make indemnity payments inconnection with certain environmental matters. However, the Company does notbelieve that resolution of the known environmental matters subject toindemnification obligations owed to the Company will have a material adverseeffect on its business or financial condition, but may have a material adverseeffect on the Company’s results of operations or cash flow in any quarterly orannual reporting period.

 

***EnvironmentalReserves***

 

The Company has established financial reserves relating to anticipatedenvironmental cleanup obligations, site reclamation and remediation and closurecosts, which are reviewed at least quarterly based on currently availableinformation. Liabilities are recorded when potential liabilities are eitherknown or believed to be probable and can be reasonably estimated. In the eventthat the Company establishes a financial reserve in connection with siteremediation costs, the Company records a reserve for the estimated cost of theremediation, even though the costs of the remediation will likely be spread outover many years. The Company does not include unasserted claims in itsreserves.

 

The Company’s liability estimates are based upon available facts,existing technology, indemnities from third parties, past experience and, insome instances, insurance recoveries where the remediation costs are being paiddirectly by its insurers and are generated by several means, includingState-mandated schedules, environmental consultants and internal experts,depending on the circumstances. On a consolidated basis, the Company hasaccrued $39.7 million and $34.9 million for known environmental liabilities asof September 30, 2007 and December 31, 2006, respectively, all of which areclassified as other non-current liabilities in the Condensed ConsolidatedBalance Sheets for such periods. The increase in the environmental reserve asof September 30, 2007 is primarily due to environmental liabilities assumed inthe acquisition of the global color pigments business of Elementis plc completedin the third quarter of 2007. The environmental liabilities assumed are subjectto change upon the finalization of purchase accounting. Included in the $39.7million as of September 30, 2007 is €6.8 million ($9.7 million usingthe Friday, September 28, 2007 exchange rate of €1.00 = $1.4267) that isdiscounted using a 5.0% discount rate (undiscounted amount equals $14.7million), and €2.1 million ($3.0 million) that is discounted using a 5.5%discount rate (undiscounted amount equals $4.0 million). Included in the $34.9million as of December 31, 2006 is €6.7 million ($8.8 million usingthe December 31, 2006 exchange rate of €1.00 = $1.3199) that is discountedusing a 5.0% discount rate (undiscounted amount equals $13.8 million), and €1.9million ($2.5 million) that is discounted using a 5.5% discount rate(undiscounted amount equals $3.2 million). In certain cases, the Company’sremediation liabilities are payable over periods of up to 30 years. AtSeptember 30, 2007, the Company estimates that the potential range for suchenvironmental matters

 

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is from $39.7 million to $53.0 million. In the nine months endedSeptember 30, 2007, excluding the acquisition of the global color pigmentsbusiness of Elementis plc, the Company recorded charges of $0.2 million toincrease its environmental liabilities and made payments of $1.3 million forclean-up and remediation costs, which reduced its environmental liabilities.For the nine months ended September 30, 2007, the recurring cost of managinghazardous substances for our ongoing operations is $37.9 million. At a numberof the sites described above, the extent of contamination has not yet beenfully investigated or the final scope of remediation is not yet determinable andcould potentially affect the range identified above.

 

The Company is obligated to undertake soil remediation at twofacilities in Europe in the event manufacturing operations are discontinuedthere at some future date. In addition, in the event that manufacturingoperations are discontinued at any of the Company’s other facilities with knowncontamination, regulatory authorities may impose more stringent requirements onthe Company including soil remediation. The Company does not contemplate anysuch action occurring in the foreseeable future, as these facilities’ remaininglives are indefinite. Given the indeterminate useful life of these facilitiesand the corresponding indeterminate settlement date of any soil remediationobligations, the Company does not have sufficient information to estimate arange of potential settlement dates for its obligations. Consequently, theCompany cannot employ a present value technique to estimate fair value and,accordingly, has not accrued for any environmental related costs to remediatesoil at these facilities.

 

The Company believes these accruals are adequate based on currentlyavailable information. The Company may incur losses in excess of the amountsaccrued, however, based on currently available information it does not believethe additional amount of potential losses would have a material effect on itsresults of operations or financial condition, but may have a material effect onthe results of operations or cash flow in any given quarterly or annualreporting period. The Company does not believe that any known individualenvironmental matter would have a material effect on its results of operationsor financial condition. The Company is unable to estimate the amount or rangeof any potential incremental charges should facts and circumstances change andmay in the future revise its estimates based on new information becomingavailable.

 

**15.    CONSOLIDATING FINANCIAL INFORMATION:**

 

As described in Note 9, “Long-term Debt,” the Company issued the 2014Notes in November 2004. The following consolidating financial statementspresent the results of operations, financial condition and cash flows, inseparate columns, of the parent company (Rockwood Specialties Group, Inc.),which is the issuer of the 2014 Notes, guarantor subsidiaries, non-guarantorsubsidiaries, elimination adjustments and consolidated totals.

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED SEPTEMBER 30, 2007**

**(Dollarsin millions)**

 
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 203.5             |       | $                | 626.1      |   | $ | 829.6 |   |
| Cost of products  sold                                                       |       | —      |       | 144.1            |       | 430.2             |       | 574.3            |       |
| Gross profit                                                                 |       | —      |       | 59.4             |       | 195.9             |       | 255.3            |       |
| Selling, general  and administrative expenses                                |       | —      |       | 44.4             |       | 115.2             |       | 159.6            |       |
| Restructuring  charges, net                                                  |       | —      |       | 1.4              |       | 1.5               |       | 2.9              |       |
| Loss (gain) on  sale of assets                                               |       | —      |       | 0.1              |       | (0.2              | )          | (0.1             | )          |
| Operating income                                                             |       | —      |       | 13.5             |       | 79.4              |       | 92.9             |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                    |       | 23.8        |       | (9.5             | )          | (14.3             | )          | —           |       |
| Interest expense                                                             |       | (48.9       | )          | (0.3             | )          | (7.8              | )          | (57.0            | )          |
| Interest income                                                              |       | 2.3         |       | 0.2              |       | (0.6              | )          | 1.9              |       |
| Intergroup  other, net                                                       |       | 2.0         |       | 1.3              |       | (3.3              | )          | —           |       |
| Foreign exchange  gain (loss), net                                           |       | 11.8        |       | (0.3             | )          | (3.9              | )          | 7.6              |       |
| Other, net                                                                   |       | —      |       | —           |       | —            |       | —           |       |
| Other income  (expenses), net                                                |       | (9.0        | )          | (8.6             | )          | (29.9             | )          | (47.5            | )          |
| (Loss) income  from continuing operations before taxes and minority interest |       | (9.0        | )          | 4.9              |       | 49.5              |       | 45.4             |       |
| Income tax  provision                                                        |       | 2.8         |       | —           |       | 15.1              |       | 17.9             |       |
| (Loss) income  from continuing operations before minority interest           |       | (11.8       | )          | 4.9              |       | 34.4              |       | 27.5             |       |
| Minority  interest in continuing operations                                  |       | —      |       | —           |       | (2.8              | )          | (2.8             | )          |
| Net (loss)  income from continuing operations                                |       | (11.8       | )          | 4.9              |       | 31.6              |       | 24.7             |       |
| (Loss) gain on  sale of discontinued operations, net of tax                  |       | —      |       | (0.5             | )          | 0.5               |       | —           |       |
| Net (loss)  income                                                           |       | $           | (11.8      | )                | $          | 4.4               |       | $                | 32.1       |   | $ | 24.7 |   |

 

28

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED SEPTEMBER 30, 2006**

**(Dollarsin millions)**

 
| ** **                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                              |       | $           | —     |             | $          | 234.6             |       | $                | 505.2      |   | $ | 739.8 |   |
| Cost of products  sold                                 |       | —      |       | 170.4            |       | 339.7             |       | 510.1            |       |
| Gross profit                                           |       | —      |       | 64.2             |       | 165.5             |       | 229.7            |       |
| Selling, general  and administrative expenses          |       | —      |       | 47.6             |       | 100.2             |       | 147.8            |       |
| Restructuring  charges, net                            |       | —      |       | —           |       | 1.7               |       | 1.7              |       |
| Operating income                                       |       | —      |       | 16.6             |       | 63.6              |       | 80.2             |       |
| Other income  (expenses):                              |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                              |       | 28.7        |       | (5.9             | )          | (22.8             | )          | —           |       |
| Interest expense                                       |       | (53.4       | )          | (0.5             | )          | (6.7              | )          | (60.6            | )          |
| Interest income                                        |       | —      |       | —           |       | 1.1               |       | 1.1              |       |
| Intergroup  other, net                                 |       | 23.3        |       | (23.8            | )          | 0.5               |       | —           |       |
| Foreign exchange  (loss) gain, net                     |       | (0.4        | )          | —           |       | 5.2               |       | 4.8              |       |
| Other, net                                             |       | —      |       | —           |       | 0.3               |       | 0.3              |       |
| Other income  (expenses), net                          |       | (1.8        | )          | (30.2            | )          | (22.4             | )          | (54.4            | )          |
| (Loss) income  from continuing operations before taxes |       | (1.8        | )          | (13.6            | )          | 41.2              |       | 25.8             |       |
| Income tax  (benefit) provision                        |       | (0.4        | )          | (7.6             | )          | 17.7              |       | 9.7              |       |
| Net (loss)  income from continuing operations          |       | (1.4        | )          | (6.0             | )          | 23.5              |       | 16.1             |       |
| Income from  discontinued operations, net of tax       |       | —      |       | —           |       | 1.9               |       | 1.9              |       |
| Minority interest  in discontinued operations          |       | —      |       | —           |       | 3.4               |       | 3.4              |       |
| Net (loss)  income                                     |       | $           | (1.4       | )                | $          | (6.0              | )          | $                | 28.8       |   | $ | 21.4 |   |

 

29

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**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**NINE MONTHS ENDED SEPTEMBER 30, 2007**

**(Dollars in millions)**

 
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 597.3             |       | $                | 1,879.1    |   | $ | 2,476.4 |   |
| Cost of products  sold                                                       |       | —      |       | 418.3            |       | 1,273.1           |       | 1,691.4          |       |
| Gross profit                                                                 |       | —      |       | 179.0            |       | 606.0             |       | 785.0            |       |
| Selling, general  and administrative expenses                                |       | 0.1         |       | 129.2            |       | 345.3             |       | 474.6            |       |
| Restructuring  charges, net                                                  |       | —      |       | 2.2              |       | 6.7               |       | 8.9              |       |
| Loss (gain) on  sale of assets                                               |       | 0.1         |       | (4.1             | )          | (1.3              | )          | (5.3             | )          |
| Operating (loss)  income                                                     |       | (0.2        | )          | 51.7             |       | 255.3             |       | 306.8            |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                    |       | 60.4        |       | (20.0            | )          | (40.4             | )          | —           |       |
| Interest expense                                                             |       | (136.7      | )          | (1.6             | )          | (20.4             | )          | (158.7           | )          |
| Interest income                                                              |       | 15.7        |       | 0.5              |       | (5.2              | )          | 11.0             |       |
| Intergroup  other, net                                                       |       | 19.6        |       | 9.8              |       | (29.4             | )          | —           |       |
| Loss on early  extinguishment of debt                                        |       | (15.6       | )          | (3.2             | )          | (0.6              | )          | (19.4            | )          |
| Refinancing  expenses                                                        |       | (0.9        | )          | —           |       | —            |       | (0.9             | )          |
| Foreign exchange  gain (loss), net                                           |       | 15.2        |       | (0.6             | )          | (3.3              | )          | 11.3             |       |
| Other, net                                                                   |       | 0.3         |       | (0.3             | )          | (0.1              | )          | (0.1             | )          |
| Other income  (expenses), net                                                |       | (42.0       | )          | (15.4            | )          | (99.4             | )          | (156.8           | )          |
| (Loss) income  from continuing operations before taxes and minority interest |       | (42.2       | )          | 36.3             |       | 155.9             |       | 150.0            |       |
| Income tax  provision                                                        |       | 3.3         |       | 4.2              |       | 54.4              |       | 61.9             |       |
| (Loss) income  from continuing operations before minority interest           |       | (45.5       | )          | 32.1             |       | 101.5             |       | 88.1             |       |
| Minority  interest in continuing operations                                  |       | —      |       | —           |       | (6.2              | )          | (6.2             | )          |
| Net (loss)  income from continuing operations                                |       | (45.5       | )          | 32.1             |       | 95.3              |       | 81.9             |       |
| Income from  discontinued operations, net of tax                             |       | —      |       | —           |       | 0.5               |       | 0.5              |       |
| (Loss) gain on  sale of discontinued operations, net of tax                  |       | —      |       | (9.6             | )          | 125.3             |       | 115.7            |       |
| Minority  interest in discontinued operations                                |       | —      |       | —           |       | (0.1              | )          | (0.1             | )          |
| Net (loss)  income                                                           |       | $           | (45.5      | )                | $          | 22.5              |       | $                | 221.0      |   | $ | 198.0 |   |

 

30

----

** **

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**NINE MONTHS ENDED SEPTEMBER 30, 2006**

**(Dollars in millions)**

 
| ** **                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                              |       | $           | —     |             | $          | 735.8             |       | $                | 1,499.6    |   | $ | 2,235.4 |   |
| Cost of products  sold                                 |       | —      |       | 534.2            |       | 1,002.8           |       | 1,537.0          |       |
| Gross profit                                           |       | —      |       | 201.6            |       | 496.8             |       | 698.4            |       |
| Selling, general  and administrative expenses          |       | 0.1         |       | 141.6            |       | 295.0             |       | 436.7            |       |
| Restructuring  charges, net                            |       | —      |       | 0.1              |       | 3.8               |       | 3.9              |       |
| Gain on sale of  assets                                |       | —      |       | —           |       | (0.4              | )          | (0.4             | )          |
| Operating (loss)  income                               |       | (0.1        | )          | 59.9             |       | 198.4             |       | 258.2            |       |
| Other income  (expenses):                              |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                              |       | 83.5        |       | (19.3            | )          | (64.2             | )          | —           |       |
| Interest expense                                       |       | (126.1      | )          | (1.4             | )          | (20.6             | )          | (148.1           | )          |
| Interest income                                        |       | —      |       | —           |       | 3.6               |       | 3.6              |       |
| Intergroup  other, net                                 |       | 40.8        |       | (42.5            | )          | 1.7               |       | —           |       |
| Foreign exchange  gain, net                            |       | 2.1         |       | —           |       | 4.9               |       | 7.0              |       |
| Other, net                                             |       | —      |       | —           |       | 2.1               |       | 2.1              |       |
| Other income  (expenses), net                          |       | 0.3         |       | (63.2            | )          | (72.5             | )          | (135.4           | )          |
| Income (loss) from  continuing operations before taxes |       | 0.2         |       | (3.3             | )          | 125.9             |       | 122.8            |       |
| Income tax  provision (benefit)                        |       | 4.2         |       | (3.2             | )          | 49.0              |       | 50.0             |       |
| Net (loss)  income from continuing operations          |       | (4.0        | )          | (0.1             | )          | 76.9              |       | 72.8             |       |
| Income from  discontinued operations, net of tax       |       | —      |       | —           |       | 26.5              |       | 26.5             |       |
| Minority  interest in discontinued operations          |       | —      |       | —           |       | (0.8              | )          | (0.8             | )          |
| Net (loss)  income                                     |       | $           | (4.0       | )                | $          | (0.1              | )          | $                | 102.6      |   | $ | 98.5 |   |

 

31

----

 

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**SEPTEMBER 30, 2007**

**(Dollars in millions)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 269.0      |             | $          | (158.9            | )          | $                | (8.5       | )                | $          | — |   | $ | 101.6 |   |
| Accounts  receivable, net                        |       | —      |       | 125.6            |       | 422.7             |       | —           |       | 548.3            |       |
| Inventories                                      |       | —      |       | 137.1            |       | 374.5             |       | —           |       | 511.6            |       |
| Deferred income  taxes                           |       | (6.4        | )          | 17.6             |       | 4.9               |       | —           |       | 16.1             |       |
| Prepaid expenses  and other current assets       |       | 10.1        |       | 11.1             |       | 46.9              |       | —           |       | 68.1             |       |
| Total current  assets                            |       | 272.7       |       | 132.5            |       | 840.5             |       | —           |       | 1,245.7          |       |
| Property, plant  and equipment, net              |       | —      |       | 256.4            |       | 1,275.2           |       | —           |       | 1,531.6          |       |
| Investment in  subsidiary                        |       | 1,480.1     |       | 93.8             |       | —            |       | (1,573.9         | )          | —           |       |
| Goodwill                                         |       | —      |       | 360.2            |       | 1,466.1           |       | —           |       | 1,826.3          |       |
| Intergroup  receivable                           |       | 2,011.3     |       | 732.5            |       | 4,045.6           |       | (6,789.4         | )          | —           |       |
| Other intangible  assets, net                    |       | —      |       | 76.7             |       | 595.5             |       | —           |       | 672.2            |       |
| Deferred debt  issuance costs, net               |       | 2.3         |       | 4.4              |       | 35.9              |       | —           |       | 42.6             |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 21.8              |       | —           |       | 21.8             |       |
| Other assets                                     |       | —      |       | 5.3              |       | 35.9              |       | —           |       | 41.2             |       |
| Total assets                                     |       | $           | 3,766.4    |             | $          | 1,661.8           |       | $                | 8,316.5    |             | $          | (8,363.3 | ) | $ | 5,381.4 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 74.4              |       | $                | 196.8      |             | $          | — |   | $ | 271.2 |   |
| Income taxes  payable                            |       | —      |       | 0.4              |       | 7.2               |       | —           |       | 7.6              |       |
| Accrued  compensation                            |       | —      |       | 17.5             |       | 74.3              |       | —           |       | 91.8             |       |
| Restructuring  liability                         |       | —      |       | 4.9              |       | 8.9               |       | —           |       | 13.8             |       |
| Accrued expenses  and other current liabilities  |       | 38.9        |       | 47.7             |       | 124.6             |       | —           |       | 211.2            |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 4.6               |       | —           |       | 4.6              |       |
| Long-term debt,  current portion                 |       | 24.7        |       | —           |       | 82.6              |       | —           |       | 107.3            |       |
| Total current  liabilities                       |       | 63.6        |       | 144.9            |       | 499.0             |       | —           |       | 707.5            |       |
| Long-term debt                                   |       | 2,250.8     |       | —           |       | 196.9             |       | —           |       | 2,447.7          |       |
| Pension and  related liabilities                 |       | —      |       | 8.5              |       | 373.8             |       | —           |       | 382.3            |       |
| Intergroup  payable                              |       | 432.8       |       | 1,352.7          |       | 5,003.9           |       | (6,789.4         | )          | —           |       |
| Deferred income  taxes                           |       | (22.3       | )          | 24.4             |       | 82.5              |       | —           |       | 84.6             |       |
| Other  liabilities                               |       | 41.2        |       | 34.6             |       | 84.2              |       | —           |       | 160.0            |       |
| Total  liabilities                               |       | 2,766.1     |       | 1,565.1          |       | 6,240.3           |       | (6,789.4         | )          | 3,782.1          |       |
| Minority  interest                               |       | —      |       | —           |       | 180.8             |       | —           |       | 180.8            |       |
| Stockholder’s  equity:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,005.4     |       | 97.6             |       | 1,121.0           |       | (1,218.6         | )          | 1,005.4          |       |
| Accumulated  other comprehensive income          |       | 28.7        |       | (1.2             | )          | 318.5             |       | —           |       | 346.0            |       |
| Retained  (deficit) earnings                     |       | (33.8       | )          | (190.3           | )          | 291.2             |       | —           |       | 67.1             |       |
| Total  stockholder’s equity                 |       | 1,000.3     |       | 96.7             |       | 1,895.4           |       | (1,573.9         | )          | 1,418.5          |       |
| Total  liabilities and stockholder’s equity |       | $           | 3,766.4    |             | $          | 1,661.8           |       | $                | 8,316.5    |             | $          | (8,363.3 | ) | $ | 5,381.4 |   |

 

32

----

** **

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**DECEMBER 31, 2006**

**(Dollars in millions)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 463.7      |             | $          | (168.4            | )          | $                | (269.4     | )                | $          | — |   | $ | 25.9 |   |
| Accounts  receivable, net                        |       | —      |       | 119.4            |       | 344.0             |       | —           |       | 463.4            |       |
| Inventories                                      |       | —      |       | 103.6            |       | 341.8             |       | —           |       | 445.4            |       |
| Deferred income  taxes                           |       | (6.4        | )          | 13.1             |       | 8.4               |       | —           |       | 15.1             |       |
| Prepaid expenses  and other current assets       |       | —      |       | 8.4              |       | 32.4              |       | —           |       | 40.8             |       |
| Assets of  discontinued operations               |       | —      |       | —           |       | 490.6             |       | —           |       | 490.6            |       |
| Total current  assets                            |       | 457.3       |       | 76.1             |       | 947.8             |       | —           |       | 1,481.2          |       |
| Property, plant  and equipment, net              |       | —      |       | 228.8            |       | 1,146.1           |       | —           |       | 1,374.9          |       |
| Investment in  subsidiary                        |       | 1,685.2     |       | 87.3             |       | —            |       | (1,772.5         | )          | —           |       |
| Goodwill                                         |       | —      |       | 349.2            |       | 1,368.5           |       | —           |       | 1,717.7          |       |
| Intergroup  receivable                           |       | 1,488.0     |       | 682.7            |       | 3,859.2           |       | (6,029.9         | )          | —           |       |
| Other intangible  assets, net                    |       | —      |       | 56.5             |       | 483.1             |       | —           |       | 539.6            |       |
| Deferred debt  issuance costs, net               |       | 3.4         |       | 8.9              |       | 39.3              |       | —           |       | 51.6             |       |
| Other assets                                     |       | 16.9        |       | 2.9              |       | 36.3              |       | —           |       | 56.1             |       |
| Total assets                                     |       | $           | 3,650.8    |             | $          | 1,492.4           |       | $                | 7,880.3    |             | $          | (7,802.4 | ) | $ | 5,221.1 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 66.3              |       | $                | 224.0      |             | $          | — |   | $ | 290.3 |   |
| Income taxes  payable                            |       | 4.5         |       | (6.4             | )          | 2.1               |       | —           |       | 0.2              |       |
| Accrued  compensation                            |       | —      |       | 24.5             |       | 61.4              |       | —           |       | 85.9             |       |
| Restructuring  liability                         |       | —      |       | 0.5              |       | 8.0               |       | —           |       | 8.5              |       |
| Accrued expenses  and other current liabilities  |       | 38.6        |       | 28.1             |       | 111.8             |       | —           |       | 178.5            |       |
| Senior secured  revolving credit facility        |       | —      |       | —           |       | 37.0              |       | —           |       | 37.0             |       |
| Long-term debt,  current portion                 |       | 59.8        |       | —           |       | 21.0              |       | —           |       | 80.8             |       |
| Liabilities of  discontinued operations          |       | —      |       | —           |       | 171.1             |       | —           |       | 171.1            |       |
| Total current  liabilities                       |       | 102.9       |       | 113.0            |       | 636.4             |       | —           |       | 852.3            |       |
| Long-term debt                                   |       | 2,477.1     |       | —           |       | 243.8             |       | —           |       | 2,720.9          |       |
| Pension and  related liabilities                 |       | —      |       | 9.3              |       | 343.7             |       | —           |       | 353.0            |       |
| Intergroup  payable                              |       | —      |       | 1,052.2          |       | 4,977.7           |       | (6,029.9         | )          | —           |       |
| Deferred income  taxes                           |       | (16.1       | )          | 24.6             |       | 40.0              |       | —           |       | 48.5             |       |
| Other  liabilities                               |       | 10.4        |       | 18.9             |       | 64.9              |       | —           |       | 94.2             |       |
| Total  liabilities                               |       | 2,574.3     |       | 1,218.0          |       | 6,306.5           |       | (6,029.9         | )          | 4,068.9          |       |
| Minority  interest                               |       | —      |       | —           |       | 33.6              |       | —           |       | 33.6             |       |
| Stockholder’s  equity:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,005.4     |       | 296.4            |       | 1,120.8           |       | (1,417.2         | )          | 1,005.4          |       |
| Accumulated  other comprehensive income          |       | 58.1        |       | (1.2             | )          | 179.8             |       | —           |       | 236.7            |       |
| Retained  earnings (deficit)                     |       | 13.0        |       | (211.4           | )          | 74.9              |       | —           |       | (123.5           | )          |
| Total  stockholder’s equity                 |       | 1,076.5     |       | 274.4            |       | 1,540.2           |       | (1,772.5         | )          | 1,118.6          |       |
| Total  liabilities and stockholder’s equity |       | $           | 3,650.8    |             | $          | 1,492.4           |       | $                | 7,880.3    |             | $          | (7,802.4 | ) | $ | 5,221.1 |   |

 

33

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** **

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**NINE MONTHS ENDED SEPTEMBER 30, 2007**

**(Dollars in millions)**

 
| ** **                                                                                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                        |       |        |       |             |       |              |       |             |       |
| Net (loss)  income                                                                                                |       | $           | (45.5      | )                | $          | 22.5              |       | $                | 221.0      |   | $ | 198.0 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities:              |       |        |       |             |       |              |       |             |       |
| Income from  discontinued operations, net of tax                                                                  |       | —      |       | —           |       | (0.5              | )          | (0.5             | )          |
| Gain on sale of  discontinued operations                                                                          |       | —      |       | 9.6              |       | (125.3            | )          | (115.7           | )          |
| Minority  interest in discontinued operations                                                                     |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Depreciation and  amortization                                                                                    |       | —      |       | 28.4             |       | 136.9             |       | 165.3            |       |
| Deferred  financing costs amortization                                                                            |       | 0.4         |       | 1.1              |       | 5.4               |       | 6.9              |       |
| Loss on early  extinguishment of debt (including $4.9 million of noncash write-offs on  deferred financing costs) |       | 15.6        |       | 3.2              |       | 0.6               |       | 19.4             |       |
| Foreign exchange  (gain) loss                                                                                     |       | (15.2       | )          | 0.6              |       | 3.3               |       | (11.3            | )          |
| Fair value  adjustment of derivatives                                                                             |       | 13.3        |       | —           |       | 2.1               |       | 15.4             |       |
| Bad debt  provision                                                                                               |       | —      |       | (0.2             | )          | 1.7               |       | 1.5              |       |
| Stock-based  compensation                                                                                         |       | —      |       | 1.7              |       | 0.7               |       | 2.4              |       |
| Deferred income  taxes                                                                                            |       | 0.3         |       | (0.3             | )          | 24.2              |       | 24.2             |       |
| Loss (gain) on  sale of assets                                                                                    |       | 0.1         |       | (4.1             | )          | (1.3              | )          | (5.3             | )          |
| Minority  interest in continuing operations                                                                       |       | —      |       | —           |       | 6.2               |       | 6.2              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:          |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                               |       | —      |       | 8.9              |       | (34.9             | )          | (26.0            | )          |
| Inventories,  including inventory write-up reversal                                                               |       | —      |       | (7.2             | )          | 4.4               |       | (2.8             | )          |
| Prepaid expenses  and other assets                                                                                |       | (0.1        | )          | (2.5             | )          | (2.9              | )          | (5.5             | )          |
| Accounts payable                                                                                                  |       | —      |       | 7.1              |       | (33.2             | )          | (26.1            | )          |
| Income taxes  payable                                                                                             |       | (4.5        | )          | 6.8              |       | 4.0               |       | 6.3              |       |
| Accrued expenses  and other liabilities                                                                           |       | 9.6         |       | 8.7              |       | 19.5              |       | 37.8             |       |
| Intercompany  operating activities, net                                                                           |       | 22.5        |       | (41.9            | )          | 19.4              |       | —           |       |
| Net cash (used  in) provided by operating activities of continuing operations                                     |       | (3.5        | )          | 42.4             |       | 251.4             |       | 290.3            |       |
| Net cash  provided by operating activities of discontinued operations                                             |       | —      |       | —           |       | 1.6               |       | 1.6              |       |
| **Net  cash (used in) provided by operating activities**                                                          |       | (3.5        | )          | 42.4             |       | 253.0             |       | 291.9            |       |
| ** **                                                                                                        |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                        |       |        |       |             |       |              |       |             |       |
| Acquisitions, including  transaction fees paid, net of cash acquired                                              |       | —      |       | (94.8            | )          | (73.6             | )          | (168.4           | )          |
| Acquisitions,  related intercompany                                                                               |       | (170.3      | )          | 89.5             |       | 80.8              |       | —           |       |
| Capital  expenditures, excluding capital leases                                                                   |       | —      |       | (18.6            | )          | (121.6            | )          | (140.2           | )          |
| Proceeds from  formation of Viance joint venture, net                                                             |       | —      |       | 51.5             |       | 21.5              |       | 73.0             |       |
| Proceeds on sale  of property, plant and equipment                                                                |       | (0.1        | )          | 6.6              |       | 7.2               |       | 13.7             |       |
| Net cash (used  in) provided by investing activities of continuing operations                                     |       | (170.4      | )          | 34.2             |       | (85.7             | )          | (221.9           | )          |
| Net cash (used in)  provided by investing activities of discontinued operations                                   |       | —      |       | (4.4             | )          | 425.5             |       | 421.1            |       |
| **Net  cash (used in) provided by investing activities**                                                          |       | (170.4      | )          | 29.8             |       | 339.8             |       | 199.2            |       |
| ** **                                                                                                        |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                        |       |        |       |             |       |              |       |             |       |
| Repayment of 2011  Notes                                                                                          |       | (273.4      | )          | —           |       | —            |       | (273.4           | )          |
| Repayment of  senior secured credit facilities                                                                    |       | (60.0       | )          | —           |       | (34.1             | )          | (94.1            | )          |
| Payments on  other long-term debt                                                                                 |       | —      |       | —           |       | (22.2             | )          | (22.2            | )          |
| Payments related  to early extinguishment of debt                                                                 |       | (14.5       | )          | —           |       | —            |       | (14.5            | )          |
| Intercompany  debt related activity                                                                               |       | 322.9       |       | (62.9            | )          | (260.0            | )          | —           |       |
| Net cash used in  financing activities of continuing operations                                                   |       | (25.0       | )          | (62.9            | )          | (316.3            | )          | (404.2           | )          |
| Net cash used in  financing activities of discontinued operations                                                 |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash used in financing activities**                                                                        |       | (25.0       | )          | (62.9            | )          | (316.3            | )          | (404.2           | )          |
| ** **                                                                                                        |       |        |       |             |       |              |       |             |       |
| Effect of  exchange rate changes on cash and cash equivalents                                                     |       | 4.2         |       | 0.2              |       | (14.0             | )          | (9.6             | )          |
| Net (decrease)  increase in cash and cash equivalents                                                             |       | (194.7      | )          | 9.5              |       | 262.5             |       | 77.3             |       |
| Less increase in  cash and cash equivalents from discontinued operations, net of sale proceeds                    |       | —      |       | —           |       | (1.6              | )          | (1.6             | )          |
| (Decrease)  increase in cash and cash equivalents from continuing operations                                      |       | (194.7      | )          | 9.5              |       | 260.9             |       | 75.7             |       |
| Cash and cash  equivalents of continuing operations, beginning of period                                          |       | 463.7       |       | (168.4           | )          | (269.4            | )          | 25.9             |       |
| Cash and cash  equivalents of continuing operations, end of period                                                |       | $           | 269.0      |             | $          | (158.9            | )          | $                | (8.5       | ) | $ | 101.6 |   |

 

34

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** **

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**NINE MONTHS ENDED SEPTEMBER 30, 2006**

**(Dollars in millions)**

 
| ** **                                                                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                   |       |        |       |             |       |              |       |             |       |
| Net (loss)  income                                                                                                           |       | $           | (4.0       | )                | $          | (0.1              | )          | $                | 102.6      |   | $ | 98.5 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:                         |       |        |       |             |       |              |       |             |       |
| Income from  discontinued operations, net of tax                                                                             |       | —      |       | —           |       | (26.5             | )          | (26.5            | )          |
| Minority  interest in discontinued operations                                                                                |       | —      |       | —           |       | 0.8               |       | 0.8              |       |
| Depreciation and  amortization                                                                                               |       | —      |       | 26.6             |       | 114.3             |       | 140.9            |       |
| Deferred  financing costs amortization                                                                                       |       | 0.5         |       | 1.5              |       | 5.2               |       | 7.2              |       |
| Foreign exchange  gain                                                                                                       |       | (2.2        | )          | —           |       | (4.8              | )          | (7.0             | )          |
| Fair value  adjustment of derivatives                                                                                        |       | (5.3        | )          | —           |       | (0.9              | )          | (6.2             | )          |
| Bad debt  provision                                                                                                          |       | —      |       | 0.5              |       | 1.4               |       | 1.9              |       |
| Deferred income  taxes                                                                                                       |       | 1.5         |       | 0.4              |       | 27.5              |       | 29.4             |       |
| Gain on sale of  assets                                                                                                      |       | —      |       | —           |       | (0.4              | )          | (0.4             | )          |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                     |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                                         |       | —      |       | (1.1             | )          | (30.5             | )          | (31.6            | )          |
| Inventories,  including inventory write-up reversal                                                                          |       | —      |       | (2.9             | )          | (13.6             | )          | (16.5            | )          |
| Prepaid expenses  and other assets                                                                                           |       | (2.1        | )          | 2.4              |       | 20.3              |       | 20.6             |       |
| Accounts payable                                                                                                             |       | —      |       | (7.5             | )          | (14.9             | )          | (22.4            | )          |
| Income taxes  payable                                                                                                        |       | 2.7         |       | (4.5             | )          | 9.9               |       | 8.1              |       |
| Accrued expenses  and other liabilities (including intercompany transactions with discontinued  operations of $45.0 million) |       | 33.2        |       | 11.0             |       | (66.6             | )          | (22.4            | )          |
| Intercompany  operating activities, net                                                                                      |       | 56.5        |       | (60.9            | )          | 4.4               |       | —           |       |
| Net cash  provided by (used in) operating activities of continuing operations                                                |       | 80.8        |       | (34.6            | )          | 128.2             |       | 174.4            |       |
| Net cash  provided by operating activities of discontinued operations                                                        |       | —      |       | —           |       | 72.2              |       | 72.2             |       |
| **Net  cash provided by (used in) operating activities**                                                                     |       | 80.8        |       | (34.6            | )          | 200.4             |       | 246.6            |       |
| ** **                                                                                                                   |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                   |       |        |       |             |       |              |       |             |       |
| Acquisitions,  net of cash acquired                                                                                          |       | —      |       | —           |       | (13.4             | )          | (13.4            | )          |
| Acquisitions,  related intercompany                                                                                          |       | 12.5        |       | (12.5            | )          | —            |       | —           |       |
| Capital  expenditures, excluding capital leases                                                                              |       | —      |       | (24.6            | )          | (94.6             | )          | (119.2           | )          |
| Proceeds from  sale of assets                                                                                                |       | —      |       | —           |       | 3.9               |       | 3.9              |       |
| Net cash  provided by (used in) investing activities of continuing operations                                                |       | 12.5        |       | (37.1            | )          | (104.1            | )          | (128.7           | )          |
| Net cash used in  investing activities of discontinued operations                                                            |       | —      |       | —           |       | (27.1             | )          | (27.1            | )          |
| **Net  cash provided by (used in) investing activities**                                                                     |       | 12.5        |       | (37.1            | )          | (131.2            | )          | (155.8           | )          |
| ** **                                                                                                                   |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                   |       |        |       |             |       |              |       |             |       |
| Proceeds from  senior secured credit facilities                                                                              |       | 44.0        |       | —           |       | 126.2             |       | 170.2            |       |
| Repayment of  senior secured credit facilities                                                                               |       | (93.7       | )          | —           |       | (149.0            | )          | (242.7           | )          |
| Payments on  other long-term debt                                                                                            |       | —      |       | —           |       | (4.3              | )          | (4.3             | )          |
| Intercompany  debt related                                                                                                   |       | 64.8        |       | (47.9            | )          | (16.9             | )          | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                                                |       | 15.1        |       | (47.9            | )          | (44.0             | )          | (76.8            | )          |
| Net cash used in  financing activities of discontinued operations                                                            |       | —      |       | —           |       | (43.9             | )          | (43.9            | )          |
| **Net  cash provided by (used in) financing activities**                                                                     |       | 15.1        |       | (47.9            | )          | (87.9             | )          | (120.7           | )          |
| ** **                                                                                                                   |       |        |       |             |       |              |       |             |       |
| Effect of  exchange rate changes on cash and cash equivalents                                                                |       | 1.4         |       | —           |       | (3.8              | )          | (2.4             | )          |
| Net increase  (decrease) in cash and cash equivalents                                                                        |       | 109.8       |       | (119.6           | )          | (22.5             | )          | (32.3            | )          |
| Less increase in  cash and cash equivalents from discontinued operations, net of sale proceeds                               |       | —      |       | —           |       | (1.3              | )          | (1.3             | )          |
| Increase  (decrease) in cash and cash equivalents from continuing operations                                                 |       | 109.8       |       | (119.6           | )          | (23.8             | )          | (33.6            | )          |
| Cash and cash  equivalents of continuing operations, beginning of period                                                     |       | 109.4       |       | (26.5            | )          | 13.5              |       | 96.4             |       |
| Cash and cash  equivalents of continuing operations, end of period                                                           |       | $           | 219.2      |             | $          | (146.1            | )          | $                | (10.3      | ) | $ | 62.8 |   |

 

35

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** **

**16.    SUBSEQUENT EVENT:**

** **

On October 7, 2007, the Company entered into a definitive agreement tosell its electronics businesses, excluding its business entity in France andits wafer reclaim business for approximately $265 million, subject to customaryadjustments. The Company’s French electronics business is subject to a putoption at the discretion of Rockwood for an additional purchase price of $50million, for combined consideration of approximately $315 million. The Company’selectronics business includes its ultra-pure chemicals business, printedcircuit board business and its photomasks business. In 2006, the businesses tobe sold had sales of $187 million and generated Adjusted EBITDA of $35.4million. The sale of these businesses was not deemed to be probable as ofSeptember 30, 2007 and as such has not been treated as a discontinued operationfor the third quarter of 2007. Beginning in the fourth quarter of 2007, theelectronics businesses to be sold will be presented as discontinuedoperations.  Prior period financialstatements will be reclassified when presented. The closing of this transactionis expected to occur in the fourth quarter of 2007, subject to regulatoryapproval.  Further details of thistransaction are included in a Form 8-K filed by the Company on October 11,2007.

 

As of September 30, 2007, assets and liabilities of the electronicsbusiness to be sold are summarized as follows:

 
| **($ in millions)**       | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| **ASSETS**                          |       |       |       |
| Current assets                      |       | $          | 67.1       |   |
| Property, plant  and equipment, net |       | 69.4       |       |
| Goodwill                            |       | 127.0      |       |
| Other assets                        |       | (2.2       | )          |
| Total assets                        |       | $          | 261.3      |   |
| **LIABILITIES**                     |       |       |       |
| Current  liabilities                |       | $          | 29.8       |   |
| Noncurrent  liabilities             |       | 4.7        |       |
| Total  liabilities                  |       | $          | 34.5       |   |

 

**Item2.     Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

** **

*The following discussion containsforward-looking statements that involve numerous risks and uncertainties. Ouractual results could differ materially from those discussed in theforward-looking statements as a result of these risks and uncertainties,including those set forth in “Forward-Looking Statements” at the end of thisManagement Discussion and Analysis section and the risk factors section of theCompany’s 2006 Form 10-K. You should read the following discussion andanalysis together with our condensed consolidated financial statements and thenotes to those statements that appear elsewhere in this Quarterly Report.Amounts may not recalculate due to rounding differences.*

* *

*On January 9, 2007, we completed thesale of our Groupe Novasep segment. As a result, our condensed consolidatedfinancial statements have been reclassified to reflect the Groupe Novasepsegment as a discontinued operation for all periods presented. See Note 3, “DiscontinuedOperations,” for further details.*

* *

**General**

** **

We are a global developer, manufacturer and marketer of technologicallyadvanced, high value-added specialty chemicals and advanced materials. We servemore than 60,000 customers across a wide variety of industries and geographicareas. We currently operate through six business segments: (1) SpecialtyChemicals; (2) Performance Additives; (3) Titanium Dioxide Pigments; (4)Advanced Ceramics; (5) Specialty Compounds; and (6) Electronics, although wewill no longer operate our Electronics segment upon the closing of the sale ofthis segment. Of these six segments, we acquired Specialty Chemicals, TitaniumDioxide Pigments and Advanced Ceramics in the Dynamit Nobel Acquisition.

 

Our net sales consist of sales of our products, net of sales discounts,product returns and allowances. Sales are primarily made on a purchase orderbasis.

 

Our cost of products sold consists of variable and fixed components.Our variable costs are proportional to volume and consist principally of rawmaterials, packaging and related supplies, certain energy costs, and certaindistribution costs including inbound, outbound, and internal shipping andtransfer costs. Our fixed costs are not significantly impacted by productionvolume and consist principally of certain fixed manufacturing costs and otherdistribution network costs, including warehousing. Fixed manufacturing costscomprise headcount-related costs and overhead, including depreciation, periodicmaintenance costs, purchasing and receiving costs, inspection costs and certainenergy costs.

 

Our selling, general and administrative expenses include research anddevelopment costs, sales and marketing, divisional management 

 

36

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expenses and corporate services including cash management, legal,benefit plan administration and other administrative and professional services.

 

We are focused on growth, productivity, cost reduction, marginexpansion, divestment of non-core businesses and debt reduction. In connectionwith this focus, among other things:

 

•                    We have cutcosts, reduced overhead and eliminated duplicative positions in both acquiredand existing businesses. For example, during the first quarter of 2006, weclosed facilities in the United States and the U.K. in the Wafer Reclaimbusiness in our Electronics segment. We have also announced the consolidation in2007 of several U.K. facilities resulting from an acquisition in October 2006by our Specialty Compounds segment. We also implemented other restructuringmeasures in our other segments, including the closure of our Baulking, U.K.facility in our Clay-based Additives business;

 

•                  We acquired theglobal color pigments business ofElementis plc in August 2007 which will be integrated into our Color Pigmentsand Service business within our Performance Additives segment;

 

•                    Wecompleted the sale of our Groupe Novasep subsidiary in January 2007 and ourUnited States Wafer Reclaim business in February 2007; and

 

•                    Weentered into a definitive agreement to sell our Electronics businesses,excluding our French electronics business and wafer reclaim business, in October2007. The French electronics business is subject to a put option exercisable byus.  See Note 16, “Subsequent Event,” forfurther details.

 

**Factors Which Affect Our Results ofOperations**

** **

**Our Markets**

** **

Because the businesses in our segments generally serve many unrelatedend-use markets, we discuss the principal market conditions on a segment basisrather than a consolidated basis. The principal market conditions in oursegments and regions in which we operate that impacted our results ofoperations during the periods presented include the following:

 

***Specialty Chemicals***

*** ***

•                    Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aerospace industries. Growth in the SurfaceTreatment business occurred in 2006 and continued in the first nine months of2007 in most markets and regions served, especially in the European automotive,general industrial and aerospace industries, as price and volume increases morethan offset raw material cost increases. We expect the Surface Treatmentbusiness to continue to grow in the remainder of 2007 in all markets as priceand volume increases are expected to offset raw material cost increases andhigher personnel costs to support the continuing growth of the business.

 

•                    Demandfor our lithium products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven by demand for lithium carbonate inindustrial applications, the aluminum business, glass ceramics, cement and thegeneral demand in China. Sales of lithium products specifically used in lifescience applications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. Growth in the FineChemicals business occurred in 2006 and continued in the first nine months of2007 in most market segments, especially driven by lithium salt applicationsthrough price increases and strong demand for lithium applications, particularlysales of lithium specialty products to the pharmaceutical industry and lithiumcompounds. Growth in the Fine Chemicals business is expected in all marketsegments in the remainder of 2007, particularly driven by price increases andhigher demand for lithium salt applications and lithium specialties.

 

***PerformanceAdditives***

*** ***

•                    Salesin our Color Pigments and Services business in North America increased in 2006on higher construction volumes and selling price increases, which helped torecover raw material and energy cost increases. Generally, a continuing trendtowards the increased use of colored concrete products in the North Americanconstruction market has had a positive effect on our Color Pigments andServices business line. However, construction sales in North America were downin the first nine months of 2007 on lower volumes due to the general slowdownin the construction market and this is expected to continue for the remainderof the year.

 

•                    Weexperienced a decrease in European construction volumes in our Color Pigmentsand Services business in 2006 due to lower demand. However, Europeanconstruction sales in our Color Pigments and Services business increased in thefirst nine months of 2007 on higher volumes resulting from a stronger Europeaneconomy.

 

37

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•      As discussed in Note 2, “Acquisitions,”we acquired the global color pigments business of Elementis plc in August 2007 that will be integrated into our ColorPigments and Service business within our Performance Additives segment.

 

•       The change in the market toenvironmentally advanced wood treatment chemical products, such as alkalinecopper quaternary, or ACQ, and the phase out of chromated copper arsenate, orCCA, for residential use previously had a positive impact on the TimberTreatment Chemicals business, which is a leading supplier of these highermargin products. However, the market position of ACQ was negatively impacted in2006 and again in the first nine months of 2007 by customer losses, competitivepricing pressure and the increasing use of wood substitutes. The expiration ofthe ACQ patent in May 2007 could also have a negative impact on our results ofoperations. We expect our Timber Treatment Chemicals business to commercializethe next generation timber treatment preservatives from our joint venture withRohm and Haas Company in 2008.

 

•       For 2006, the major driversof growth in the Clay-based Additives business, which supplies specialtyrheology modifiers and additives, both clay-based and synthetic, to a varietyof end-use markets, were the acquisition of Süd-Chemie’s rheological additivesand carbonless clay businesses, continued strength in oilfield sales and growthin additives for water-based coatings.  However, sales were down in thefirst nine months of 2007 primarily due to lower demand for coatings and inksand carbonless applications, which is expected to continue for the remainder ofthe year.

 

•       Raw material costs haveincreased in general in the Performance Additives segment since 2004 andcontinue to trend upward. In the Color Pigments and Services and Clay-basedAdditives businesses, selling price increases were initiated in 2006 andcontinued in 2007 to partially offset the increases in raw material and energycosts, specifically quaternary amine (“quat”) for Clay-based Additives. In2006, the Timber Treatment Chemicals business experienced record high costs forcopper, a primary component in ACQ, and was unable to pass on these increasedmaterial costs to customers in 2006. However, selling price increases wereimplemented in 2007 to offset higher copper costs. Although selling priceincreases were implemented in 2007 to offset raw material cost increases, ourability to pass on additional selling price increases is uncertain in thesebusinesses.

 

***Titanium DioxidePigments***

 

•       Demand for our titaniumdioxide products in anatase grade is driven mainly by demand in the syntheticfiber industry, while demand for titanium dioxide products in rutile grade andour functional additives is driven by demand in the coatings, paper and plasticsindustries. Throughout 2006, we experienced pricing pressure from globalsuppliers in Asia, specifically Chinese suppliers related to titanium dioxideproducts in anatase grade. We also experienced pricing pressures on ourtitanium products in rutile grade. While volumes and selling prices in thefiber anatase business increased in 2006, volumes and selling prices were lowerin the first nine months of 2007 and are expected to be down slightly for theremainder of 2007. Sales of titanium dioxide products in rutile grade were downslightly in 2006 as lower volumes were partially offset by higher sellingprices.  Sales of titanium dioxide products in rutile grade were up in thefirst nine months of 2007 on increased volumes, partially offset by lower sellingprices. We expect sales of these rutile grade products to continue to beup in 2007 on higher volumes. Our functional additives business increasedin 2006 on higher selling prices and volumes and continued to grow this yearfrom higher selling prices. This trend is expected to continue for theremainder of 2007.

 

***Advanced Ceramics***

 

•       Demand for our ceramicmedical devices is mainly tied to the aging population in Europe and the UnitedStates. Although the volume of our products used in medical device applicationssold experienced double-digit growth each year from 2001 through 2005, in 2006some customers in the U.S. reduced their demand due to high inventory levelsand delayed approvals resulting in lower volumes. However, growth of ourmedical device applications has increased in the first nine months of 2007 onhigher volumes and is expected to continue to increase throughout the remainderof the year.

 

•       Despite the negative impactof pricing pressure from Asian competitors, sales of ceramic products for usein cutting tool products and mechanical systems were higher in 2006 and for thefirst nine months of 2007 due to volume increases. This growth is expected tocontinue throughout 2007 on higher volumes and increased market share. Sellingprices in our electronic products business were lower in 2006, and, in thefirst nine months of 2007, sales were lower primarily on decreased volumes,which is expected to continue throughout the remainder of the year. Salesof our multi-functional applications were higher in the first nine months of2007 from increased volumes and are expected to continue to increase throughoutthe remainder of 2007.

 

***Specialty Compounds***

 

•       Our largest product line inthe Specialty Compounds segment is wire and cable compounds. Sales within thisproduct line are dependent upon the telecommunications market and relatedsectors, specifically demand for high-end voice and data communication wire andcable, for which our Specialty Compounds segment is a significant provider ofsheathing materials. 

 

38

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Newly developednon-halogen products for wire and cable data communication, military and otherapplications have expanded business in North America for those applications andcreated opportunities in Europe. Sales of wire and cable products were upslightly in 2006 and were higher in the first nine months of 2007 due to theacquisition of the Megolon division of Scapa Group, plc. Higher net salesvolume for wire and cable products is expected to continue throughout 2007 dueto the acquisition of Megolon. However, the wire and cable business has beenimpacted from a general downturn in the wire and cable market.

 

•       Most of the other end-usemarkets for which Specialty Compounds’ products are used generally track growthof gross domestic product, but many are also application specific, such asautomotive. Our net sales in consumer/industrial thermoplastic elastomers wereup in 2006 and the first nine months of 2007 and we expect continued growth inthese markets for the remainder of 2007. Net sales of regulated packaging wereup in 2006, but were lower in the first nine months of 2007 and are expected tobe lower for the remainder of the year. We are focusing more of our effortstowards increasing high margin specialty products, in particular, thermoplasticelastomers, and less of our efforts in automotive and footwear.

 

•       The price of ammoniumoctamolybdate (“AOM”) and polyvinyl chloride (“PVC”) resin and plasticizers,key raw materials used in the production of wire and cable products, increasedfrom 2004 through 2006. As a result, selling price increases weresuccessfully initiated in 2005 and 2006 to help offset the raw materials priceincrease. However, raw material prices were lower in the first nine monthsof 2007 and are not expected to be as volatile for the remainder of the year.

 

***Electronics***

 

•       Demand for our Electronicsproducts generally follows the activity levels of semiconductor and printedcircuit board manufacturers. The global semiconductor and printed circuit board(“PCB”) markets are cyclical in nature. Worldwide sales of semiconductorsincreased in 2006 and in the first nine months of 2007 due to demand forconsumer electronics, including cell phones and PC’s. Likewise, the printedcircuit board industry in the United States and Europe improved in 2006, whilethe market in Asia experienced significant growth during thisperiod. Volumes in our electronic chemicals business increased in 2006 andthe first nine months of 2007, particularly in Asia, which provides nearly halfof the global market.

 

•       The price of certain of ourproducts is insulated to some degree from the effect of changes in the price ofsemiconductors and printed circuit boards due to the fact that the cost of theseproducts is generally a small component of the cost of the end product. Despitethis, we have experienced pricing pressure in certain businesses, particularlywith respect to photomasks in Europe due to very aggressive competition. Weexpect that this pricing pressure will continue throughout this year.

 

•       We expect overall demand inour Electronics segment to be relatively flat for the remainder of 2007.

 

•      As discussed in Note 16, “SubsequentEvent,” we entered into a definitive agreement to sell its electronicsbusiness, excluding our French electronics business and our wafer reclaimbusiness in October 2007. The French electronics business is subject to a putoption exercisable by us. This transaction is subject to regulatory approvaland is expected to close in the fourth quarter of 2007.

 

**Global Exposure**

 

We operate a geographically diverse business. Of our 2006 net sales,49% were shipments to Europe, 34% to North America (predominantly the UnitedStates) and 17% to the rest of the world. For a geographic description of theorigin of our net sales and location of our long-lived assets, see Note 5, “SegmentInformation” in our 2006 Form 10-K.

 

We estimate that we sold to customers in more than 60 countries duringthis period. Currently, we serve our diverse and extensive customer base with100 manufacturing facilities in 25 countries. Consequently, we are exposed toglobal economic and political changes, particularly currency fluctuations thatcould impact our profitability.

 

Our sales and production costs are mainly denominated in U.S. dollarsor euros. Our results of operations and financial condition have beenhistorically impacted by the fluctuation of the euro against our reportingcurrency, the U.S. dollar. For the three and nine month period ended September30, 2007, the average exchange rate of the euro against the U.S. dollar washigher compared to the same periods in 2006. As a result, our net sales, grossprofit and operating income were positively impacted. Historically, however,our operating margins have not been significantly impacted by currencyfluctuations because, in general, sales and costs of products sold aregenerated or incurred in the same currency, subject to certain exceptions.

 

**Raw Materials**

 

Raw materials constituted approximately 53% of our cost of productssold for 2006. We have a broad raw material base, with the cost of no singleraw material representing more than 3% of our cost of products sold in 2006.Nonetheless, the significant price fluctuations our raw materials haveexperienced in the past during periods of high demand have had an adverseimpact on our results 

 

39

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of operations. In particular, higher prices for copper used in theTimber Treatment Chemicals business of our Performance Additives segment had anegative impact on results in 2006 and the first nine months of 2007. We cannotaccurately predict the impact of any future price increases for raw materialsor any raw material shortages on our business as a whole or in specificgeographic regions. In addition, we may not be able to pass on raw materialprice increases to our customers.

 

**Energy Costs**

 

In 2006, energy purchases represented approximately 5% of our cost ofproducts sold. However, within certain business lines, such as our TitaniumDioxide Pigments segment and the Color Pigments and Services and Clay-basedAdditives businesses of our Performance Additives segment, energy costs aremore significant. The cost of products sold for certain of our businesses,including Color Pigments and Services and Clay-based Additives, increases whenthe price of natural gas in North America rises. Natural gas prices werevolatile and continued to increase in North America in 2006, but wererelatively stable in the first nine months of 2007. In contrast, natural gasprices in Europe, where our Titanium Dioxide Pigments segment is located, havehistorically been relatively stable, although prices were higher in 2006 and inthe first nine months of 2007.

 

**Income Taxes**

 

The effective tax rate for the third quarter of 2007 was 39.4% which isprimarily a function of the valuation allowance related to domestic earningsand foreign rate differentials and their impact on the effective rate. In thethird quarter of 2007, the worldwide valuation allowance increased by $17.9million. The increase in the valuation allowance was primarily due to adecrease of $1.3 million in deferred tax assets associated with the Company’sdomestic losses and $19.2 million in other comprehensive income. Of the $1.3million decrease in the valuation allowance for the third quarter of 2007, $0.3million impacted the effective tax rate and $1.0 million was offset byreversing NOLs. The effective income tax rate for the third quarter of 2007also included a benefit due to the tax law and tax rate changes in Germany andthe U.K.

 

**Acquisitions**

 

During the periods presented, we made acquisitions pursuant to ourbusiness strategy of achieving profitable growth. See Note 2, “Acquisitions,”for further details.

 

**Special Charges and Credits**

 

During the periods presented, we incurred certain special charges thatinclude systems/organization establishment expenses, restructuring and relatedcharges, foreign exchange gains and losses and inventory write-up reversals.See “Items excluded from Adjusted EBITDA” section in Note 5, “SegmentInformation,” for a discussion of special charges and credits recorded in thethree and nine months ended September 30, 2007 and 2006.

 

**Special Note Regarding Non-GAAPFinancial Measures**

 

A non-GAAP financial measure is generally defined by the SEC as onethat purports to measure historical or future financial performance, financialposition or cash flows but excludes or includes amounts that would not be soadjusted in the most comparable U.S. GAAP measure. From time to time in thismanagement’s discussion and analysis, we disclose non-GAAP financial measures,primarily Adjusted EBITDA, as defined below.

 

**Definition of Adjusted EBITDA**

 

The presentation of consolidated Adjusted EBITDA contained in thisreport is calculated using the definition set forth in the senior securedcredit agreement as a basis and reflects management’s interpretations thereof.Adjusted EBITDA, which is referred to under the senior secured credit agreementas “Consolidated EBITDA,” is defined in the senior secured credit agreement asconsolidated earnings (which, as defined in the senior secured creditagreement, equals income (loss) before the deduction of income taxes ofRockwood Specialties Group, Inc. and the Restricted Subsidiaries (as such termis defined in the senior secured credit agreement), excluding extraordinaryitems) plus:

 

•       interest expense;

 

•       depreciation expense;

 

•      amortization expense,including amortization of deferred financing fees;

 

•      extraordinary losses andnon-recurring charges;

 

•      non-cash charges;

 

40

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•      losses on asset sales;

 

•      restructuring charges orreserves (including severance, relocation costs and one-time compensationcharges and costs relating to the closure of facilities);

 

•      expenses paid by us or anyof our subsidiaries in connection with the Dynamit Nobel Acquisition, thesenior secured credit agreement, the granting of liens under the securitydocuments (as such term is defined in the senior secured credit agreement), theindenture governing the 2014 Notes and the offering of the 2014 Notes and anyother related transactions;

 

•      any expenses or chargesincurred in connection with any issuance of debt or equity securities;

 

•      any fees and expensesrelated to permitted acquisitions;

 

•      any deduction for minorityinterest expense; and

 

•      items arising in connectionwith CCA litigation related to our Timber Treatment Chemicals business of ourPerformance Additives segment;

 

less:

 

•      extraordinary gains andnon-recurring gains;

 

•      non-cash gains; and

 

•      gains on asset sales,

 

in all cases, subject to certain exclusions.

 

For presentation purposes within this report, we use the computationset forth in our senior secured credit agreement as a basis which reflectsmanagement’s interpretations thereof. Management has determined thatstock-based compensation costs, which are non-cash charges, will not be anadjustment in calculating Adjusted EBITDA as these costs will be an ongoingrecurring cost to the Company. Specifically, calculation of Adjusted EBITDAaccording to the indenture underlying our 2014 Notes excludes certainadjustments prescribed within the senior secured credit agreement. Given thatborrowings under the senior secured credit agreement are secured by most of ourassets and given that the calculation does not materially differ from thecalculation of Adjusted EBITDA for performance measurement purposes, we believethis is the most appropriate computation of Adjusted EBITDA to present.

 

**Management’s Uses**

 

We use Adjusted EBITDA on a consolidated basis to assess our operatingperformance. We believe this financial measure on a consolidated basis ishelpful in highlighting trends in our overall business because the itemsexcluded in calculating Adjusted EBITDA have been deemed by management to havelittle or no bearing on our day-to-day operating performance. It is also themost significant criterion in our calculation of performance-based cash bonusesand our determination of whether certain performance-based stock options andrestricted stock units vest, all of which are tied to Adjusted EBITDA targets.

 

We also use Adjusted EBITDA on a consolidated basis as a liquiditymeasure. We believe this financial measure on a consolidated basis is importantin analyzing our liquidity because our senior secured credit agreement andindenture governing the 2014 Notes contain financial covenants that aredetermined based on Adjusted EBITDA. These covenants are material terms ofthese agreements, because they govern substantially all of our long-term debt,which in turn represents a substantial portion of our capitalization.Non-compliance with these financial covenants under our senior secured creditfacilities—our maximum total leverage ratio and our minimum interest coverageratio, in particular—could result in the lenders requiring us to immediatelyrepay all amounts borrowed. Any such acceleration could also lead to thenoteholders accelerating the maturity of the 2014 Notes. In addition, if wecannot satisfy these financial covenants in the indenture governing the 2014Notes, we cannot engage in certain activities, such as incurring additionalindebtedness or making certain payments. Consequently, Adjusted EBITDA iscritical to our assessment of our liquidity.

 

We also use Adjusted EBITDA on a segment basis as the primary measureused by our chief operating decision maker, our Chief Executive Officer, toevaluate the ongoing performance of our business segments and reporting units.On a segment basis, we define Adjusted EBITDA as operating income excludingdepreciation and amortization, certain non-cash gains and charges, certainother special gains and charges determined by our senior management to benon-recurring gains and charges and certain items deemed by our seniormanagement to have little or no bearing on the day-to-day operating performanceof our business segments and reporting units. The adjustments made to operatingincome directly correlate with the adjustments to net income in calculatingAdjusted EBITDA on a consolidated basis pursuant to the senior secured creditagreement, which reflects management’s interpretations thereof.

 

41

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**Limitations**

 

Adjusted EBITDA has limitations as an analytical tool, and should notbe viewed in isolation and is not a substitute for U.S. GAAP measures ofearnings and cash flows. Material limitations associated with making theadjustments to our earnings and cash flows to calculate Adjusted EBITDA, and usingthis non-GAAP financial measure as compared to the most directly comparableU.S. GAAP financial measures, include:

 

•      the cash portion of interestexpense, net, income tax provision (benefit), and restructuring as well asnon-recurring charges related to securities issuance, acquisition activities,and systems/organization establishment, generally represent charges (gains)which may significantly affect funds available to use in our operating,investing and financing activities;

 

•      non-operating foreign exchangegains (losses), although not immediately affecting cash used in investingactivities, may affect the amount of funds needed to service our debt if thosecurrency impacts remain in place as we meet our future principal repaymentobligations; and

 

•      depreciation, amortization,non-cash (gains) charges and impairment charges, though not directly affectingour current cash position, represent the wear and tear and/or reduction invalue of the plant, equipment and intangible assets which permit us to manufactureand/or market our products; these items may be indicative of future needs forcapital expenditures, for development or acquisition of intangible assets orrelevant trends causing asset value changes.

 

An investor or potential investor may find any one or all of theseitems important in evaluating our performance, results of operations, financialposition and liquidity. Management compensates for the limitations of usingnon-GAAP financial measures by using them only to supplement our U.S. GAAP resultsto provide a more complete understanding of the factors and trends affectingour business.

 

Adjusted EBITDA is not an alternative to net income (loss) or income(loss) from continuing operations before taxes and minority interest oroperating income or cash flows from operating activities as calculated andpresented in accordance with U.S. GAAP. You should not rely on Adjusted EBITDAas a substitute for any such U.S. GAAP financial measures. We strongly urge youto review the reconciliations of Adjusted EBITDA to GAAP financial measures andother financial information, in each case included elsewhere in this QuarterlyReport. We also strongly urge you not to rely on any single financial measureto evaluate our business. Our measure of Adjusted EBITDA may not be comparableto those of other companies.

 

**Results of Operations**

 

**Actual Results of Operations**

 

The following table presents the major components of our operations onan actual basis and Adjusted EBITDA (the reconciliation to net income is setforth in—Reconciliation of Net Income to Adjusted EBITDA for the three and ninemonths ended September 30, 2007 and 2006), including as a percentage of netsales, for the periods presented. See Note 5, “Segment Information,” forsegment information and a reconciliation to income from continuing operationsbefore taxes and minority interest to Adjusted EBITDA on a segment basis.

 

42

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| ** **                                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Statement  of operations data:**                                    |       |                             |       |                            |       |   |   |   |   |
| **Net  sales:**                                                       |       |                             |       |                            |       |   |   |   |   |
| Specialty  Chemicals                                                  |       | $                                | 261.4      |                            | $          | 225.5 |   | $ | 800.2 |   | $ | 685.6 |   |
| Performance  Additives                                                |       | 210.4                            |       | 192.4                           |       | 611.4 |   | 587.7 |   |
| Titanium Dioxide  Pigments                                            |       | 122.8                            |       | 111.2                           |       | 362.2 |   | 330.4 |   |
| Advanced  Ceramics                                                    |       | 111.7                            |       | 95.6                            |       | 335.8 |   | 286.3 |   |
| Specialty  Compounds                                                  |       | 69.8                             |       | 62.1                            |       | 210.2 |   | 191.4 |   |
| Electronics                                                           |       | 53.5                             |       | 53.0                            |       | 156.6 |   | 154.0 |   |
| Total net sales                                                       |       | 829.6                            |       | 739.8                           |       | 2,476.4 |   | 2,235.4 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                          |       | 255.3                            |       | 229.7                           |       | 785.0 |   | 698.4 |   |
|                                                                  |       | 30.8                             | %          | 31.0                            | %          | 31.7 | % | 31.2 | % |
| Selling, general  and administrative expenses                         |       | 159.6                            |       | 147.8                           |       | 474.6 |   | 436.7 |   |
|                                                                  |       | 19.2                             | %          | 20.0                            | %          | 19.2 | % | 19.5 | % |
| Restructuring  charges, net                                           |       | 2.9                              |       | 1.7                             |       | 8.9 |   | 3.9 |   |
| Gain on sale of  assets                                               |       | (0.1                             | )          | —                          |       | (5.3 | ) | (0.4 | ) |
| **Operating  income (loss):**                                         |       |                             |       |                            |       |   |   |   |   |
| Specialty  Chemicals                                                  |       | 44.7                             |       | 36.3                            |       | 153.0 |   | 114.2 |   |
|                                                                  |       | 17.1                             | %          | 16.1                            | %          | 19.1 | % | 16.7 | % |
| Performance  Additives                                                |       | 22.9                             |       | 18.1                            |       | 74.3 |   | 71.7 |   |
|                                                                  |       | 10.9                             | %          | 9.4                             | %          | 12.2 | % | 12.2 | % |
| Titanium Dioxide  Pigments                                            |       | 12.6                             |       | 13.7                            |       | 34.5 |   | 38.1 |   |
|                                                                  |       | 10.3                             | %          | 12.3                            | %          | 9.5 | % | 11.5 | % |
| Advanced  Ceramics                                                    |       | 19.5                             |       | 16.8                            |       | 59.9 |   | 48.6 |   |
|                                                                  |       | 17.5                             | %          | 17.6                            | %          | 17.8 | % | 17.0 | % |
| Specialty  Compounds                                                  |       | 5.0                              |       | 6.0                             |       | 16.6 |   | 17.6 |   |
|                                                                  |       | 7.2                              | %          | 9.7                             | %          | 7.9 | % | 9.2 | % |
| Electronics                                                           |       | 5.4                              |       | 5.7                             |       | 16.5 |   | 14.5 |   |
|                                                                  |       | 10.1                             | %          | 10.8                            | %          | 10.5 | % | 9.4 | % |
| Corporate costs                                                       |       | (17.2                            | )          | (16.4                           | )          | (48.0 | ) | (46.5 | ) |
| Total operating  income                                               |       | 92.9                             |       | 80.2                            |       | 306.8 |   | 258.2 |   |
| **Other  income (expenses):**                                         |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                      |       | (57.0                            | )          | (60.6                           | )          | (158.7 | ) | (148.1 | ) |
| Interest income                                                       |       | 1.9                              |       | 1.1                             |       | 11.0 |   | 3.6 |   |
| Loss on early  extinguishment of debt                                 |       | —                           |       | —                          |       | (19.4 | ) | — |   |
| Refinancing  expenses                                                 |       | —                           |       | —                          |       | (0.9 | ) | — |   |
| Foreign exchange  gain, net                                           |       | 7.6                              |       | 4.8                             |       | 11.3 |   | 7.0 |   |
| Other, net                                                            |       | —                           |       | 0.3                             |       | (0.1 | ) | 2.1 |   |
| Other income  (expenses), net                                         |       | (47.5                            | )          | (54.4                           | )          | (156.8 | ) | (135.4 | ) |
| Income from  continuing operations before taxes and minority interest |       | 45.4                             |       | 25.8                            |       | 150.0 |   | 122.8 |   |
| Income tax  provision                                                 |       | 17.9                             |       | 9.7                             |       | 61.9 |   | 50.0 |   |
| Income from  continuing operations before minority interest           |       | 27.5                             |       | 16.1                            |       | 88.1 |   | 72.8 |   |
| Minority interest  in continuing operations                           |       | (2.8                             | )          | —                          |       | (6.2 | ) | — |   |
| Net income from  continuing operations                                |       | 24.7                             |       | 16.1                            |       | 81.9 |   | 72.8 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | 1.9                             |       | 0.5 |   | 26.5 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                          |       | 115.7 |   | — |   |
| Minority  interest in discontinued operations                         |       | —                           |       | 3.4                             |       | (0.1 | ) | (0.8 | ) |
| Net income                                                            |       | $                                | 24.7       |                            | $          | 21.4 |   | $ | 198.0 |   | $ | 98.5 |   |
| **Adjusted  EBITDA:**                                                 |       |                             |       |                            |       |   |   |   |   |
| Specialty  Chemicals                                                  |       | $                                | 58.2       |                            | $          | 49.0 |   | $ | 192.8 |   | $ | 151.1 |   |
|                                                                  |       | 22.3                             | %          | 21.7                            | %          | 24.1 | % | 22.0 | % |
| Performance  Additives                                                |       | 40.9                             |       | 31.3                            |       | 119.0 |   | 107.4 |   |
|                                                                  |       | 19.4                             | %          | 16.3                            | %          | 19.5 | % | 18.3 | % |
| Titanium Dioxide  Pigments                                            |       | 23.9                             |       | 23.2                            |       | 67.3 |   | 65.9 |   |
|                                                                  |       | 19.5                             | %          | 20.9                            | %          | 18.6 | % | 19.9 | % |
| Advanced  Ceramics                                                    |       | 30.7                             |       | 25.8                            |       | 92.2 |   | 75.0 |   |
|                                                                  |       | 27.5                             | %          | 27.0                            | %          | 27.5 | % | 26.2 | % |
| Specialty  Compounds                                                  |       | 7.8                              |       | 8.2                             |       | 25.4 |   | 24.1 |   |
|                                                                  |       | 11.2                             | %          | 13.2                            | %          | 12.1 | % | 12.6 | % |
| Electronics                                                           |       | 9.7                              |       | 9.6                             |       | 27.8 |   | 27.9 |   |
|                                                                  |       | 18.1                             | %          | 18.1                            | %          | 17.8 | % | 18.1 | % |
| Corporate costs                                                       |       | (13.9                            | )          | (13.4                           | )          | (42.0 | ) | (38.5 | ) |
| Total Adjusted  EBITDA (a)                                            |       | $                                | 157.3      |                            | $          | 133.7 |   | $ | 482.5 |   | $ | 412.9 |   |

 

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(a)   This amount does not include$13.9 million for the three months ended September 30, 2006 and $1.8 millionand $49.6 million for the nine months ended September 30, 2007 and 2006,respectively, of Adjusted EBITDA from the former Groupe Novasep segment whichwas sold on January 9, 2007.

 

 

43

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The following table presents the changes in the major components of ouroperations on a historical basis in dollars and percentages:

 
| ** **                                                                | ** ** | **Change: Three months ended September 30, 2007 versus 2006** | ** ** | **Change: Nine months ended September 30, 2007 versus 2006** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                                            | ** ** | **%**                                                                                                | ** ** | **FX** | ** ** | **Net** | ** ** | ** ** | ** ** | **%** | ** ** | **FX** | ** ** | **Net** | ** ** |
| **($ in millions)**                                             | ** ** | **Total**                                                                                             | ** ** | **Change**                                                                                           | ** ** | **Effect (a)** | ** ** | **Change** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Change** | ** ** |
| **Statement  of operations data:**                                        |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  sales:**                                                           |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                     | 35.9       |                                                                                                 | 15.9       | % | $ | 14.4 |   | $ | 21.5 |   | $ | 114.6 |   | 16.7 | % | $ | 40.2 |   | $ | 74.4 |   |
| Performance  Additives                                                    |       | 18.0                                                                                                  |       | 9.4                                                                                                  |       | 4.4 |   | 13.6 |   | 23.7 |   | 4.0 |   | 14.8 |   | 8.9 |   |
| Titanium Dioxide  Pigments                                                |       | 11.6                                                                                                  |       | 10.4                                                                                                 |       | 9.1 |   | 2.5 |   | 31.8 |   | 9.6 |   | 27.0 |   | 4.8 |   |
| Advanced Ceramics                                                         |       | 16.1                                                                                                  |       | 16.8                                                                                                 |       | 7.5 |   | 8.6 |   | 49.5 |   | 17.3 |   | 22.8 |   | 26.7 |   |
| Specialty  Compounds                                                      |       | 7.7                                                                                                   |       | 12.4                                                                                                 |       | 2.1 |   | 5.6 |   | 18.8 |   | 9.8 |   | 6.8 |   | 12.0 |   |
| Electronics                                                               |       | 0.5                                                                                                   |       | 0.9                                                                                                  |       | 1.6 |   | (1.1 | ) | 2.6 |   | 1.7 |   | 4.8 |   | (2.2 | ) |
| Total net sales                                                           |       | 89.8                                                                                                  |       | 12.1                                                                                                 |       | 39.1 |   | 50.7 |   | 241.0 |   | 10.8 |   | 116.4 |   | 124.6 |   |
|                                                                      |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                              |       | 25.6                                                                                                  |       | 11.1                                                                                                 |       | 12.1 |   | 13.5 |   | 86.6 |   | 12.4 |   | 36.9 |   | 49.7 |   |
| Selling, general  and administrative expenses                             |       | 11.8                                                                                                  |       | 8.0                                                                                                  |       | 7.8 |   | 4.0 |   | 37.9 |   | 8.7 |   | 23.0 |   | 14.9 |   |
| Restructuring  charges                                                    |       | 1.2                                                                                                   |       |                                                                                                 |       |   |   | 1.2 |   | 5.0 |   |   |   |   |   | 5.0 |   |
| (Gain) loss on  sale of assets                                            |       | (0.1                                                                                                  | )          |                                                                                                 |       |   |   | (0.1 | ) | (4.9 | ) |   |   |   |   | (4.9 | ) |
| Total operating  expenses                                                 |       | 12.9                                                                                                  |       | 8.6                                                                                                  |       | 7.8 |   | 5.1 |   | 38.0 |   | 8.6 |   | 23.0 |   | 15.0 |   |
| **Operating  income (loss):**                                             |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 8.4                                                                                                   |       | 23.1                                                                                                 |       | 2.1 |   | 6.3 |   | 38.8 |   | 34.0 |   | 6.5 |   | 32.3 |   |
| Performance  Additives                                                    |       | 4.8                                                                                                   |       | 26.5                                                                                                 |       | 0.3 |   | 4.5 |   | 2.6 |   | 3.6 |   | 1.1 |   | 1.5 |   |
| Titanium Dioxide  Pigments                                                |       | (1.1                                                                                                  | )          | (8.0                                                                                                 | )          | 0.9 |   | (2.0 | ) | (3.6 | ) | (9.4 | ) | 2.5 |   | (6.1 | ) |
| Advanced Ceramics                                                         |       | 2.7                                                                                                   |       | 16.1                                                                                                 |       | 1.4 |   | 1.3 |   | 11.3 |   | 23.3 |   | 4.5 |   | 6.8 |   |
| Specialty  Compounds                                                      |       | (1.0                                                                                                  | )          | (16.7                                                                                                | )          | — |   | (1.0 | ) | (1.0 | ) | (5.7 | ) | 0.1 |   | (1.1 | ) |
| Electronics                                                               |       | (0.3                                                                                                  | )          | (5.3                                                                                                 | )          | — |   | (0.3 | ) | 2.0 |   | 13.8 |   | 0.1 |   | 1.9 |   |
| Corporate costs                                                           |       | (0.8                                                                                                  | )          | (4.9                                                                                                 | )          | (0.4 | ) | (0.4 | ) | (1.5 | ) | (3.2 | ) | (0.9 | ) | (0.6 | ) |
| Total                                                                     |       | 12.7                                                                                                  |       | 15.8                                                                                                 |       | 4.3 |   | 8.4 |   | 48.6 |   | 18.8 |   | 13.9 |   | 34.7 |   |
| **Other  income (expenses):**                                             |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                          |       | 3.6                                                                                                   |       | (5.9                                                                                                 | )          | 1.3 |   | 2.3 |   | (10.6 | ) | 7.2 |   | (1.7 | ) | (8.9 | ) |
| Interest income                                                           |       | 0.8                                                                                                   |       | 72.7                                                                                                 |       | (0.2 | ) | 1.0 |   | 7.4 |   | 205.6 |   | (0.7 | ) | 8.1 |   |
| Loss on early  extinguishment of debt                                     |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | (19.4 | ) |   |   |   |   |   |   |
| Refinancing  expenses                                                     |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | (0.9 | ) |   |   |   |   |   |   |
| Foreign exchange  gain, net                                               |       | 2.8                                                                                                   |       |                                                                                                 |       |   |   |   |   | 4.3 |   |   |   |   |   |   |   |
| Other, net                                                                |       | (0.3                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (2.2 | ) |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 8.3                                                                                                   |       |                                                                                                 |       |   |   |   |   | 43.8 |   |   |   |   |   |   |   |
| Performance  Additives                                                    |       | 1.1                                                                                                   |       |                                                                                                 |       |   |   |   |   | (0.9 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (1.6                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (7.3 | ) |   |   |   |   |   |   |
| Advanced Ceramics                                                         |       | 2.5                                                                                                   |       |                                                                                                 |       |   |   |   |   | 10.0 |   |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | 4.1                                                                                                   |       |                                                                                                 |       |   |   |   |   | (1.6 | ) |   |   |   |   |   |   |
| Electronics                                                               |       | 0.3                                                                                                   |       |                                                                                                 |       |   |   |   |   | 4.2 |   |   |   |   |   |   |   |
| Corporate costs                                                           |       | 4.9                                                                                                   |       |                                                                                                 |       |   |   |   |   | (21.0 | ) |   |   |   |   |   |   |
| Total                                                                     |       | 19.6                                                                                                  |       |                                                                                                 |       |   |   |   |   | 27.2 |   |   |   |   |   |   |   |
| Income tax  provision                                                     |       | 8.2                                                                                                   |       |                                                                                                 |       |   |   |   |   | 11.9 |   |   |   |   |   |   |   |
| Income from  continuing operations before minority interest               |       | 11.4                                                                                                  |       |                                                                                                 |       |   |   |   |   | 15.3 |   |   |   |   |   |   |   |
| Minority interest  in continuing operations                               |       | (2.8                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (6.2 | ) |   |   |   |   |   |   |
| Net income from  continuing operations                                    |       | 8.6                                                                                                   |       |                                                                                                 |       |   |   |   |   | 9.1 |   |   |   |   |   |   |   |
| Income from discontinued  operations, net of tax                          |       | (1.9                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (26.0 | ) |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | 115.7 |   |   |   |   |   |   |   |
| Minority interest  in discontinued operations                             |       | (3.4                                                                                                  | )          |                                                                                                 |       |   |   |   |   | 0.7 |   |   |   |   |   |   |   |
| Net income                                                                |       | $                                                                                                     | 3.3        |                                                                                                 |       |   |   |   |   |   | $ | 99.5 |   |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                     | 9.2        |                                                                                                 | 18.8       | % | $ | 2.7 |   | $ | 6.5 |   | $ | 41.7 |   | 27.6 | % | $ | 8.5 |   | $ | 33.2 |   |
| Performance  Additives                                                    |       | 9.6                                                                                                   |       | 30.7                                                                                                 |       | 0.8 |   | 8.8 |   | 11.6 |   | 10.8 |   | 2.8 |   | 8.8 |   |
| Titanium Dioxide  Pigments                                                |       | 0.7                                                                                                   |       | 3.0                                                                                                  |       | 1.7 |   | (1.0 | ) | 1.4 |   | 2.1 |   | 4.9 |   | (3.5 | ) |
| Advanced Ceramics                                                         |       | 4.9                                                                                                   |       | 19.0                                                                                                 |       | 2.3 |   | 2.6 |   | 17.2 |   | 22.9 |   | 6.8 |   | 10.4 |   |
| Specialty  Compounds                                                      |       | (0.4                                                                                                  | )          | (4.9                                                                                                 | )          | 0.1 |   | (0.5 | ) | 1.3 |   | 5.4 |   | 0.6 |   | 0.7 |   |
| Electronics                                                               |       | 0.1                                                                                                   |       | 1.0                                                                                                  |       | 0.2 |   | (0.1 | ) | (0.1 | ) | (0.4 | ) | 0.8 |   | (0.9 | ) |
| Corporate costs  and eliminations                                         |       | (0.5                                                                                                  | )          | (3.7                                                                                                 | )          | (0.2 | ) | (0.3 | ) | (3.5 | ) | (9.1 | ) | (0.7 | ) | (2.8 | ) |
| Total Adjusted  EBITDA                                                    |       | $                                                                                                     | 23.6       |                                                                                                 | 17.7       | % | $ | 7.6 |   | $ | 16.0 |   | $ | 69.6 |   | 16.9 | % | $ | 23.7 |   | $ | 45.9 |   |

 

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(a)     The foreign exchange effectwas calculated based on the change in the applicable rate, primarily the euro,to the U.S. dollar exchange rate for the applicable period.

 

***Three months endedSeptember 30, 2007 compared to three months ended September 30, 2006***

 

**Overview**

 

Net sales increased $89.8 million in the third quarter of 2007 comparedwith the same period in the prior year primarily due to increased sellingprices of $16.5 million, higher volumes related to acquisitions and thepositive impact of currency changes. See further discussion by segmentbelow.

 

44

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We also had increased operating income and Adjusted EBITDA in the thirdquarter of 2007 compared with the same period in the prior year primarily dueto the sales increases noted above. Operating income and Adjusted EBITDA werenegatively impacted by higher raw material costs in most businesses.

 

Net income from continuing operations of $24.7 million in the thirdquarter of 2007 increased $8.6 million compared with the same period in theprior year primarily due to the reasons noted above. In addition, net incomefrom continuing operations was higher due to lower interest expense recorded inthe third quarter of 2007 compared to the same period in the prior yearresulting from the redemption of the 2011 Notes on May 15, 2007 and additionalinterest income related to interest earned on the net cash proceeds receivedfrom the sale of Groupe Novasep in January 2007.

 

Income from discontinued operations, net of tax and minority interest,was $5.3 million in the third quarter of 2006 due to income from operating GroupeNovasep in the third quarter of 2006 and minority interest income related tothe settlement of a guarantee associated with the sale of Rohner AG, asubsidiary of the former Groupe Novasep segment (See further details of theguarantee settlement in Note 3, “Discontinued Operations).”

 

Net income of $24.7 million in the third quarter of 2007 increased $3.3million compared with the same period in the prior year due to the reasonsnoted above.

 

**Net sales**

 

*Specialty Chemicals*.  Net sales increased $35.9 million over the prior year, primarily on higherselling prices, as well as increased volumes and the positive impact ofcurrency changes of $14.4 million. In the Fine Chemicals business, higherselling prices of lithium products, as well as increased volumes had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by higher selling prices and growth in most markets,particularly in European automotive, aerospace and general industrialapplications.

 

*Performance Additives*.  Net sales increased $18.0 million over the prior year due to increased salesrelated to the acquisition of the global color pigments business of Elementisplc completed on August 31, 2007 and the positive impact of currency changes of$4.4 million. Net sales were also up due to higher selling prices primarilyrelated to ACQ products in our Timber Treatment Chemicals business. HigherEuropean construction volumes in our Color Pigments and Services business werepartially offset by lower construction volumes in North America in our ColorPigments and Services business and lower volumes to the pool and spa chemicalsmarkets in our Water Treatment Chemicals business.

 

*Titanium Dioxide Pigments*.  Net sales increased $11.6 million over the prior year due to the positiveimpact of currency changes of $9.1 million, as well as higher selling pricesfor functional additives and higher volumes of titanium dioxide products. Thiswas partially offset by lower selling prices of titanium dioxide products.

 

*Advanced Ceramics*.  Net sales increased $16.1 million over the prior year primarily due to thepositive impact of currency changes of $7.5 million and the impact of a bolt-onacquisition made in April 2007. Increased volumes in most businesses, particularlyin medical and multi-functional ceramics, also had a favorable impact on netsales. This was partially offset by lower selling prices.

 

*Specialty Compounds*.  Net sales increased $7.7 million over the prior year primarily due to highervolumes resulting from an acquisition made in October 2006 in the wire andcable business and the positive impact of currency changes of $2.1 million. Thiswas partially offset by lower volumes resulting from a general downturn in thewire and cable market and lower volumes in the regulated packaging business.

 

*Electronics*.  Net sales increased $0.5 million over the prior year due to the positive impactof currency changes of $1.6 million. Excluding the impact of currency changes,net sales decreased as a result of lower net sales related to the divestitureof our U.S Wafer Reclaim business in the first quarter of 2007, lower sellingprices and lower volumes of high purity chemicals. The impact of these itemswas partially offset by increased volumes on sales to the printed circuit boardand semiconductor markets.

 

**Gross profit**

 

Gross profit increased $25.6 million over the prior year primarily dueto the sales increases noted above, in particular selling price increases, andthe positive impact of currency changes of $12.1 million. This was partiallyoffset by raw material cost increases, particularly from the impact of higherzinc, tin and other raw material costs in our Specialty Chemicals and TitaniumDioxide Pigments segments and higher cobalt and other raw material costs in ourColor Pigments and Services business and higher quat costs in our Clay-basedAdditives business of our Performance Additives segment. Gross profit as apercentage of net sales was 30.8% in the third quarter of 2007 versus 31.0% inthe third quarter of 2006. Gross profit in the third quarter of 2007 includes areduction of $2.6 million due to the inventory write-up reversal related to theacquisition of the global color pigments business of Elementis plc in August2007.

 

45

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**Selling, general and administrativeexpenses**

 

Selling, general and administrative expenses, or SG&A, increased$11.8 million over the prior year primarily due to the impact of currencychanges of $7.8 million. Higher SG&A costs were also recorded in a numberof our segments related to increased sales volumes. SG&A expenses as apercentage of net sales was 19.2% in the third quarter of 2007 versus 20.0% inthe third quarter of 2006.

 

**Restructuring charges, net**

 

We recorded $2.9 million of restructuring charges in the third quarterof 2007 for miscellaneous restructuring actions in the Specialty Chemicals,Performance Additives, Advanced Ceramics and Corporate segments formiscellaneous headcount reductions and facility closures. We recorded $1.7million of restructuring charges in the third quarter of 2006 in the SpecialtyChemicals, Performance Additives, Advanced Ceramics and Electronics segmentsfor miscellaneous headcount reductions and facility closures. See Note 13, “RestructuringLiability,” for further details.

 

**Operating income**

 

*Specialty Chemicals*.  Operating income increased $8.4 million primarily due to the impact of highersales in both the Surface Treatment and Fine Chemicals businesses and thepositive impact of currency changes of $2.1 million. This increase waspartially offset by higher raw material costs of $5.5 million primarily relatedto zinc, tin and other raw materials, increased depreciation and amortizationcosts of $1.8 million and higher restructuring costs of $0.8 million.

 

*Performance Additives*.  Operating income increased $4.8 million over the prior year primarily from theselling price increases noted above and productivity improvements.  Thiswas partially offset by higher raw material costs of $2.7 million, particularlyhigher cobalt and other raw material costs in our Color Pigments and Servicesbusiness and higher quat costs in our Clay-based Additives business, higherdepreciation and amortization costs of $2.3 million primarily due to the Viance,LLC joint venture formed in January 2007 and the acquisition of the globalcolor pigments business of Elementis plc in August 2007 and an inventorywrite-up reversal charge of $2.6 million in connection therewith.

 

*Titanium Dioxide Pigments*.  Operating income decreased $1.1 million over the prior year due to higher rawmaterial costs of $1.4 million, particularly zinc and other raw material costs,an unfavorable mix and lower selling prices of titanium dioxide products, andhigher depreciation and amortization costs of $1.3 million. This decreasewas partially offset by the sales increases noted above and the positive impactof currency changes of $0.9 million.

 

*Advanced Ceramics*.  Operating income increased $2.7 million over the prior year primarily due tothe impact of a bolt-on acquisition made in April 2007 and the positive impactof currency changes of $1.4 million. Increased sales in most businesses,particularly from increased volumes in medical and multi-functional ceramicsalso had a favorable impact on operating income. This increase was partiallyoffset by lower selling prices and increased depreciation and amortizationcosts of $1.8 million related to the April 2007 acquisition.

 

*Specialty Compounds*.  Operating income decreased $1.0 million primarily due to higher raw materialcosts of $0.6 million, higher depreciation and amortization costs of $1.0million and increased production costs. This was partially offset by the highersales volumes and a favorable product mix.

 

*Electronics*.  Operating income decreased $0.3 million over the prior year primarily from thedivestiture of our U.S. Wafer Reclaim business, lower volumes and sellingprices of high purity chemicals and higher depreciation and amortization costsof $0.4 million. This was partially offset by increased volumes in ourElectronic Chemicals businesses on sales to the printed circuit board andsemiconductor markets.

 

*Corporate.*Operating lossincreased $0.8 million over the prior year primarily due to the impact ofcurrency changes of $0.4 million, the recording of additional stockcompensation expense related to the May 2007 equity grant and higher legalaccruals. This was partially offset by lower professional fees incurredregarding systems and internal control documentation required in connectionwith the Company’s compliance with the Sarbanes-Oxley Act of 2002 and fees in2006 relating to the implementation of a new consolidation software system.

 

**Other income (expenses)**

 

*Interest expense*.  Interestexpense decreased $3.6 million in the third quarter of 2007 compared to thesame period in the prior year. The third quarter of 2007 and 2006 includedlosses of $13.4 million and $9.1 million, respectively, representing themovement in the mark-to-market valuation of our interest rate hedginginstruments. Excluding the impact of these losses, interest expense decreased$7.9 million primarily due to lower interest expense related to the redemptionon May 15, 2007 of the 2011 Notes.

 

46

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*Interest income*.  Interestincome increased $0.8 million in the third quarter of 2007 compared to the sameperiod in the prior year primarily related to interest earned on cashequivalents primarily stemming from the net cash proceeds received from thesale of Groupe Novasep in January 2007.

 

*Foreign exchange gain, net*.  In the third quarter of 2007, we had foreign exchange gains of $7.6 millioncompared to foreign exchange gains of $4.8 million recorded in the same periodin the prior year. The change from the prior year is primarily related tothe impact of the stronger euro.

 

**Provision for income taxes**

 

The effective income tax rate for the third quarter of 2007 was 39.4%.We recorded an income tax provision of $17.9 million for the third quarter of2007. The effective income tax rate compared to the federal statutory rate wasnegatively impacted by an increase in the valuation allowance related to U.S.operations offset by foreign rate differentials and a benefit due to the taxlaw and tax rate changes in Germany and the U.K. The effective income tax ratewas 37.6% for the third quarter of 2006 and was impacted by foreign ratedifferentials offset by the U.S. valuation allowance.

 

**Minority interest in continuingoperations**

 

Minority interest represents the minority interest portion of theViance, LLC joint venture completed in January 2007 between our TimberTreatment Chemicals business and Rohm and Haas Company.

 

**Net income from continuing operations**

 

Net income from continuing operations for the third quarter of 2007 was$24.7 million as compared to net income from continuing operations of $16.1million for the third quarter of 2006 for the reasons described above.

 

**Income from discontinued operations,net of tax**

 

Income from discontinued operations, net of tax decreased by $1.9million due to income earned from the Groupe Novasep segment in the thirdquarter of 2006. As noted above, the Groupe Novasep segment was sold on January9, 2007.

 

**Minority interest in discontinuedoperations**

 

Minority interest in discontinued operations represents the minorityinterest portion of Groupe Novasep’s net income for the third quarter of 2006. Minorityinterest for the third quarter of 2006 includes minority interest income of$3.3 million ($5.5 million before taxes) related to the settlement of aguarantee associated with the Rohner AG sale (See Note 3, “DiscontinuedOperations,” for further detail).

 

**Net income**

 

Net income for the third quarter of 2007 was $24.7 million as comparedto net income of $21.4 million for the third quarter of 2006 for the reasonsdescribed above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.  Adjusted EBITDA increased $9.2 million over the prior year primarily due to theimpact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $2.7 million. Thisincrease was partially offset by higher raw material costs.

 

*Performance Additives*.  Adjusted EBITDA increased $9.6 million over the prior year primarily from theselling price increases noted above, productivity improvements and theacquisition of the global color pigments business of Elementis plc. Thepositive impact of currency changes of $0.8 million also had a favorable impacton Adjusted EBITDA. The increase in Adjusted EBITDA was partially offset byhigher raw material costs.

 

*Titanium Dioxide Pigments*.  Adjusted EBITDA increased $0.7 million over the prior year due to the positiveimpact of currency changes of $1.7 million, as well as the net sales increasesnoted above. This was partially offset by higher raw material costs, anunfavorable mix and lower selling prices of titanium dioxide products.

 

*Advanced Ceramics*.  Adjusted EBITDA increased $4.9 million over the prior year primarily due to thepositive impact of currency changes of $2.3 million and the impact of a bolt-onacquisition made in April 2007. Increased volumes in most businesses,particularly in medical and multi-functional ceramics also had a favorableimpact on Adjusted EBITDA. This increase was partially offset by lower sellingprices.

 

*Specialty Compounds*.  Adjusted EBITDA decreased $0.4 million primarily due to increased raw materialcosts of $0.6 million and 

 

47

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higher production costs. This was partially offset by the higher salesvolumes and a favorable product mix.

 

*Electronics*.  Adjusted EBITDA increased $0.1 million over the prior year primarily due to thepositive impact of currency changes of $0.2 million and increased volumes inour Electronic Chemicals businesses on sales to the printed circuit board andsemiconductor markets. This increase was partially offset by lower net salesrelated to the divestiture of our U.S Wafer Reclaim business in the firstquarter of 2007, as well as lower volumes and selling prices of high puritychemicals.

 

*Corporate*.  Adjusted EBITDA loss at Corporate increased $0.5 million over the prior yearprimarily due to the recording of additional stock compensation expense in thethird quarter of 2007 related to the May 2007 equity grant and the impact ofcurrency changes.

 

*Discontinued operations. *Adjusted EBITDA from discontinued operations decreased $13.9 million over theprior year due to income from operating Groupe Novasep in the third quarter of2006.

 

***Nine months endedSeptember 30, 2007 compared to nine months ended September 30, 2006***

 

**Overview**

 

Net sales increased $241.0 million in the first nine months of 2007compared with the same period in the prior year driven by strong demand in anumber of our segments, particularly in our Specialty Chemicals segment,increased selling prices of $58.8 million and higher volumes related toacquisitions. The positive impact of currency changes of $116.4 million alsohad a favorable impact on net sales. See further discussion by segment below.

 

We also had increased operating income and Adjusted EBITDA in the firstnine months of 2007 compared with the same period in the prior year primarilydue to the impact of the sales increases noted above. Operating income andAdjusted EBITDA were negatively impacted by higher raw material costs in mostbusinesses.

 

Net income from continuing operations increased $9.1 million in thefirst nine months of 2007 compared with the same period in the prior yearprimarily due to the reasons noted above. This was partially offset by costs of$19.4 million incurred in the second quarter of 2007 to redeem our 2011 Notesand higher interest expense recorded in the first nine months of 2007 comparedto the same period in the prior year due to a decrease in mark-to-market gainson our interest rate hedging instruments.

 

Income from discontinued operations, net of tax and minority interest,increased $90.4 million in the first nine months of 2007 compared with the sameperiod in the prior year primarily due to the recording of a gain of $115.7million (net of taxes) on the sale of Groupe Novasep in the first quarter of2007, partially offset by income from operating the business in 2006, the taxbenefit recorded in the first quarter of 2006 related to the favorable treatmenton the sale of Rohner AG and minority interest income related to the settlementof a guarantee associated with the sale of Rohner AG in 2006 (See furtherdetails of the guarantee settlement in Note 3, “Discontinued Operations”).

 

Net income increased $99.5 million in the first nine months of 2007compared with the same period in the prior year primarily due to the reasonsnoted above.

 

**Net sales**

 

*Specialty Chemicals*.  Net sales increased $114.6 million over the prior year, primarily on higherselling prices, as well as increased volumes and the positive impact ofcurrency changes of $40.2 million. In the Fine Chemicals business, higherselling prices of lithium products, as well as increased volumes, had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by higher selling prices and growth in most markets,particularly in European automotive, aerospace and general industrialapplications.

 

*Performance Additives*.  Net sales increased $23.7 million over the prior year due to increased salesrelated to the acquisition of the global color pigments business of Elementisplc completed on August 31, 2007 and the positive impact of currency changes of$14.8 million. Excluding these increases, sales were down as lower MineralsResearch Division (“MRD”) and ACQ volumes in our Timber Treatment Chemicalsbusiness, lower volumes of coatings and inks and carbonless paper applicationsin our Clay-based Additives business and lower construction volumes in NorthAmerica were partially offset by higher selling prices primarily related to ACQproducts and increased European construction volumes in our Color Pigments andServices business.

 

*Titanium Dioxide Pigments*.  Net sales increased $31.8 million over the prior year due to the positiveimpact of currency changes of $27.0 million, as well as higher selling pricesfor functional additives and higher volumes of titanium dioxide products inrutile grade.

 

*Advanced Ceramics*.  Net sales increased $49.5 million over the prior year primarily due to thepositive impact of currency changes of $22.8 million and the impact of bolt-onacquisitions made in May 2006 and April 2007. Higher volumes in mostbusinesses, particularly in medical, mechanical systems, cutting tools andmulti-functional ceramics also had a favorable impact on net sales. This 

 

48

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was partially offset by lower selling prices.

 

*Specialty Compounds*.  Net sales increased $18.8 million over the prior year primarily due to highervolumes resulting from an acquisition made in October 2006 in the wire andcable business and the positive impact of currency changes of $6.8 million.This was partially offset by lower selling prices and lower volumes in theregulated packaging and automotive businesses.

 

*Electronics*.  Net sales increased $2.6 million over the prior year due to the positive impactof currency changes of $4.8 million. Excluding the impact of currency changes,net sales were down as lower net sales related to the divestiture of our U.SWafer Reclaim business in the first quarter of 2007, lower selling prices andlower volumes of high purity chemicals were partially offset by increasedvolumes in our Electronic Chemicals businesses on sales to the printed circuitboard and semiconductor markets.

 

**Gross profit**

 

Gross profit increased $86.6 million over the prior year primarily dueto the sales increases noted above, in particular selling price increases,productivity improvements and the positive impact of currency changes of $36.9million. This was partially offset by raw material cost increases, particularlyfrom the impact of higher zinc, tin and other raw material costs in ourSpecialty Chemicals and Titanium Dioxide Pigments segment, and higher cobaltand other raw material costs in our Color Pigments and Services business andhigher quat costs in our Clay-based Additives business of our PerformanceAdditives segment. Gross profit as a percentage of net sales was 31.7% in thefirst nine months of 2007 versus 31.2% in the first nine months of 2006. Grossprofit in the third quarter of 2007 includes a reduction of $2.6 million due toan inventory write-up reversal related to the acquisition of the global colorpigments business of Elementis plc.

 

**Selling, general and administrativeexpenses**

 

Selling, general and administrative expenses, or SG&A, increased$37.9 million over the prior year primarily due to the impact of currencychanges of $23.0 million. Higher SG&A costs were also recorded in a numberof our segments related to increased sales volumes. SG&A expenses as apercentage of net sales were 19.2% in the first nine months of 2007 compared to19.5% in the first nine months of 2006, primarily impacted by selling priceincreases.

 

**Restructuring charges, net**

 

We recorded $8.9 million of restructuring charges in the first ninemonths of 2007 for miscellaneous restructuring actions in the SpecialtyChemicals, Performance Additives, Advanced Ceramics, Electronics and Corporatesegments. We recorded $3.9 million of restructuring charges in the first ninemonths of 2006 for miscellaneous restructuring actions in the SpecialtyChemicals, Performance Additives, Advanced Ceramics and Electronics segmentsfor miscellaneous headcount reductions and facility closures. See Note 13, “RestructuringLiability,” for further details.

 

**Gain on sale of assets**

 

We recorded gains of $5.3 million and $0.4 million for the nine monthsended September 30, 2007 and 2006, respectively, related to asset sales. In thefirst quarter of 2007, we sold our U.S. Wafer Reclaim business and reported again of $4.3 million.

 

**Operating income**

 

*Specialty Chemicals*.  Operating income increased $38.8 million primarily due to the impact of highersales in both the Surface Treatment and Fine Chemicals businesses and thepositive impact of currency changes of $6.5 million. This increase waspartially offset by higher raw material costs of $18.8 million primarilyrelated to zinc, tin and other raw materials and increased depreciation andamortization costs of $5.1 million.

 

*Performance Additives*.  Operating income increased $2.6 million over the prior year primarily from theselling price increases noted above, productivity improvements and the positiveimpact of currency changes of $1.1 million.  This was partially offset bythe lower sales volumes discussed above, higher raw material costs of $9.9million, particularly copper costs in the Timber Treatment Chemicals business,higher cobalt and other raw material costs in our Color Pigments and Servicesbusiness and higher quat costs in our Clay-based Additives business. Higherdepreciation and amortization costs of $7.5 million primarily due to theViance, LLC joint venture formed in January 2007 and the acquisition of theglobal color pigments business of Elementis plc and increased inventorywrite-up reversal charges of $1.8 million primarily related to the acquisitionof the Elementis plc businesses also had an unfavorable impact on operatingincome.

 

*Titanium Dioxide Pigments*.  Operating income decreased $3.6 million over the prior year due to higher rawmaterial costs of $4.1 million, particularly zinc and other raw material costs,higher energy costs of $0.9 million, an unfavorable mix and lower sellingprices of titanium dioxide products and higher depreciation and amortizationcosts of $3.8 million.  This decrease was partially offset by the salesincreases noted above and the positive impact of currency changes of $2.5million.

 

49

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*Advanced Ceramics*.  Operating income increased $11.3 million over the prior year primarily due tothe impact of increased sales in most businesses, particularly from increasedvolumes in medical, mechanical systems, cutting tools and multi-functionalapplications, productivity improvements and the positive impact of currencychanges of $4.5 million. The impact of bolt-on acquisitions made in May 2006and April 2007 also had a favorable impact on operating income. This increasewas partially offset by lower selling prices and increased depreciation andamortization costs of $5.1 million related to acquisitions made in May 2006 andApril 2007.

 

*Specialty Compounds*.  Operating income decreased $1.0 million primarily due to higher depreciationand amortization costs of $2.2 million and lower selling prices. This waspartially offset by the higher sales volumes from the acquisition completed inOctober 2006 and a favorable product mix.

 

*Electronics*.  Operating income increased $2.0 million over the prior year due to gains onasset sales of $4.7 million recorded in the first quarter of 2007 primarilyfrom the divestiture of our U.S. Wafer Reclaim business and higher volumes inour electronic chemicals businesses on sales to the printed circuit board andsemiconductor markets. These increases were partially offset by higherrestructuring costs of $2.6 million primarily related to facility closure costsand lower selling prices (primarily high purity chemicals).

 

*Corporate.*Operating lossincreased $1.5 million over the prior year primarily due to the impact ofcurrency changes of $0.9 million, the recording of additional stockcompensation expense related to the May 2007 equity grant and higher legalaccruals. This was partially offset by lower professional fees incurredregarding systems and internal control documentation required in connectionwith the Company’s compliance with the Sarbanes-Oxley Act of 2002 and feesincurred in 2006 relating to the implementation of a new consolidation softwaresystem.

 

**Other income (expenses)**

 

*Interest expense*.  Interestexpense increased $10.6 million in the first nine months of 2007 compared tothe same period in the prior year. The first nine months of 2007 and 2006included losses of $15.4 million and gains of $6.2 million, respectively,representing the movement in the mark-to-market valuation of our interest ratehedging instruments. Excluding the impact of these losses and gains, interestexpense decreased $11.0 million primarily due to lower interest expense relatedto the redemption on May 15, 2007 of the 2011 Notes in the aggregate amount of$273.4 million.

 

*Interest income*.  Interestincome increased $7.4 million in the first nine months of 2007 compared to thesame period in the prior year from interest earned on cash from operations andinterest earned on cash equivalents stemming from the net cash proceedsreceived from the sale of Groupe Novasep in January 2007.

 

*Loss on early extinguishment ofdebt. * In May 2007, the Company paid a redemptionpremium of $14.5 million and wrote off $4.9 million of deferred financing costsassociated with the redemption of the 2011 Notes on May 15, 2007.

 

*Refinancing expenses*.  In March 2007, we expensed $0.9 million related to the fourth amendment of thesenior secured credit agreement resulting in a 50 basis point reduction on ournew tranche G term loans.

 

*Foreign exchange gain, net*.  For the nine months ended September 30, 2007 and 2006, we had foreign exchangegains of $11.3 million and $7.0 million, respectively. The change from theprior year is primarily related to the impact of the stronger euro.

 

*Other, net*.  For the first nine months of 2006, we recorded $1.6 million of income inconnection with the correction of an immaterial error related to a previouslyunrecorded asset in the Titanium Dioxide Pigments segment.

 

**Provision for income taxes**

 

The effective income tax rate for the first nine months of 2007 was41.3%. We recorded an income tax provision of $61.9 million for the first ninemonths of 2007. The effective income tax rate compared to the federal statutoryrate was negatively impacted by an increase in the valuation allowance relatedto U.S. operations offset by foreign rate differentials and a benefit due tothe tax law and tax rate changes in Germany and the U.K. The effective incometax rate for the first nine months of 2006 of 40.7% was impacted by foreignrate differentials offset by the U.S. valuation allowance.

 

**Minority interest in continuingoperations**

 

Minority interest represents the minority interest portion of theViance, LLC joint venture that was completed in January 2007 between our TimberTreatment Chemicals business and Rohm and Haas Company.

 

**Net income from continuing operations**

 

Net income from continuing operations was $81.9 million as compared tonet income from continuing operations of $72.8 million for the first ninemonths of 2006 for the reasons described above.

 

50

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**Income from discontinued operations,net of tax**

 

Income from discontinued operations, net of tax decreased to $0.5million for the first nine months of 2007 compared to income of $26.5 millionfor the first nine months of 2006 due to income earned from the Groupe Novasepsegment in the first nine months of 2006 and the tax benefit recorded in thefirst quarter of 2006 related to the favorable treatment on the sale of RohnerAG. As noted above, the Groupe Novasep segment was sold on January 9, 2007.

 

**Gain on sale of discontinuedoperations, net of tax**

 

Gain on sale of discontinued operations, net of tax was $115.7 millionfor the first nine months of 2007 as a result of the sale of Groupe Novasep.

 

**Minority interest in discontinuedoperations**

 

Minority interest in discontinued operations represents the minorityinterest portion of Groupe Novasep’s net income for the first nine months of2007 and 2006.

 

**Net income**

 

Net income for the first nine months of 2007 was $198.0 million ascompared to net income of $98.5 million for the first nine months of 2006 forthe reasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.  Adjusted EBITDA increased $41.7 million primarily due to higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $8.5 million. This increase was partially offset by higherraw material costs.

 

*Performance Additives*.  Adjusted EBITDA increased $11.6 million over the prior year primarily from theselling price increases noted above, productivity improvements, and theacquisition of the global color pigments business of Elementis plc that wascompleted on August 31, 2007. The positive impact of currency changes of $2.8million also had a favorable impact on Adjusted EBITDA.  This waspartially offset by higher raw material costs and the lower sales volumesdiscussed above.

 

*Titanium Dioxide Pigments*.  Adjusted EBITDA increased $1.4 million over the prior year due to the positiveimpact of currency changes of $4.9 million. Excluding the impact of currencychanges, Adjusted EBITDA was lower as higher raw material and energy costs, anunfavorable mix and lower selling prices were partially offset by the salesincreases noted above.

 

*Advanced Ceramics*.  Adjusted EBITDA increased $17.2 million over the prior year primarily due tothe impact of the bolt-on acquisitions made in May 2006 and April 2007,productivity improvements and the positive impact of currency changes of $6.8million. Increased sales in most businesses also had a favorable impact onAdjusted EBITDA. This increase was partially offset by lower selling prices andhigher selling, general and administrative expenses.

 

*Specialty Compounds*.  Adjusted EBITDA increased $1.3 million primarily due to higher volumesresulting from an acquisition made in October 2006 in the wire and cablebusiness and a favorable product mix. This was partially offset by lowerselling prices.

 

*Electronics*.  Adjusted EBITDA decreased $0.1 million over the prior year primarily due tolower selling prices and the divestiture of our U.S. Wafer Reclaim business. Thiswas partially offset by higher volumes in our electronic chemicals businesseson sales to the printed circuit board market and the positive impact ofcurrency changes of $0.8 million.

 

*Corporate*.  Adjusted EBITDA loss at Corporate increased $3.5 million primarily due tohigher legal accruals and the recording of additional stock compensationexpense related to the May 2007 equity grant.

 

*Discontinued operations*.  Adjusted EBITDA from discontinued operations decreased $47.8 million over theprior year primarily due to the sale of the Groupe Novasep segment on January9, 2007.

 

***Reconciliation ofNet Income to Adjusted EBITDA***

 

Because we view Adjusted EBITDA on both a consolidated basis andsegment basis as an operating performance measure, we use net income as themost comparable U.S. GAAP measure on a consolidated basis. The following table,which sets forth the applicable components of Adjusted EBITDA, presents areconciliation of net income to Adjusted EBITDA on a consolidated basis:

 

51

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| ** **                                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                            |       | $                                | 24.7       |                            | $          | 21.4 |   | $ | 198.0 |   | $ | 98.5 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | (1.9                            | )          | (0.5 | ) | (26.5 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                          |       | (115.7 | ) | — |   |
| Minority  interest in discontinued operations                         |       | —                           |       | (3.4                            | )          | 0.1 |   | 0.8 |   |
| Net income from  continuing operations                                |       | 24.7                             |       | 16.1                            |       | 81.9 |   | 72.8 |   |
| Income tax  provision                                                 |       | 17.9                             |       | 9.7                             |       | 61.9 |   | 50.0 |   |
| Minority interest  in continuing operations                           |       | 2.8                              |       | —                          |       | 6.2 |   | — |   |
| Income from  continuing operations before taxes and minority interest |       | 45.4                             |       | 25.8                            |       | 150.0 |   | 122.8 |   |
| Interest expense  (a)                                                 |       | 57.0                             |       | 60.6                            |       | 158.7 |   | 148.1 |   |
| Interest income                                                       |       | (1.9                             | )          | (1.1                            | )          | (11.0 | ) | (3.6 | ) |
| Depreciation and  amortization                                        |       | 56.9                             |       | 47.9                            |       | 165.3 |   | 140.9 |   |
| Restructuring  charges, net                                           |       | 2.9                              |       | 1.7                             |       | 8.9 |   | 3.9 |   |
| CCA litigation  defense costs                                         |       | 0.1                              |       | 0.3                             |       | 0.4 |   | 0.8 |   |
| Systems/organization  establishment expenses                          |       | 0.6                              |       | 3.2                             |       | 1.8 |   | 7.3 |   |
| Cancelled  acquisition and disposal costs                             |       | 2.3                              |       | 0.4                             |       | 3.1 |   | 1.3 |   |
| Inventory  write-up reversal                                          |       | 2.7                              |       | —                          |       | 2.8 |   | 0.9 |   |
| Refinancing  expenses                                                 |       | —                           |       | —                          |       | 0.9 |   | — |   |
| Loss on early  extinguishment of debt                                 |       | —                           |       | —                          |       | 19.4 |   | — |   |
| Gain on sale of  assets                                               |       | (0.1                             | )          | —                          |       | (5.3 | ) | (0.4 | ) |
| Foreign exchange  gain, net                                           |       | (7.6                             | )          | (4.8                            | )          | (11.3 | ) | (7.0 | ) |
| Other                                                                 |       | (1.0                             | )          | (0.3                            | )          | (1.2 | ) | (2.1 | ) |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 157.3      |                            | $          | 133.7 |   | $ | 482.5 |   | $ | 412.9 |   |

 

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(a)          Includeslosses of $13.4 million and $9.1 million for the three months ended September30, 2007 and 2006, respectively, and losses of $15.4 million and gains of $6.2million for the nine months ended September 30, 2007 and 2006, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

 

(b)        Thisamount does not include $13.9 million for the three months ended September 30,2006 and $1.8 million and $49.6 million for the nine months ended September 30,2007 and 2006, respectively, of Adjusted EBITDA from the former Groupe Novasepsegment which was sold on January 9, 2007.

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

*Unless otherwise noted, all amountsbelow which are denominated in currencies other than the U.S. dollar areconverted at the Friday, September 28, 2007 exchange rate of €1.00 = $1.4267.*

 

*Operating Activities*.  Net cash provided by operating activities was $291.9 million and $246.6 millionfor the nine months ended September 30, 2007 and 2006, respectively. Net cashfrom operating activities increased in 2007 primarily from lower use ofoperating cash from working capital changes, higher operating income and lowercash interest expense, partially offset by the lack of operating cash flows dueto the Groupe Novasep divestiture.

 

*Investing Activities*.  Netcash provided by investing activities was $199.2 million for the nine monthsended September 30, 2007. Net cash used in investing activities was $155.8million for the nine months ended September 30, 2006. Net cash from investingactivities increased in 2007 primarily due to the proceeds from the sale of theGroupe Novasep segment and the proceeds received from the formation of theViance, LLC joint venture. This was partially offset by the acquisition of theglobal color pigments businesses of Elementis plc in August 2007, anacquisition in the Advanced Ceramics segment in the second quarter of 2006 andhigher capital expenditures in the current year.

 

*Financing Activities*.  Net cash used in financing activities was $404.2 million and $120.7 million forthe nine months ended September 30, 2007 and 2006, respectively. For the ninemonths ended September 30, 2007, net cash used in financing activities includedthe payment of our 10 5/8% Senior Subordinated Notes due in 2011 in theaggregate principal amount of $273.4 million and related redemption premiums of$14.5 million.

 

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**Liquidity**

 

Our primary source of liquidity has been and will continue to be cashgenerated from the operations of our subsidiaries. In addition, the followingevents have had or are expected to have an impact on our liquidity:

 

•       On January 2, 2007, CSI,our wholly-owned subsidiary and Rohm and Haas Company formed Viance, LLC, ajoint venture company. We received net cash proceeds of $73.0 million. We alsopaid approximately $1.0 million in fees and expenses associated with thistransaction. The remainder was used for general corporate purposes.

 

•       On January 9, 2007, we soldour Groupe Novasep subsidiary and received net cash proceeds of $421.1 million.

 

•       On February 12, 2007, wecompleted the sale of our U.S. Wafer Reclaim business for approximately $11.0million in cash and a long-term notes receivable. The proceeds were used forgeneral corporate purposes.

 

•       On May 15, 2007, weredeemed our outstanding 10 5/8% Senior Subordinated Notes due 2011 in theaggregate principal amount of $273.4 million. In connection with thisrepayment, redemption premiums of $14.5 million and accrued and unpaid interestof $14.5 million to the redemption date were paid. In addition, $4.9million of deferred financing costs were written off in the second quarter of2007. We expect the interest savings associated with the reduction of debt tolargely offset the historic cash flow from the Groupe Novasep subsidiary.

 

•      As discussed in Note 16, “SubsequentEvent,” we entered into a definitive agreement on October 7, 2007 to sell ourelectronics businesses, excluding our business entity in France and our waferreclaim business for approximately $265 million, subject to customaryadjustments. The Company’s French electronics business is subject to a putoption at the discretion of Rockwood for an additional purchase price of $50million, for combined consideration of approximately $315 million. The sale ofthese businesses was not deemed to be probable as of September 30, 2007. Theclosing of this transaction is expected to occur in the fourth quarter of 2007,subject to regulatory approval.

 

Our primary liquidity requirements are working capital, debt service,capital expenditures and acquisitions. Our debt service requirements and othercontractual obligations and commitments over the next several years aresignificant and are substantially higher than historical amounts. We believethat our currently available sources of liquidity will be sufficient for theseneeds. Furthermore, any future major acquisitions, business combinations orsimilar transactions will likely require additional capital resources. If ourpresent operating performance and current market conditions continue, webelieve that such resources will be available to us for certain transactions.We would need access to alternative sources of liquidity for largeracquisitions such as through additional borrowings or other sources, and we maynot have access to these sources for a variety of reasons. See Item 1, “Business,”and Item 1A, “Risk Factors” in our 2006 Form 10-K.

 

We believe that based on current and anticipated levels of operationsand conditions in our industry and markets, cash flows from operations andborrowings available under our revolving credit facility will be adequate for2007 and the foreseeable future to make required payments of principal andinterest on our debt and fund our working capital and capital expenditurerequirements. We are taking actions to reduce costs and exit unprofitablebusinesses, in part to improve our long-term liquidity. We expect this tofurther improve our short and long-term liquidity. If our cash flow fromoperations and borrowings under our revolving credit facility are insufficientto fund our currently existing liquidity requirements, we may be forced to useother means available to us, such as to reduce or delay capital expendituresand seek additional capital. We may not have adequate capital for future acquisitions,business combinations or similar transactions.

 

As of September 30, 2007, we had actual total indebtedness of $2,555.0million. As of September 30, 2007, the revolving credit facility under thesenior secured credit facilities provided for additional borrowings of up to$222.0 million, after giving effect to $28.0 million of letters of creditissued on our behalf. As of September 30, 2007, there were no outstandingborrowings under the revolving credit facility.

 

As of September 30, 2007, we had cash and cash equivalents of $101.6million primarily from cash from operations and the net cash proceeds receivedfrom the sale of Groupe Novasep in January 2007 less cash used for theredemption of the 2011 Notes and the acquisition of the global color pigmentsbusiness of Elementis plc.

 

*Senior secured credit facilities*.  Thesenior secured credit facilities, as amended, consist of the following as ofSeptember 30, 2007:

 

•       tranche A-1 term loans inan aggregate principal amount of €29.3 million (or $41.9 million atSeptember 30, 2007) and tranche A-2 term loans in an aggregate principal amountof €127.8 million (or $182.3 million at September 30, 2007), each maturing onJuly 30, 2011 and bearing interest at Adjusted EURIBOR plus 1.75%;

 

•       tranche E term loans in anaggregate principal amount of $1,116.3 million at September 30, 2007, maturingon July 30, 2012 

 

53

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and bearinginterest at the Company’s option of either (i) Adjusted LIBOR plus 1.50%or (ii) ABR plus 0.75%;

 

•       tranche G term loans in anaggregate principal amount of €267.9 million (or $382.3 million at September30, 2007) maturing on July 30, 2012 and bearing interest of Adjusted LIBORplus 1.75%; and

 

•       a revolving credit facilityin an aggregate principal amount of $250.0 million maturing onJuly 30, 2010, bearing interest at the Company’s option of either(i) Adjusted LIBOR plus 1.75% or (ii) ABR plus 1.00%. As of September30, 2007, we had no borrowings outstanding under this facility and hadoutstanding letters of credit of $28.0 million that reduced our availabilityunder the credit facility.

 

Our leverage ratio for the twelve-month period ended September 30, 2007was 3.73 (see further details below). In accordance with the terms of ourcredit agreement, the status levels which determine interest expense wasreduced as of July 1, 2007. As a result, our tranche A-1 term loans bearinterest at Adjusted EURIBOR plus 1.75%, our tranche E term loans bear interestat the Company’s option of either (i) Adjusted Libor plus 1.50% or (ii) ABRplus 0.75%, and our tranche G term loans bear interest at Adjusted LIBOR plus1.75%. These lower interest rates are expected to reduce annualized interestexpense by approximately $5.0 million.

 

The U.S. dollar equivalents of term loans denominated in euros areshown based on the exchange rate on Friday, September 28, 2007 of €1.00 =$1.4267. In each case, the interest rates are subject to step-downs determinedby reference to a performance test. Adjusted LIBOR is the London inter-bankoffered rate adjusted for statutory reserves. ABR is the alternate base rate,which is the highest of Credit Suisse’s prime rate and the federal fundseffective rate plus 0.5%. Tranche A-1 and A-2 term loans are payable inJanuary and July of each year at escalating percentages of the originalprincipal amount. Tranche E and tranche G term loans are payable inJanuary and July of each year at amounts equal to 0.5% of the principal amountof the former tranche D term loans and tranche F term loans, respectively,with the remainder due at the final maturity date.

 

The Company’s borrowings and the borrowings of Rockwood SpecialtiesLimited under the senior secured credit facilities are guaranteed and securedby assets and pledges of capital stock.

 

In addition to the financial covenants described below under “CovenantCompliance,” the Company’s senior secured credit facilities contain variousaffirmative and restrictive covenants. The restrictive covenants limit ourability to, among other things, incur indebtedness and other liabilities;create liens; merge or consolidate; dispose of assets; make investments; paydividends and make payments to shareholders; make payments on certainindebtedness or to amend documents related to certain indebtedness and to enterinto sale leaseback transactions. In connection with the fourth amendment ofour senior secured credit agreement, substantially all of the baskets relatingto the above restrictions were reset.

 

*2014 Notes*.  The 2014 Notes have an aggregate principal amount of €375.0 million ($535.0million at September 30, 2007) in the case of the Euro notes and $200.0 millionin the case of the U.S. Dollar notes, and mature on November 15, 2014.Interest on the 2014 Notes is payable semi-annually on May 15 and November 15.Interest on the 2014 Notes accrues at the rate of 7.625% in the case of Euronotes and 7.500% in the case of U.S. Dollar notes. Certain of our domesticsubsidiaries guarantee the 2014 Notes on a senior subordinated unsecured basis(see Note 15, “Consolidating Financial Information,” for further details). Asmentioned above, the Company redeemed its 2011 Notes on May 15, 2007.

 

The 2014 Notes contain various affirmative and restrictive covenants.The restrictive covenants limit our ability, and the ability of our restrictedsubsidiaries, to, among other things, incur or guarantee additionalindebtedness (as described below under “Covenant Compliance”), pay dividends ormake other equity distributions or repurchase capital stock, make investmentsor other restricted payments, create liens, transfer or sell assets, restrictdividends or other payments to us, engage in transactions with affiliates, andmerge or consolidate with other companies or sell substantially all of ourassets.

 

*Covenant compliance.*  In addition to the affirmative and restrictive covenants, the senior securedcredit agreement contains the following financial covenants that are determinedbased on our Adjusted EBITDA, which reflects management’s interpretationsthereof:

 

•       a leverage ratio: for thetwelve-month period ended September 30, 2007, net debt (total debt plus capitallease obligations, minus cash up to a maximum of $100.0 million) to AdjustedEBITDA must be less than 5.50 to 1; for such period, our ratio equaled 3.73 to1; and

 

•       an interest coverage ratio:for the twelve-month period ended September 30, 2007, Adjusted EBITDA to cashinterest expense (interest expense, net excluding deferred debt issuance costamortization and the movements in the mark-to market value of our interest rateand cross-currency interest rate derivatives) must be at least 1.85 to 1; forsuch period, our ratio equaled 3.63 to 1.

 

Please see Item 2, Management’s Discussion and Analysis of FinancialCondition and Results of Operations—”Definitions of Adjusted EBITDA,” for adiscussion of the definition of Adjusted EBITDA used in calculating ourfinancial covenants.

 

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These covenants are material terms of the senior secured creditagreement. Non-compliance with these covenants or other defaults could resultin a default under the senior secured credit agreement and the lenders couldelect to declare all amounts borrowed immediately due and payable. Any suchacceleration would also result in a default under the indenture governing the2014 Notes, which could lead to the note holders electing to declare theprincipal, premium, if any, and interest on the then outstanding notesimmediately due and payable. Because the indenture governing the 2014 Notesdefines an event of default to include, among other things, a default under anyother debt obligation in excess of $35.0 million that could cause theacceleration of such obligation, any acceleration under the senior securedcredit agreement would also result in a default under the indenture governingthese notes, which could lead to the note holders electing to declare theprincipal, premium, if any, and interest on the then outstanding notesimmediately due and payable. The senior secured credit agreement contains asimilar cross default provision for indebtedness in excess of $30.0 million;therefore, a default under the indenture governing the 2014 Notes or otherindebtedness may likewise cause the lenders to declare the principal andinterest on the then outstanding senior secured credit facilities immediatelydue and payable.

 

The indenture governing the 2014 Notes prohibits us from incurringadditional debt, subject to certain permitted incurrences, unless the fixedcharge coverage ratio, which is the ratio of Adjusted EBITDA (as definedtherein excluding certain adjustments permitted under the senior secured creditagreement) to fixed charges (as defined therein), for the most recently endedfour fiscal quarters is at least 2.00 to 1. In addition, the indentureprohibits us from making restricted payments (such as dividends or other equitydistributions, repurchases of capital stock or restricted investments), subjectto certain permitted payments, unless, among other things, the fixed chargecoverage ratio for the most recently ended four fiscal quarters is at least2.00 to 1. For the four-fiscal quarter period ended September 30, 2007, thefixed charge coverage ratio equaled 3.63 to 1. This covenant is a material termof the indenture governing the 2014 Notes.

 

We were in compliance with all of the above covenants as of September30, 2007 and December 31, 2006.

 

Given our use of Adjusted EBITDA (see “Special Note Regarding Non-GAAPFinancial Measures” for the definition of Adjusted EBITDA and management’s usesof Adjusted EBITDA) as a liquidity measure, the following table presents areconciliation of net cash provided by operating activities to Adjusted EBITDA:

 
| ** **                                                                                                             | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                             | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                                                                                          | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                               | 290.3      |   | $ | 174.4 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 19.2                            |       | 64.6 |   |
| Current portion  of income tax provision                                                                               |       | 37.7                            |       | 20.6 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 125.4                           |       | 143.5 |   |
| Restructuring  and related charges                                                                                     |       | 8.9                             |       | 3.9 |   |
| CCA litigation  defense costs                                                                                          |       | 0.4                             |       | 0.8 |   |
| Systems/organization  establishment expenses                                                                           |       | 1.8                             |       | 7.3 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 3.1                             |       | 1.3 |   |
| Costs incurred  related to debt modifications                                                                          |       | 0.9                             |       | — |   |
| Inventory  write-up reversal                                                                                           |       | 2.8                             |       | 0.9 |   |
| Bad debt  provision                                                                                                    |       | (1.5                            | )          | (1.9 | ) |
| Gain on sale of  assets                                                                                                |       | (5.3                            | )          | (0.4 | ) |
| Other                                                                                                                  |       | (1.2                            | )          | (2.1 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                               | 482.5      |   | $ | 412.9 |   |

 

***ContractualObligations***

 

The Company is obligated to make future payments under variouscontracts such as debt agreements (including scheduled cash interest payments),operating lease agreements, and unconditional purchase obligations. Adiscussion of these contractual obligations is included in the Company’s 2006Form 10-K. As noted above, we have redeemed our 2011 Notes in theaggregate principal amount of $273.4 million in the second quarter of 2007. Inaddition, we adopted FIN 48,*Accounting forUncertainty in Income Taxes — An Interpretation of FASB Statement No. 109*,in the first quarter of 2007. As a result of the implementation of FIN 48, theCompany recognized a $1.0 million increase in the liability for unrecognizedtax benefits. The total amount of unrecognized tax benefits as of September 30,2007 was $45.5 million and has been classified as non-current income taxliabilities in the condensed consolidated balance sheets (see Note 10, “IncomeTaxes,” for further details). Except for redemption of the 2011 Notes and theadoption of FIN 

 

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48, there have been no other significant changes to these contractualobligations as of September 30, 2007.

*** ***

***Capital Expenditures***

 

Rockwood’s capital expenditures in the first nine months of 2007consisted primarily of replacements of worn, obsolete or damaged equipment aswell as investments in new equipment, mostly for our Specialty Chemicals,Performance Additives, Titanium Dioxide Pigments and Advanced Ceramicssegments.

 

For the nine months ended September 30, 2007 and 2006, our capitalexpenditures, excluding capital leases, were $140.2 million and $119.2 million,respectively. Capital expenditures for each of our reporting segments isprovided in the following table:

 
| ** **                             | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|----------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                             | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**          | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Nine months  ended September  30, 2007 |       | $             | 42.7       |            | $          | 23.5         |       | $            | 30.3       |          | $          | 21.5            |       | $             | 14.6       |             | $          | 4.5 |   | $ | 3.1 |   | $ | 140.2 |   |
| Nine months  ended September  30, 2006 |       | 34.3          |       | 19.6            |       | 24.5         |       | 23.4         |       | 4.1           |       | 5.0             |       | 8.3           |       | 119.2            |       |
|                                        |            |               |            |                 |            |              |            |              |            |               |            |                 |            |               |            |                  |            |  |  |  |  |  |  |  |  |

 

We may incur future costs for capital improvements and generalcompliance under Safety, Health and Environmental (“SHE”) laws. For the yearended December 31, 2006, our capital expenditures for SHE matters totaledapproximately $35.3 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2007, we estimate capital expenditures for compliancewith SHE laws to be at similar levels; however, because capital expendituresfor these matters are subject to changes in and new SHE laws, we cannot provideassurance that our recent expenditures will be indicative of future amountsrequired to comply with these laws.

 

***Foreign currencyrelated transactions***

 

As of September 30, 2007, based on the Friday, September 28, 2007exchange rate of €1.00 = $1.4267, $1,200.7 million of the debt outstandingis denominated in euros.

 

**Recent Accounting Pronouncements**

 

See Note 1, “Description of Business and Summary of SignificantAccounting Policies,” for a discussion of recent accounting pronouncements.

 

**Off-Balance Sheet Arrangements**

 

See Note 9, “Long-Term Debt,” for guarantees related to contractcompletion, regulatory compliance and product performance.

 

**Commitments and Contingencies**

 

See Note 14, “Commitments and Contingencies,” for a discussion of theCompany’s Commitments and Contingencies.

 

**Critical Accounting Policies andEstimates**

 

Our discussion and analysis of our financial condition and results ofoperations are based upon our condensed consolidated financial statements,which have been prepared in accordance with U.S. GAAP. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and therelated disclosure of contingent assets and liabilities. These estimatesinclude assessing, among other things:

 

•       the fair values of assetsacquired and liabilities assumed in business combinations;

 

•       the use and recoverabilityof inventory;

 

•       the valuation of deferredtax assets;

 

•       the amount of unrecognizedtax benefits in accordance with FIN 48;

 

•       impairment of goodwill,property, plant and equipment and other intangible assets; and

 

•       the useful lives oftangible and intangible assets.

 

We evaluate our estimates on an ongoing basis, based on historicalexperience and various other assumptions that we believe to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and 

 

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liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

 

The significant accounting policies of the Company are described inNote 1, “Description of Business and Summary of Significant AccountingPolicies,” to the unaudited condensed consolidated financial statements and thecritical accounting policies and estimates are described in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section in the Company’s 2006 Form 10-K. There have been no significantchanges to these critical accounting policies and estimates as of September 30,2007.

 

**Forward-Looking Statements**

 

This document contains forward-looking statements. Forward-lookingstatements are not statements of historical fact and may involve a number ofrisks and uncertainties. Forward-looking statements give our currentexpectations or forecasts of future events and estimates of amounts not yetdeterminable. We have used the words “anticipate,” “estimate,” “expect,” “project,”“intend,” “plan,” “believe,” “predict,” “could,” “may” and other words andterms of similar meaning, including references to assumptions, in this reportto identify forward-looking statements. These forward-looking statements aremade based on expectations and beliefs concerning future events affecting usand are subject to uncertainties and factors relating to our operations andbusiness environment, all of which are difficult to predict and many of whichare beyond our control, that could cause our actual results to differmaterially from those expressed in or implied by these forward-lookingstatements. In particular, these factors include, among other things:

 

•       our business strategy;

 

•       competitive pricing orproduct development activities affecting demand for our products;

 

•       fluctuations in interestrates, exchange rates and currency values;

 

•       availability and pricing ofraw materials;

 

•       fluctuations in energyprices;

 

•       changes in the end-usemarkets in which our products are sold;

 

•       changes in the generaleconomic conditions in North America and Europe and in other locations in whichwe currently do business;

 

•       technological changesaffecting production of our materials;

 

•       governmental andenvironmental regulations and changes in those regulations;

 

•       hazards associated withchemicals manufacturing;

 

•       our high level ofindebtedness;

 

•       risks associated withnegotiating, consummating and integrating acquisitions;

 

•       risks associated withcompetition and the introduction of new competing products, especially in theAsia-Pacific region; and

 

•       risks associated withinternational sales and operations.

 

You should keep in mind that any forward-looking statements made by usin this document or elsewhere speak only as of the date on which we make them.New risks and uncertainties come up from time to time, and it is impossible forus to predict these events or how they may affect us. We disclaim anyobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk.**

 

We are exposed to market risk from changes in interest rates, foreigncurrency exchange rates and commodity prices. We manage our exposure to thesemarket risks through regular operating and financing activities and through theuse of derivatives. When used, derivatives are employed as risk managementtools and not for trading purposes. A discussion and analysis of theCompany’s market risk is included in the Company’s 2006 Form 10-K. There havebeen no significant changes to these market risks as of September 30, 2007.

 

In the third quarter of 2007, we entered into interest rate swaps thatwill effectively replace swaps that are due to expire during 2008. 

 

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These swaps manage our exposure to changes in interest rates related tocertain of our variable rate debt. These swaps become effective in July 2008and will serve to continue to convert a portion of our floating rate debtinstruments to fixed rate obligations for the contract periods. These swapsmature between November 2009 and July 2012. We elected not to apply hedgeaccounting for these interest rate swaps and have recorded the mark-to-marketof these derivative transactions as a component of interest expense.

 

**Item4.  Controls and Procedures**

 

Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of September 30, 2007and concluded that our disclosure controls and procedures are effective. Inconnection with this evaluation, our management did not identify any change inour internal control over financial reporting that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting during the third quarter of 2007.

 

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**PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

In April 2005, Hospira Incorporated filed suit in Mecklenburg County,North Carolina Superior Court against one of our wholly-owned subsidiaries inour Specialty Compounds segment alleging claims for negligence, negligentmisrepresentation, estoppel, fraud, third party beneficiary breach of contractand unfair trade practices as a result of our subsidiary providing PVC compoundto its customer. Hospira is seeking damages of approximately $16.0 million forcosts allegedly related to its recall and destruction of intravenousadministration kits that incorporated components made with this compound, andfurther seeks treble damages of approximately $48.0 million, plus attorneys’fees and interest, under the North Carolina unfair trade practice statute. TheCourt has dismissed Hospira’s negligence and estoppel claims, but denied oursubsidiary’s motion to dismiss the other claims. Following discovery, oursubsidiary filed a motion for summary judgment to dismiss the remaining claims.On November 9, 2007, the trial court granted our motion for summary judgmentdismissing all of the plaintiff's claims. We cannot predict whether theplaintiff will appeal this decision or how this decision will impact theultimate resolution of the case; however, we will continue to vigorously defendthis matter. While we believe our subsidiary has meritorious defenses againstHospira’s claims and do not believe that resolution of this matter will have amaterial adverse effect on our business or financial condition, we cannotpredict the ultimate outcome of this litigation and resolution of this claimmay have a material adverse effect on our results of operations or cash flowsin any quarterly or annual reporting period.

 

Further, a customer of our Advanced Ceramics business has been named ina class action lawsuit in New Jersey relating to a prosthesis hip replacementsystem using ceramic components. The lawsuit alleges a violation of theConsumer Fraud Act, design defect, breach of warranty and negligence based on thecustomer’s design and manufacture of hip implant systems. While our subsidiaryhas not been named in this litigation, we cannot predict whether this actionwill affect our cash flows or results of operations.

 

In addition, we are involved in various legal proceedings, includingcommercial, product liability, intellectual property and environmental mattersof a nature considered normal to our business. However, except as set forthabove, we do not believe that there is any individual legal proceeding that mayhave a material adverse effect on our business or financial condition. Wecannot predict the outcome of any litigation or the potential for futurelitigation.

 

**Item 1A.Risk Factors.**

 

A discussion of the Company’s risk factors is included in the Company’s2006 Form 10-K. There have been no significant changes to these risk factors,except as set forth below.

 

On November 5, 2007, Rockwood Holdings, Inc., our ultimate parent,filed a registration statement on Form S-3 and a prospectus supplementregistering 11.5 million shares (including an over allotment of 1.5 millionshares) of its common stock, par value $0.01 per share for resale by affiliatesof KKR, DLJMB and certain management stockholders. Holdings will not receiveany proceeds from the offering. Upon completion of the offering, should itoccur, Holdings will no longer be a “controlled company” within the meaning ofthe New York Stock Exchange rules because KKR will control less than a majorityof the voting power of its outstanding common stock. As a result, Holdings willbe required to have a board of directors comprised of a majority of independentdirectors and a nominating and corporate governance committee and acompensation committee composed entirely of independent directors. However,Holdings will be permitted to phase in these corporate governance requirementsover the course of 12 months.

 

On November 12, 2007, funds affiliated with KKR, DLJMB and certainmanagement stockholders agreed to sell an aggregate of 10 million shares ofcommon stock of Rockwood, at $34.00 per share. To the extent that theunderwriters sell more than 10 million shares of common stock, the underwritershave a 30-day option to purchase up to an additional 1.5 million shares fromthe selling stockholders. 

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds.**

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

**Item4.  Submission of Matters to a Vote of Security Holders.**

 

None.

 

**Item5.  Other Information.**

 

None.

 

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**Item6.  Exhibits.**

** **
| **Exhibit No.** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                                             |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                              |
| 31.1            |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer.                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                    |
| 31.2            |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Financial Officer.                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                    |
| 32.1            |       | Section 1350 Certification of Chief Executive  Officer. This certification accompanies this report pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  filed by the Company for purposes of Section 18 or any other provision of the  Securities Exchange Act of 1934, as amended. |
|            |       |                                                                                                                                                                                                                                                                                                                    |
| 32.2            |       | Section 1350 Certification of Chief Financial  Officer. This certification accompanies this report pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  filed by the Company for purposes of Section 18 or any other provision of the  Securities Exchange Act of 1934, as amended. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|--------|---------------------------------------|
|   |                                  |
|   |                                  |   |
|   | By:                                   | /s/ SEIFI GHASEMI |
|   |                                  | Seifi Ghasemi |
|   |                                  | Chairman of the Board and Chief Executive Officer |
|   |                                  | Date: November 13, 2007 |
|   |                                  |   |
|   |                                  |   |
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|   |                                  |
|   |                                  |   |
|   | By:                                   | /s/ ROBERT J. ZATTA |
|   |                                  | Robert J. Zatta |
|   |                                  | Senior Vice President and Chief Financial Officer |
|   |                                  | Date: November 13, 2007 |

 

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