**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 
| **x**                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** **                                                                                              |
| **For the  quarterly period ended March 31, 2006** |
| ** **                                              | ** ** | ** **                                                                                              |
| **or**                                                  |
| ** **                                              | ** ** | ** **                                                                                              |
| **o**                                                   | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number   333-109686**

**Rockwood Specialties Group, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**100Overlook 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 markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   x Yes   o No

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o            Acceleratedfiler o            Non-acceleratedfiler x

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

As of May 11, 2006,there were 382,000 outstanding shares of common stock, par value $0.01 pershare, of the Registrant.

 

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**TABLE OF CONTENTSFORM 10-Q**

 
|         | PART I- FINANCIAL INFORMATION                                                                       |   |   |
|---------|----------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1  | Financial  Statements (Unaudited)                                                                        |   |   |
|    | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2006 and 2005 |   |   |
|    | Condensed Consolidated Balance Sheets as of  March 31, 2006 and December 31, 2005              |   |   |
|    | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2006 and 2005 |   |   |
|    | 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                                                                                               |   |   |

 

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**PART I —FINANCIAL INFORMATION**

**Item 1. FinancialStatements (Unaudited).**

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in millions)(Unaudited)**
| ** **                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| NET SALES                                     |       | $                                                | 812.6      |   | $ | 769.7 |   |
| COST OF PRODUCTS  SOLD                        |       | 562.9                                            |       | 544.1 |   |
| GROSS PROFIT                                  |       | 249.7                                            |       | 225.6 |   |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | 157.0                                            |       | 150.2 |   |
| RESTRUCTURING  CHARGES, net                   |       | 1.2                                              |       | 2.9 |   |
| OPERATING INCOME                              |       | 91.5                                             |       | 72.5 |   |
| OTHER INCOME  (EXPENSES):                     |       |                                             |       |   |   |
| Interest  expense, net                        |       | (39.1                                            | )          | (48.2 | ) |
| Foreign exchange  (loss) gain, net            |       | (2.6                                             | )          | 41.9 |   |
| Loss on sale of  business                     |       | (12.1                                            | )          | — |   |
| Other, net                                    |       | 2.2                                              |       | — |   |
| Net                                           |       | (51.6                                            | )          | (6.3 | ) |
| INCOME BEFORE  TAXES AND MINORITY INTEREST    |       | 39.9                                             |       | 66.2 |   |
| INCOME TAX  (BENEFIT) PROVISION               |       | (3.1                                             | )          | 24.9 |   |
| NET INCOME BEFORE MINORITY INTEREST           |       | 43.0                                             |       | 41.3 |   |
| MINORITY  INTEREST                            |       | (3.0                                             | )          | 0.8 |   |
| NET INCOME                                    |       | $                                                | 40.0       |   | $ | 42.1 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Dollars in millions, except per share amounts)(Unaudited)**
| ** **                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                           |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                      |       |               |       |                  |       |
| Cash and cash equivalents                                                                            |       | $                  | 39.3       |                  | $          | 98.1 |   |
| Accounts  receivable, net                                                                            |       | 533.3              |       | 484.2                 |       |
| Inventories                                                                                          |       | 456.1              |       | 458.2                 |       |
| Deferred income  taxes                                                                               |       | 8.0                |       | 17.7                  |       |
| Prepaid expenses  and other current assets                                                           |       | 58.6               |       | 68.1                  |       |
| Total current assets                                                                                 |       | 1,095.3            |       | 1,126.3               |       |
| PROPERTY, PLANT  AND EQUIPMENT, net                                                                  |       | 1,430.8            |       | 1,406.5               |       |
| GOODWILL                                                                                             |       | 1,618.0            |       | 1,599.2               |       |
| OTHER INTANGIBLE  ASSETS, net                                                                        |       | 582.2              |       | 578.9                 |       |
| DEFERRED DEBT  ISSUANCE COSTS, net of accumulated amortization of $16.0 and $13.5,  respectively     |       | 55.4               |       | 56.6                  |       |
| OTHER ASSETS                                                                                         |       | 52.0               |       | 44.0                  |       |
| TOTAL ASSETS                                                                                         |       | $                  | 4,833.7    |                  | $          | 4,811.5 |   |
| **LIABILITIES AND STOCKHOLDER’S  EQUITY**                                                       |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                 |       |               |       |                  |       |
| Accounts payable                                                                                     |       | $                  | 264.9      |                  | $          | 295.7 |   |
| Income taxes  payable                                                                                |       | 23.9               |       | 18.9                  |       |
| Accrued  compensation                                                                                |       | 107.5              |       | 92.0                  |       |
| Restructuring  liability                                                                             |       | 11.2               |       | 13.6                  |       |
| Accrued expenses  and other current liabilities                                                      |       | 215.5              |       | 188.8                 |       |
| Senior secured  revolving credit facility                                                            |       | 25.2               |       | 30.0                  |       |
| Long-term debt,  current portion                                                                     |       | 70.0               |       | 83.1                  |       |
| Total current liabilities                                                                            |       | 718.2              |       | 722.1                 |       |
| LONG-TERM DEBT                                                                                       |       | 2,718.2            |       | 2,730.7               |       |
| PENSION AND RELATED  LIABILITIES                                                                     |       | 353.8              |       | 361.6                 |       |
| DEFERRED INCOME  TAXES                                                                               |       | 11.2               |       | 32.7                  |       |
| OTHER  LIABILITIES                                                                                   |       | 94.3               |       | 106.3                 |       |
| Total liabilities                                                                                    |       | 3,895.7            |       | 3,953.4               |       |
| MINORITY  INTEREST                                                                                   |       | 28.8               |       | 25.2                  |       |
|                                                                                                 |       |               |       |                  |       |
| STOCKHOLDER’S EQUITY:                                                                           |       |               |       |                  |       |
| Common stock  ($0.01 par value, 1,000,000 shares authorized; 382,000 shares issued and  outstanding) |       | —             |       | —                |       |
| Paid-in capital                                                                                      |       | 1,003.4            |       | 1,003.4               |       |
| Accumulated  other comprehensive income                                                              |       | 92.3               |       | 56.0                  |       |
| Accumulated  deficit                                                                                 |       | (186.5             | )          | (226.5                | )          |
| Total stockholder’s equity                                                                      |       | 909.2              |       | 832.9                 |       |
| TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY                                                      |       | $                  | 4,833.7    |                  | $          | 4,811.5 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in millions)(Unaudited)**
| ** **                                                                                               | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                                               | ** ** | ** **                                       | ** ** | **As restated** | ** ** |
| ** **                                                                                               | ** ** | ** **                                       | ** ** | **See Note 16** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                               |       |                                             |       |   |   |
| Net income                                                                                               |       | $                                                | 40.0       |   | $ | 42.1 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                       |       |                                             |       |   |   |
| Depreciation and amortization                                                                            |       | 52.1                                             |       | 53.2 |   |
| Deferred financing costs amortization                                                                    |       | 2.3                                              |       | 2.5 |   |
| Foreign exchange loss (gain)                                                                             |       | 2.6                                              |       | (41.9 | ) |
| Loss on sale of business, net of cash                                                                    |       | 11.3                                             |       | — |   |
| Gains related to asset sales                                                                             |       | (0.6                                             | )          | — |   |
| Fair value adjustment of derivatives                                                                     |       | (10.9                                            | )          | (7.6 | ) |
| Bad debt provision                                                                                       |       | 0.6                                              |       | 0.2 |   |
| Deferred income taxes                                                                                    |       | (15.5                                            | )          | 18.2 |   |
| Minority interest                                                                                        |       | 3.0                                              |       | (0.8 | ) |
| Changes in assets and  liabilities, net of the effect of foreign currency translation and  acquisitions: |       |                                             |       |   |   |
| Accounts receivable                                                                                      |       | (48.8                                            | )          | (11.5 | ) |
| Inventories, including inventory write-up reversal                                                       |       | (6.1                                             | )          | (11.9 | ) |
| Prepaid expenses and other assets                                                                        |       | 7.0                                              |       | (12.9 | ) |
| Accounts payable                                                                                         |       | (15.7                                            | )          | 10.6 |   |
| Income taxes payable                                                                                     |       | 9.7                                              |       | 1.0 |   |
| Accrued expenses and other liabilities                                                                   |       | 16.6                                             |       | (30.1 | ) |
| **Net cash provided by operating activities**                                                            |       | 47.6                                             |       | 11.1 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                               |       |                                             |       |   |   |
| Capital  expenditures, excluding capital leases                                                          |       | (45.6                                            | )          | (54.1 | ) |
| Proceeds on sale  of property, plant and equipment                                                       |       | 2.5                                              |       | 0.2 |   |
| **Net cash used in investing activities**                                                                |       | (43.1                                            | )          | (53.9 | ) |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                               |       |                                             |       |   |   |
| Proceeds from  senior secured credit facilities                                                          |       | 45.2                                             |       | 260.0 |   |
| Repayment of  senior secured credit facilities                                                           |       | (70.1                                            | )          | (85.0 | ) |
| Payments on  other long-term debt                                                                        |       | (37.3                                            | )          | (5.9 | ) |
| **Net cash (used in) provided by financing  activities**                                                 |       | (62.2                                            | )          | 169.1 |   |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                                 |       | (1.1                                             | )          | (0.4 | ) |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                     |       | (58.8                                            | )          | 125.9 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 98.1                                             |       | 111.4 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                 |       | $                                                | 39.3       |   | $ | 237.3 |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                                      |       |                                             |       |   |   |
| Interest paid,  net                                                                                      |       | $                                                | 17.9       |   | $ | 23.7 |   |
| Income taxes  paid, net of refunds                                                                       |       | $                                                | 2.7        |   | $ | 4.8 |   |
| NON-CASH INVESTING  ACTIVITIES:                                                                          |       |                                             |       |   |   |
| Acquisition of  equipment under capital leases                                                           |       | $                                                | 1.5        |   | $ | 4.8 |   |
| Net decrease in  liabilities for property, plant and equipment                                           |       | $                                                | (15.8      | ) | $ | (18.4 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESNotes To Condensed Consolidated Financial Statements (Unaudited)**

**1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

***Business Description, Background***—RockwoodSpecialties Group, Inc. and Subsidiaries (“Rockwood” or the “Company”) isa global developer, manufacturer and marketer of high value-added specialtychemicals and advanced materials used for industrial and commercial purposes.

The Company is anindirect wholly-owned subsidiary of Rockwood Holdings, Inc. (“Holdings”),an entity controlled by affiliates of Kohlberg Kravis Roberts & Co.L.P. (“KKR”) and was formed in connection with an acquisition of certainassets, stock and businesses from Laporte plc (“Laporte”) on November 20,2000 (the “KKR Acquisition”).

On August 22, 2005,Holdings, our ultimate parent company, completed an initial public offering (“IPO”)of 23,469,387 shares of its common stock, which included 3,061,224 sharesissued and sold as a result of the underwriters’ exercise of the over-allotmentoption. For the three month period ended March 31, 2005, interest expenseon the debt repaid with IPO proceeds was $2.8 million.

***Basis of Presentation***—The accompanyingcondensed financial statements of Rockwood are presented on a consolidatedbasis. All significant intercompany accounts and transactions have beeneliminated in consolidation.

The interim financialstatements included herein are unaudited. The condensed consolidated financialstatements are presented based upon accounting principles generally accepted inthe United States of America (“US GAAP”), except that certain information andfootnote disclosures, normally included in financial statements prepared inaccordance with US GAAP, have been condensed or omitted. The accompanyingcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and the notes thereto contained in theCompany’s 2005 Form 10-K. In the opinion of management, thisinformation contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

The results of operationsfor the interim periods are not necessarily indicative of the results ofoperations for the full year.

The Company’s minorityinterest represents the total of the minority party’s interest in certaininvestments (principally the Groupe Novasep segment) that are consolidated butless than 100% owned.

***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-addedspecialty chemicals and advanced materials. The Company operates in variousbusiness lines within its seven reportable segments consisting of: (1) PerformanceAdditives, which includes color pigments and services, timber treatmentchemicals, clay-based additives, and water treatment chemicals, (2) SpecialtyCompounds, which consists of plastic compounds, (3) Electronics, whichconsists of electronic chemicals, wafer reclaim and photomasks, (4) SpecialtyChemicals, which includes lithium compounds and chemicals, metal surfacetreatment chemicals, and synthetic metal sulfides, (5) Titanium DioxidePigments, which consists of titanium dioxide pigments, and zinc- andbarium-based compounds, (6) 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, and (7) GroupeNovasep (formerly known as Custom Synthesis), which includes sensitivechemistry and chiral technologies for the synthesis of pharmaceuticalcompounds.

The basis for determiningan enterprise’s operating segments is the manner in which financial informationis used internally by the enterprise’s chief operating decision maker, theCompany’s Chief Executive Officer. See Note 4, “Segment Information,” forfurther segment reporting information.

***Use of Estimates***—The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and revenue and expenses during the periods reported.These estimates include, among other things, assessing the collectibility ofaccounts receivable, the use and recoverability of inventory, the valuation ofdeferred tax assets, impairment of goodwill as well as property, plant andequipment and other intangible assets, and the useful lives of tangible andintangible assets, among others. Actual results could differ from thoseestimates.

Such estimates alsoinclude the fair value of assets acquired and liabilities assumed allocated tothe purchase price of business combinations consummated.

***Risks Associated with International Operations and CurrencyRisk***—The Company’s international operations are subjectto risks normally associated with foreign operations, including, but notlimited to, the disruption of markets, changes in export or import laws, 

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restrictions on currencyexchanges and the modification or introduction of other governmental policieswith potentially adverse effects. A majority of the Company’s sales andexpenses are denominated in currencies other than U.S. dollars. Changes inexchange rates may have a material effect on the Company’s reported results ofoperations and financial position. In addition, a significant portion of theCompany’s indebtedness is denominated in euros.

***Related Party Transactions***—In theordinary course of business, Rockwood has engaged in transactions with certainrelated parties including KKR and DLJ Merchant Banking Partners III, L.P. (“DLJMB”)and affiliates of each.

KKR and DLJMB hadprovided the Company with consulting and management advisory services for anannual fee of $2.1 million, increasing 5% annually. In connection with the IPO,the parties agreed to terminate the management services agreement for anaggregate consideration of $10.0 million.

***Revenue Recognition***—The Companyrecognizes revenue when the earnings process is complete, except for amounts(less than 1% of consolidated revenues in 2005) derived from long-termcontracts accounted for under the percentage of completion method within theGroupe Novasep segment. Product sales are recognized when products are shippedto the customer in accordance with the terms of the contract of sale, title andrisk of loss have been transferred, collectibility is reasonably assured, andpricing is fixed or determinable. Accruals are made for sales returns and otherallowances based on the Company’s experience. Revenue under service agreementsis realized when the service is performed.

***Foreign Currency Translation***—Thefunctional currency of each of the Company’s foreign subsidiaries is primarilythe respective local currency. Balance sheet accounts of the foreign operationsare translated into U.S. dollars at period-end exchange rates and income andexpense accounts are translated at average exchange rates during the period.Translation gains and losses related to net assets located outside the U.S. areshown as a component of accumulated other comprehensive income. Gains andlosses resulting from foreign currency transactions (transactions denominatedin a currency other than the entity’s functional currency) are included indetermining net income for the period in which exchange rates change. However,the related gains or losses on certain intercompany transactions that are of along-term investment nature for which settlement is not planned or anticipatedin the foreseeable future and gains or losses on euro-denominated debt that isdesignated as a net investment hedge of our euro-denominated investments arereported and accumulated in the same manner as translation adjustments.

***Derivatives***—The Company accounts forderivatives based on Statement of Financial Accounting Standards (“SFAS”) 133, *Accounting for Derivative Instruments and HedgingActivities*, as amended and interpreted. SFAS 133 requires that allderivatives be recognized as either assets or liabilities at fair value.Changes in the fair value of derivatives not designated as hedging instrumentsare recognized currently in earnings while changes in the fair value ofderivatives that are designated as hedging instruments are recognized as acomponent of other comprehensive income. The Company uses derivativeinstruments to manage its exposure to market risks associated with fluctuationsin 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 tradingpurposes nor does it use leveraged or complex instruments.

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87, *Employers’ Accounting for Pensions*. Otherpostretirement benefit costs and liabilities have been determined in accordancewith SFAS 106, *Employers’ Accountingfor Postretirement Benefits Other Than Pensions*. Postemploymentbenefit costs and liabilities have been determined in accordance withSFAS 112, *Employers’ Accounting forPostemployment Benefits*. See Note 11, “Employee Benefit Plans,” forfurther detail.

***Income Taxes***—Income taxes aredetermined in accordance with SFAS 109, *Accountingfor Income Taxes*. Deferred tax assets and liabilities are recognizedfor future tax consequences attributable to differences between the financialstatement carrying amounts and the corresponding tax carrying amounts of assetsand liabilities. Deferred tax assets are also recognized for tax loss and taxcredit carryforwards. A valuation allowance is recorded to reduce deferred taxassets when it is more likely than not that a tax benefit will not be realizedbased on available evidence weighted toward evidence that is objectivelyverifiable. Deferred taxes are not provided on the undistributed earnings ofsubsidiaries as such amounts are considered to be permanently invested or couldbe distributed to the parent company in a tax free manner.

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature aswell as minimum pension liability adjustments that are recorded directly into aseparate section of stockholders’ 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.

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Comprehensive income issummarized as follows:
| ($ in millions)                           | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net income                                          |       | $                                                | 40.0       |   | $ | 42.1 |   |
| Foreign currency  translation                       |       | 25.4                                             |       | (65.1 | ) |
| Intercompany  foreign currency transactions         |       | 31.6                                             |       | (40.5 | ) |
| Net investment  hedge, net of tax                   |       | (25.3                                            | )          | 6.2 |   |
| Reduction of  minimum pension liability, net of tax |       | 4.6                                              |       | — |   |
| Total comprehensive income (loss)                   |       | $                                                | 76.3       |   | $ | (57.3 | ) |

 

In November 2004,the Company completed the sale of €375.0 million aggregate principalamount of 7.625% senior subordinated notes and $200.0 million aggregateprincipal amount of 7.500% senior subordinated notes, both due in 2014 (“2014Notes”). In connection with the 2014 Notes, the Company entered into cross-currencyinterest rate swaps with a five-year term and a notional amount of €155.6 millionthat effectively convert the U.S. dollar fixed-rate debt in respect of thedollar notes sold into euro fixed-rate debt. The Company has designated thiscontract as a hedge of the foreign currency exposure of its net investment inits euro denominated operations. There was no ineffective portion of the netinvestment hedge as of March 31, 2006 and December 31, 2005. TheCompany does not expect any of the loss on the net investment hedge residing inother comprehensive income at March 31, 2006 to be reclassified intoearnings 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 debtof €684.2 million or $828.0 million based on the March 31, 2006 exchangerate of €1.00 = $1.2102). As a result, any foreign currency gains and lossesresulting from the euro-denominated debt discussed above, effective October 1,2005 is accounted for as a component of accumulated other comprehensive income.There was no ineffective portion of the net investment hedge as of March 31,2006. The Company does not expect any of the loss on the net investment hedgeresiding in other comprehensive income at March 31, 2006 to bereclassified into earnings during the subsequent twelve months.

***Accounting for Environmental Liabilities***—Inthe ordinary course of business, the Company is subject to extensive andchanging federal, state, local and foreign environmental laws and regulations,and has made provisions for the estimated financial impact of environmentalcleanup related costs. The Company policy has been to accrue costs of anon-capital nature related to environmental clean-up when those costs arebelieved to be probable and can be reasonably estimated. If the aggregateamount of the obligation and the amount and timing of the cash payments for asite are fixed or reliably determinable, the liability is discounted.Expenditures that extend the life of the related property or mitigate orprevent future environmental contamination are capitalized and expendituresrelated to existing conditions resulting from past or present operations andfrom which no current or future benefit is discernible are immediatelyexpensed. The quantification of environmental exposures requires an assessmentof many factors, including changing laws and regulations, advancements inenvironmental technologies, the quality of information available related tospecific sites, the assessment stage of each site investigation and the lengthof time involved in remediation or settlement. In some matters, the Company mayshare costs with other parties. The Company does not include anticipatedrecoveries from insurance carriers or other third parties in its accruals forenvironmental liabilities. The Company’s liability estimates are based uponavailable facts, existing technology, past experience and, in some instancesinsurance recoveries where the remediation costs are being paid directly by theCompany’s insurers and are generated by several means, including State-mandatedschedules, environmental consultants and internal experts, depending on the circumstances.

***Cash and Cash Equivalents***—All highlyliquid instruments and money market funds with an original maturity of threemonths or less are considered to be cash equivalents. The carrying amountapproximates fair value because of the short maturities of these instruments.

***Other Current Assets***—During the firstquarter of 2006, the Company recorded an adjustment related to a previouslyunrecorded asset in the Titanium Dioxide segment. This adjustment increased thepreviously reported other current assets by $1.6 million, other income by $1.6million, income tax expense by $0.6 million and net income by $1.0 million. Theeffect of this adjustment to the Company’s financial statements for the yearended December 31, 2005 is not material.

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***Recent Accounting Pronouncements***—TheCompany implemented the financial accounting standards listed below on January 1,2006. The adoption of these standards did not have a material impact on theCompany.
| SFAS 123R |   | Share-Based Payment                      |
|-----------|--------|------------------------------------------|
| SFAS 151  |   | Inventory Costs                          |
| SFAS 153  |   | Exchanges of Nonmonetary Assets          |
| SFAS 154  |   | Accounting Changes and Error Corrections |

 

SFAS123R revises SFAS 123, *Accounting forStock-Based Compensation,* and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and its related implementation guidance. SFAS 123R requires entities tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. That costwill be recognized over the period during which the employee is required toprovide services in exchange for the award. This standard eliminates the use ofthe intrinsic value method of accounting for share-based payments as previouslyprovided in APB 25. The Company is applying SFAS 123R on a modifiedprospective basis. In accordance with SFAS 123R, beginning in the first quarterof 2006, the Company is recording compensation cost for the unvested portion ofawards issued after February 2005, which is the date Holdings filed itsregistration statement with the Securities and Exchange Commission (“SEC”), andfor any awards modified, repurchased or cancelled after this date. See Note 2, “NewAccounting Standard — Share-Based Payment (SFAS No. 123R),” and Note 3, “Stock-BasedCompensation,” for further details of the impact of adopting this standard.

SFAS 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage), requiring that suchitems be recognized as current-period charges. This statement eliminates anarrow difference between the Financial Accounting Standards Board (“FASB”) andInternational Accounting Standards Board (“IASB”) accounting standards toimprove the comparability of cross-border financial reporting.

SFAS 153eliminates the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. This statement eliminates a narrowdifference between the FASB and IASB accounting standards to improve thecomparability of cross-border financial reporting.

SFAS154 replaces APB Opinion No. 20, *AccountingChanges*, and SFAS Statement No. 3, *Reporting Accounting Changes in Interim Financial Statements*,and changes the requirements for the accounting and reporting of a change inaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle, unless it is impracticableto determine either the period-specific effects or the cumulative effect of thechange. SFAS 154 also requires that (1) a change in depreciation,amortization, or depletion method for long-lived, non-financial assets beaccounted for as a change in accounting estimate effected by a change inaccounting principle and (2) correction of errors in previously issuedfinancial statements should be termed a “restatement.” This statementeliminates a narrow difference between the FASB and IASB accounting standardsto improve the comparability of cross-border financial reporting.

**2.    NEW ACCOUNTING STANDARD — SHARE-BASEDPAYMENT (SFAS NO. 123R):**

Effective January 1,2006, the Company adopted SFAS No. 123R, *Share-BasedPayment*, and related interpretations and began expensing thegrant-date fair value of stock options. Prior to January 1, 2006, theCompany applied the recognition and measurement principles of APB Opinion 25, *Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, no compensation expense wasrecognized in net income for employee stock options, as the options granted hadan exercise price equal to the market value of the underlying common stock onthe date of grant. The estimated impact of adopting SFAS No. 123R in 2006is expected to reduce net income for the year by approximately $0.3 millionbefore taxes.

Asnoted above under “Recent Accounting Pronouncements,” the Company adopted SFAS No. 123Rusing the modified prospective method and therefore has not restated priorperiods. As a result, the Company is recording compensation cost for theunvested portion of awards issued after February 2005 and for any awardsmodified, repurchased or cancelled after this date. In the first quarter of2006, the adoption of SFAS No. 123R resulted in incremental stock-basedcompensation expense of less than $0.1 million. The incremental stock-basedcompensation expense caused income before taxes and minority interest todecrease by $0.1 million and net income to decrease by less than $0.1 million.Net cash provided by operating activities decreased and net cash provided byfinancing activities was insignificant related to excess tax benefits fromshare-based payment arrangements.

SFASNo. 123R modified the disclosure requirements related to share-basedcompensation. Accordingly, the disclosures prescribed by SFAS No. 123R areincluded in Note 3, “Stock-Based Compensation.”

 

9

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Forstock options granted prior to the adoption of SFAS No. 123R, the Companyapplied APB Opinion 25 to account for its stock-based awards. If compensationcost for the Company’s stock option plans had been determined based on the fairvalue at grant date consistent with the provisions of SFAS No. 123 asamended by SFAS No. 148, *Accounting forStock-Based Compensation-Transition and Disclosure*, the Company’snet earnings and earnings per share would have been as follows:
| ** **                                                                                             | ** ** | **Three months** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                             | ** ** | **ended**             | ** ** |
| **($ in millions, except per share amounts)**                            | ** ** | ** **            | ** ** | **March 31, 2005** | ** ** |
| Net income, as reported                                                                                |       | 42.1                  |       |
| Less: Stock-based  employee compensation expense determined under fair value based method, net  of tax |       | (0.2                  | )          |
| Pro forma net income                                                                                   |       | 41.9                  |       |
|                                                                                                        |            |                       |            |  |  |

 

**3.    STOCK-BASED COMPENSATION:**

**Rockwood Plan**

Rockwood 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 Holdings’common stock. There are 10,000,000 authorized shares available for grant underthe Plan.

***Restricted Stock***—Restricted stock of Holdings can be granted withor without payment of consideration with restrictions on the recipient’s rightto transfer or sell the stock.

***Stock Purchase***—Eligible employees and directors can purchaseshares of Holdings’ common stock at prices as determined by Holdings’ board ofdirectors.

***Stock Options***—Stock options granted under the Plan shall havean exercise price at least equal to the fair market value of Rockwood Holdings’common stock on the date of grant. There are two types of options available forgrant under the Plan. Time options have a life of ten years from the date ofgrant and vest as follows: time options granted prior to 2004 vest 10% in yearone, 10% year two, 25% year three, 25% year four and 30% year five; timeoptions granted in 2004 and after vest in installments of 20% on each of thefirst five anniversaries of the grant date. Performance options have a life often years and become exercisable with respect to 20% of the total performanceoptions granted upon the achievement of certain performance targets.Performance options become exercisable on the eighth anniversary of the grantdate to the extent that the options have not become otherwise exercisable orhave not been terminated. In October 2004, the performance targets weremodified as a result of the Dynamit Nobel Acquisition. Certain option holdershave “company-wide performance targets,” for which targets are based on theachievement by Holdings of certain implied equity values. Other option holdershave “divisional performance targets,” for which targets are based on aparticular division’s achievement of annual or cumulative EBITDA.

***Board of DirectorsStock Options***—Stockoptions granted to directors under this Plan shall have an exercise price atleast equal to the fair market value of Holdings’ common stock on the date ofgrant. Options available for grant under this Plan are time options which havea life 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.

The Company recorded no compensation cost in thehistorical statements of operations related to the Plan prior to 2006. Themeasurement date for determining compensation expense for each option has beenthe option issuance date and at that time the market price of the stock wasequal to the exercise price in each case. The time options have been accountedfor as a fixed plan. The performance options have been treated similar to fixedstock option plans as the Company concluded the predefined (non-accelerated)vesting schedule is substantive as it is deemed to be more likely than not thatthe applicable individuals will remain employed with the Company through thatvesting date, particularly if the performance trigger has not occurred. Assuch, the measurement date for these options is the option grant date inaccordance with APB Opinion 25. The change to the applicable performancetargets as a result of the Dynamit Nobel Acquisition was a permitted change perthe applicable stock option agreements; as such no modification occurredrequiring a new measurement date calculation.

Thecompensation cost charged against income under the Plan in the first quarter of2006 for share-based compensation programs was less than $0.1 million beforetaxes.

The fairvalue of options granted in the first quarter of 2006 is estimated on the dateof grant using the Black-Scholes option pricing

 

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modelthat used the assumptions noted in the following table:
| Expected term  (in years) |   | 6.0 |   |
|---------------------------|--------|-----|--------|
| Expected  volatility      |   | 35  | %      |
| Risk-free rate            |   | 4.7 | %      |
| Expected  dividends       |   | N/A |   |

 

Theexpected term represents the period of time that options granted are expectedto be outstanding based on the simplified method for determining expected termof an employee share option (in accordance with SEC Staff Accounting Bulletin No. 107).As Holdings became a public company in August 2005, there is not a longperiod of history of its share price. As a result, Holdings’ expectedvolatility is based on the expected volatilities of comparable peer companiesthat are publicly traded. The risk-free rate is based on the U.S. Treasuryyield curve in effect at the time of grant. Expected dividends are notapplicable as Holdings currently does not pay a dividend on its shares.

As of March 31,2006, there was $0.5 million of unrecognized compensation cost related tononvested stock options, which is expected to be recognized over aweighted-average period of approximately 6.1 years.

As ofJanuary 1, 2006 and March 31, 2006, the number of nonvested stockoptions were 53,800 and 64,357, respectively, and the weighted-average grantdate fair value of nonvested stock options was $8.68 and $8.92, respectively.

Thetotal intrinsic value of stock options exercised during the first quarter of2006 was less than $0.1 million. Cash received from option exercises during thefirst quarter of 2006 was less than $0.1 million. The total tax benefitrealized from options exercised in the first quarter of 2006 was less than $0.1million. The total fair value of shares vested during the first quarter of 2006was less than $0.1 million.

Asummary of the status of the options granted by Rockwood Holdings at March 31,2006 and changes during the period ended on that date is presented below:
| ** **                                                        | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **                    | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                        | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **                    | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**                 | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**                 | ** ** |
| ** **                                                        | ** ** | **Shares**      | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**                     | ** ** |
| ** **                                                        | ** ** | **(‘000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **($ in millions)** | ** ** |
| Outstanding at  December 31, 2005                            |       | 3,863           |       | $            | 14.69      |            |       |                          |       |   |
| Granted                                                           |       | 11              |       | 23.68        |       |            |       |                          |       |
| Exercised                                                         |       | (2              | )          | 14.61        |       |            |       |                          |       |
| Forfeited                                                         |       | (10             | )          | 14.61        |       |            |       |                          |       |
| Outstanding at  March 31, 2006                               |       | 3,862           |       | $            | 14.71      |            | 6.97       |                          | $          | 32.1 |   |
|                                                              |       |            |       |         |       |            |       |                          |       |
| Options exercisable at  March 31, 2006                       |       | 1,696           |       | $            | 14.62      |            | 6.35       |                          | $          | 14.2 |   |
|                                                              |       |            |       |         |       |            |       |                          |       |
| Weighted-average fair  value of options granted during the period |       | $               | 10.12      |         |       |            |       |                          |       |   |
|                                                                   |            |                 |            |              |            |                 |            |                               |            |  |  |  |

 

**Subsidiary Plan**

***Stock Options***—In September 2005, Groupe Novasep approved astock option plan for certain of its employees (the “Subsidiary Plan”). Underthe Subsidiary Plan, there are 24,543 authorized shares available for grant.There are two types of options available for grant under the Subsidiary Plan.Time options have a life of 62 months from the date of grant and vest asfollows: 20% per year at each one year anniversary. Performance options have amaximum life of ten years and become exercisable based on attainment of certainstock price targets on the occasion of certain triggering events (IPO or Changeof Control).

***Stock Purchase***—Eligible employees and management personnel ofGroupe Novasep SAS (“Groupe Novasep”), a subsidiary of the Company, and itssubsidiaries can purchase shares of common stock at prices as determined by theSupervisory Board of Groupe Novasep. Under the Subsidiary Plan, Groupe Novasepsold 4,013 shares during the quarter ended December 31, 2005 at the fairmarket value of the stock (€211.00 per share) as determined by the SupervisoryBoard of Groupe Novasep at the date of purchase for gross proceeds of $1.0million.

The Company recorded no compensation cost in thehistorical statements of operations related to the Subsidiary Plan prior to2006. The time options qualified as a fixed plan in accordance with APB Opinion25 prior to 2006. The performance options do not qualify as a

 

11

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fixed plan and therefore are accounted for as a variable plan. Inaccordance with FASB Interpretation No. 38, *Determiningthe Measurement Date for Stock Option, Purchase, and Award Plans InvolvingJunior Stock - An Interpretation of APB Opinion No. 25,* as thetriggering events were not probable, no compensation cost was recorded as of March 31,2006.

 

The compensation cost charged against income under the Subsidiary Planin the first quarter of 2006 for share-based compensation programs was lessthan $0.1 million before taxes.

 

Therewere no options granted or exercised in the first quarter of 2006 under theSubsidiary Plan. The fair value of options granted in 2005 was estimated on thedate of grant using the Black-Scholes option pricing model.

As of March 31,2006, there was €1.0 million ($1.2 million using a March 31, 2006 exchangerate of €1.00 = $1.2102) of unrecognized compensation cost related to nonvestedstock options under the Subsidiary Plan, which is expected to be recognizedover a weighted-average period of approximately 4.5 years.

Asummary of the status of the options granted by Groupe Novasep at March 31,2006 and changes during the quarter ended on that date is presented below:
| ** **                                                        | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                        | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **             | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**          | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**          | ** ** |
| ** **                                                        | ** ** | **Shares**      | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**              | ** ** |
| ** **                                                        | ** ** | **(‘000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **(in millions)** | ** ** |
| Outstanding at  December 31, 2005                            |       | 22              |       | €       | 211.00     |            |       |                   |       |   |
| Granted                                                           |       | —          |       | —       |       |            |       |                   |       |
| Exercised                                                         |       | —          |       | —       |       |            |       |                   |       |
| Forfeited                                                         |       | (1              | )          | 211.00       |       |            |       |                   |       |
| Outstanding at  March 31, 2006                               |       | 21              |       | €       | 211.00     |            | 9.58       |                   | €     | — |   |
|                                                              |       |            |       |         |       |            |       |                   |       |
| Options  exercisable at March 31, 2006                       |       | —          |       | €       | —     |            | —     |                   | €     | — |   |
|                                                              |       |            |       |         |       |            |       |                   |       |
| Weighted-average  fair value of options granted during the period |       | €          | —     |         |       |            |       |                   |       |   |
|                                                              |       |            |       |         |       |            |       |                   |       |
|                                                                   |            |                 |            |              |            |                 |            |                        |            |  |  |  |

 

**4.    SEGMENT INFORMATION:**

Rockwood operates in seven reportable segments accordingto the nature and economic characteristics of its products and services as wellas the manner in which the information is used internally by the Company’s keydecision maker, who is the Company’s Chief Executive Officer. The sevensegments are: (1) Performance Additives, which consists of the colorpigments and services, timber treatment chemicals, clay-based additives andwater treatment chemicals business lines; (2) Specialty Compounds; (3) Electronics,which consists of the electronic chemicals, wafer reclaim and photomasksbusiness lines; (4) Specialty Chemicals, which consists of the surfacetreatment and fine chemicals business lines; (5) Titanium DioxidePigments; (6) Advanced Ceramics; and (7) Groupe Novasep.

Itemsthat cannot be readily attributed to individual segments have been classifiedas “Corporate.” Corporate operating lossprimarily represents payroll, professional fees and other operating expenses ofcentralized functions such as treasury, legal, internal auditing andconsolidation accounting as well as the cost of operating our central offices(including some maintained based on legal or tax considerations). The primarycomponents of corporate loss, in addition to operating loss, are interestexpense on external debt (including the amortization of deferred financingcosts), foreign exchange losses or gains, and mark-to-market gains or losses onderivatives. Major Corporate components within the reconciliation of incomebefore taxes and minority interest (described more fully below) includesystems/organization establishment expenses such as outside consulting costsfor Sarbanes-Oxley initial documentation, tax provision (benefit)resulting from corporate income (losses), interest expense on external debt,foreign exchange losses or gains, refinancing expenses related to external debtand initial public offering related expenses. 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.

 

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Summarized financialinformation for each of the reportable segments is provided in the followingtable:
| ** **                                  | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|------------------|------------|
| ** **                                  | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Specialty** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**               | ** ** | **Additives**   | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three  months ended March 31, 2006** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                   |       | $               | 182.5      |          | $          | 63.2            |       | $             | 49.4       |         | $          | 228.1        |       | $           | 108.2      |          | $          | 92.7             |       | $ | 88.5 |   | — |   | $ | 812.6 |   |
| Adjusted EBITDA                             |       | 33.3            |       | 7.3           |       | 8.6             |       | 51.4          |       | 20.9         |       | 23.6         |       | 15.9        |       | (12.3         | )          | 148.7            |       |
| **Three  months ended March 31, 2005** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                   |       | $               | 159.5      |          | $          | 58.1            |       | $             | 42.8       |         | $          | 220.0        |       | $           | 104.5      |          | $          | 91.9             |       | $ | 92.9 |   | $ | — |   | $ | 769.7 |   |
| Adjusted EBITDA                             |       | 34.2            |       | 7.3           |       | 5.8             |       | 43.0          |       | 20.9         |       | 21.4         |       | 10.2        |       | (9.6          | )          | 133.2            |       |
|                                             |            |                 |            |               |            |                 |            |               |            |              |            |              |            |             |            |               |            |                  |            |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Specialty** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Additives**   | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **(a)**       | ** ** | **(b)**          | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |             |       |
| March 31,  2006        |       | $               | 1,040.9    |          | $          | 226.8           |       | $             | 329.5      |         | $          | 1,608.5      |       | $           | 649.6      |          | $          | 662.6            |       | $                | 342.5      |   | $ | 176.8 |   | $ | (203.5 | ) | $ | 4,833.7 |   |
| December 31, 2005      |       | 1,011.5         |       | 221.9         |       | 323.6           |       | 1,501.6       |       | 644.8        |       | 653.3        |       | 396.7       |       | 259.5         |       | (201.4           | )          | 4,811.5          |       |
|                             |            |                 |            |               |            |                 |            |               |            |              |            |              |            |             |            |               |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

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(a)             Thisincludes $40.7 million and $39.7 million of assets from the legacy businessesformerly belonging to Dynamit Nobel at March 31, 2006 and December 31,2005, respectively.

(b)            Amountscontained in the “Eliminations” column represent the individual subsidiaries’retained interest in their cumulative net cash balance (deposits lesswithdrawals) included in the corporate centralized cash system and within theidentifiable assets of the respective segment. These amounts are eliminated asthe corporate centralized cash system is included in the Corporate segment’sidentifiable assets.

The summary of segmentinformation above includes “Adjusted EBITDA,” a financial measure used by thechief operating decision maker, who is the Company’s Chief Executive Officer,to evaluate the operating performance of each segment.

*Itemsexcluded from Adjusted EBITDA*

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe Dynamit Nobel Acquisition and Holdings’ initial public offering, resultedin a number of charges that have affected Rockwood’s historical results. Thesecharges, along with certain other items, are added to or subtracted from incomebefore taxes and minority interest to derive Adjusted EBITDA, as defined below.The more significant of these items include the following:

·                  *Systems/organization establishment expenses*.For the three months ended March 31, 2006, expenses of $1.9 million wererecorded related to professional fees incurred regarding systems and internalcontrol documentation in connection with the Sarbanes-Oxley Act of 2002 andfees relating to the implementation of a new consolidation software system. Forthe three months ended March 31, 2005, expenses of $1.2 million wererecorded related to the integration of the business acquired in the DynamitNobel Acquisition, as well as professional fees incurred regarding systems andinternal control documentation in connection with the Sarbanes-Oxley Act of2002. These expenses are reflected in the “Corporate” column when the Company’sresults are presented on a segment basis. We estimate non-recurring costs ofapproximately $0.7 million are remaining to complete initial Sarbanes-Oxleycompliance.

·                  *Restructuring and related charges*. Restructuringcharges of $1.2 million and $2.9 million were recorded in the three monthsended March 31, 2006 and 2005, respectively, for miscellaneousrestructuring activities, including headcount reductions and facility closures(see Note 13, “Restructuring Liability,” for further details).

·                  *Loss on sale of business*. In connectionwith the sale of Rohner AG in March 2006, the Company recorded a pre-taxloss of $12.1 million for the three months ended March 31, 2006 (see Note12, “Sale of Rohner AG,” for further detail).

·                  *Inventory write-up reversal*. UnderSFAS 141, *Business Combinations*,all inventories acquired in an acquisition must be revalued to “fair value.” Inconnection with the Groupe Novasep combination in 2004 and the acquisition ofthe Süd-Chemie businesses in 2005,the Company allocated a portion of the total purchase price to inventory toreflect manufacturing profit in inventory at the date of the acquisition. Thisresulted in a consequential reduction in gross profit, including currencyeffects, of $0.8 million and $2.8 million for the three months ended March 31,2006 and 2005, respectively, as the inventory was sold in the normal course ofbusiness.

 

13

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·                  *CCAlitigation defense costs*. Costs of $0.3 million and $0.4 millionwere recorded in the three months ended March 31, 2006 and 2005,respectively, in connection with litigation defense costs related to theCompany’s Timber Treatment Chemicals business line of the Performance Additivessegment.

·                  *Cancelled acquisition and disposal costs*. Forthe three months ended March 31, 2006 and 2005, costs of $0.6 million and$0.2 million, respectively, were recorded in connection with non-consummatedacquisitions and dispositions.

·*                  Foreign exchangegain (loss), net*. During the periods presented, the Company recordedforeign exchange gains and (losses) related to our long-term debt. Theseamounts reflect losses of $2.6 million for the three months ended March 31,2006 and gains of $41.9 million for the three months ended March 31, 2005,for the non-cash translation impact on our euro-denominated debt resulting fromthe strengthening or weakening of the euro against the U.S. dollar and/or theBritish pound.

·                  *Gains related to asset sales and other*. Forthe three months ended March 31, 2006, we recorded $1.9 million of incomeprimarily related to the correction of an immaterial error related to apreviously unrecorded asset in the Titanium Dioxide segment ($1.6 million).

Ona segment basis, the Company defines Adjusted EBITDA as operating incomeexcluding depreciation and amortization, certain non-cash gains and charges,certain other special gains and charges deemed by our senior management to benon-recurring gains and charges and certain items deemed by senior managementto have little or no bearing on the day-to-day operating performance of itsbusiness segments and reporting units. The adjustments made to operating incomedirectly correlate with the adjustments to net income in calculating AdjustedEBITDA on a consolidated basis pursuant to the senior secured credit agreement.The indentures governing the 2011 Notes and the 2014 Notes exclude certainadjustments permitted under the senior credit agreement. Senior management usesAdjusted EBITDA on a segment basis as the primary measure to evaluate theongoing performance of the Company’s business segments and reporting units.

TheCompany uses Adjusted EBITDA on a segment and consolidated basis to assess itsoperating performance. In addition, management uses Adjusted EBITDA on aconsolidated basis as the most significant criterion in the calculation ofperformance-based bonuses under its short-term incentive plan and thedetermination of whether certain performance-based stock options vest.

TheCompany believes this financial measure on a consolidated basis is helpful inhighlighting trends in its overall business because Adjusted EBITDA excludesthose items deemed by senior management to have little or no bearing onday-to-day operating performance.

Because the Company viewsAdjusted EBITDA on both a segment basis and consolidated basis as an operatingperformance measure, the Company uses income before taxes and minority interestas the most comparable GAAP measure on a segment basis and net income as themost comparable GAAP measure on a consolidated basis. The following tablepresents a reconciliation of income before taxes and minority interest toAdjusted EBITDA on a segment GAAP basis:
| ** **                                        | ** ** | ** **      | ** ** | ** **    | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium**  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** |
|---------------------------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|
| ** **                                        | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **    | ** ** | **Specialty**   | ** ** | **Dioxide**   | ** ** | **Advanced** | ** ** | **Groupe**   | ** ** | ** **  | ** ** | ** **    | ** ** |
| **($ in millions)**                     | ** ** | ** **      | ** ** | **Additives** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three  months ended March 31, 2006**       | ** ** | ** **      | ** ** | ** **    | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** |
| Income (loss)  before taxes and minority interest |       | $               | 20.0       |          | $          | 5.4           |       | $               | 2.4        |          | $          | 30.1         |       | $            | 6.5        |        | $          | 7.6           |       | $ | (7.5 | ) | $ | (24.6 | ) | $ | 39.9 |   |
| Interest expense,  net (a)                        |       | 4.0             |       | (0.1          | )          | 0.8           |       | 9.2             |       | 7.0           |       | 7.4          |       | 3.3          |       | 7.5         |       | 39.1          |       |
| Depreciation and  amortization                    |       | 8.1             |       | 2.0           |       | 4.2           |       | 11.4            |       | 9.0           |       | 8.2          |       | 8.4          |       | 0.8         |       | 52.1          |       |
| Restructuring and  related charges                |       | 0.2             |       | —        |       | 0.8           |       | 0.2             |       | —        |       | —       |       | —       |       | —      |       | 1.2           |       |
| CCA litigation  defense costs                     |       | 0.3             |       | —        |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.3           |       |
| Systems/organization  establishment expenses      |       | —          |       | —        |       | —        |       | —          |       | —        |       | —       |       | —       |       | 1.9         |       | 1.9           |       |
| Cancelled  acquisition and disposal costs         |       | —          |       | —        |       | —        |       | 0.6             |       | —        |       | —       |       | —       |       | —      |       | 0.6           |       |
| Inventory  write-up reversal                      |       | 0.8             |       | —        |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.8           |       |
| Gains related to  asset sales                     |       | (0.1            | )          | —        |       | —        |       | —          |       | —        |       | —       |       | (0.1         | )          | (0.4        | )          | (0.6          | )          |
| Loss on sale of  business                         |       | —          |       | —        |       | —        |       | —          |       | —        |       | —       |       | 12.1         |       | —      |       | 12.1          |       |
| Foreign exchange  loss (gain)                     |       | 0.1             |       | —        |       | 0.4           |       | (0.1            | )          | —        |       | —       |       | (0.3         | )          | 2.5         |       | 2.6           |       |
| Other                                             |       | (0.1            | )          | —        |       | —        |       | —          |       | (1.6          | )          | 0.4          |       | —       |       | —      |       | (1.3          | )          |
| Total Adjusted  EBITDA                            |       | $               | 33.3       |          | $          | 7.3           |       | $               | 8.6        |          | $          | 51.4         |       | $            | 20.9       |        | $          | 23.6          |       | $ | 15.9 |   | $ | (12.3 | ) | $ | 148.7 |   |
| **Three  months ended March 31, 2005**       | ** ** | ** **      | ** ** | ** **    | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** |
| Income (loss)  before taxes and minority interest |       | $               | 17.2       |          | $          | 6.0           |       | $               | 0.8        |          | $          | 17.0         |       | $            | 3.2        |        | $          | 4.5           |       | $ | (5.8 | ) | $ | 23.3 |   | $ | 66.2 |   |
| Interest expense,  net (a)                        |       | 6.6             |       | (0.1          | )          | 1.3           |       | 12.1            |       | 8.5           |       | 9.4          |       | 4.5          |       | 5.9         |       | 48.2          |       |
| Depreciation and  amortization                    |       | 8.5             |       | 1.4           |       | 5.1           |       | 11.7            |       | 9.2           |       | 7.5          |       | 8.9          |       | 0.9         |       | 53.2          |       |
| Restructuring and  related charges                |       | 2.4             |       | —        |       | —        |       | 0.5             |       | —        |       | —       |       | —       |       | —      |       | 2.9           |       |
| CCA litigation  defense costs                     |       | 0.3             |       | —        |       | —        |       | —          |       | —        |       | —       |       | —       |       | 0.1         |       | 0.4           |       |
| Systems/organization  establishment expenses      |       | —          |       | —        |       | —        |       | —          |       | —        |       | —       |       | —       |       | 1.2         |       | 1.2           |       |
| Cancelled  acquisition and disposal costs         |       | —          |       | —        |       | —        |       | —          |       | —        |       | —       |       | —       |       | 0.2         |       | 0.2           |       |
| Inventory  write-up reversal                      |       | —          |       | —        |       | —        |       | —          |       | —        |       | —       |       | 2.8          |       | —      |       | 2.8           |       |
| Foreign exchange  (gain) loss                     |       | (0.9            | )          | —        |       | (1.4          | )          | 1.8             |       | —        |       | —       |       | —       |       | (41.4       | )          | (41.9         | )          |
| Other                                             |       | 0.1             |       | —        |       | —        |       | (0.1            | )          | —        |       | —       |       | (0.2         | )          | 0.2         |       | —        |       |
| Total Adjusted EBITDA                             |       | $               | 34.2       |          | $          | 7.3           |       | $               | 5.8        |          | $          | 43.0         |       | $            | 20.9       |        | $          | 21.4          |       | $ | 10.2 |   | $ | (9.6 | ) | $ | 133.2 |   |
|                                                   |            |                 |            |               |            |               |            |                 |            |               |            |              |            |              |            |             |            |               |            |  |  |  |  |  |  |  |  |  |  |  |

 

14

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(a) Includes gainsof $10.9 million and $7.6 million for the three months ended March 31,2006 and 2005, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

The following table,which sets forth the applicable components of Adjusted EBITDA, presents areconciliation of net income to Adjusted EBITDA on a consolidated basis:
| ** **                                   | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in millions)**                | ** ** | ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                   |       | $                                                    | 40.0       |   | $ | 42.1 |   |
| Income tax  provision                        |       | (3.1                                                 | )          | 24.9 |   |
| Minority  interest                           |       | 3.0                                                  |       | (0.8 | ) |
| Income before  taxes and minority interest   |       | 39.9                                                 |       | 66.2 |   |
| Interest  expense, net (a)                   |       | 39.1                                                 |       | 48.2 |   |
| Depreciation and  amortization               |       | 52.1                                                 |       | 53.2 |   |
| Restructuring  and related charges           |       | 1.2                                                  |       | 2.9 |   |
| CCA litigation  defense costs                |       | 0.3                                                  |       | 0.4 |   |
| Systems/organization  establishment expenses |       | 1.9                                                  |       | 1.2 |   |
| Cancelled  acquisition and disposal costs    |       | 0.6                                                  |       | 0.2 |   |
| Inventory  write-up reversal                 |       | 0.8                                                  |       | 2.8 |   |
| Gains related to  asset sales                |       | (0.6                                                 | )          | — |   |
| Loss from  disposed businesses               |       | 12.1                                                 |       | — |   |
| Foreign exchange  loss (gain)                |       | 2.6                                                  |       | (41.9 | ) |
| Other                                        |       | (1.3                                                 | )          | — |   |
| Total Adjusted EBITDA                        |       | $                                                    | 148.7      |   | $ | 133.2 |   |
|                                              |            |                                                      |            |  |  |  |  |  |  |

 

(a) Includes gainsof $10.9 million and $7.6 million for the three months ended March 31,2006 and 2005, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

**5.    ACQUISITIONS:**

SinceFebruary 2002, pursuant to our business strategy of achieving profitablegrowth through selective acquisitions, we have acquired nine businesses atpurchase prices ranging from approximately $3.0 million (a U.S. liquidpigments asset acquisition by our Performance Additives segment) to $2,290.3million, including net debt assumed (the four businesses of Dynamit Nobel); andcombined the three business lines of our Custom Synthesis segment (now known asGroupe Novasep segment) with the acquired businesses of Groupe Novasep SAS. Inaccordance with SFAS No. 142, *Goodwilland Other Intangible Assets*, any goodwill resulting fromacquisitions is tested for impairment at least annually.

In December 2005, we completed an acquisition of therheological additives and carbonless developers businesses of Süd-Chemie AG,Munich, Germany. Both businesses have been incorporated into Rockwood’sClay-based Additives business unit, which is part of the Performance Additivessegment. We accounted for the acquisition of these businesses using thepurchase method of accounting and have allocated the total estimatedpurchase price to the assets acquired and liabilities assumed. The balancesheet as of December 31, 2005 and March 31, 2006 reflects apreliminary purchase price allocation based on the preliminary results of anindependent asset appraisal and internal review of the fair value of otherassets acquired and liabilities assumed. Except for the possible effect of post-closingadjustments, the Company expects to complete its assessment of the fair valueof assets acquired during the second quarter of 2006. The excess of the totalpurchase price over the estimated fair value of the net assets acquired atclosing has been allocated to goodwill. Based on the preliminary allocation oftotal estimated purchase price, goodwill in the transaction totaled $9.9million as of the acquisition date. This amount has not changed significantlyfrom the preliminary allocation but could change at a subsequent date when wefinalize the purchase accounting for this acquisition.

In the first quarter of2006, the Company recorded adjustments primarily relating to certain previouslyunidentified fixed assets acquired and an erroneous pension accrual inconnection with the Groupe Novasep combination and Dynamit Nobel Acquisition.These adjustments to the Company’s purchase accounting resulted in an increaseto property, plant and equipment-net of $10.9 million, an increase todeferred income tax liabilities of $3.7 million, and a decrease to pensionliabilities of $4.0 million with a corresponding decrease in goodwill of$11.7 million at March 31, 2006. The effects of the adjustments tothe Company’s financial statements for the year ended December 31, 2005are not material.

15

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**6.   INVENTORIES:**

Inventories are comprisedof the following:
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | ** **         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw materials                 |       | $                  | 134.1      |                  | $          | 141.6 |   |
| Work-in-process               |       | 63.6               |       | 75.0                  |       |
| Finished goods                |       | 244.8              |       | 227.9                 |       |
| Packaging  materials          |       | 13.6               |       | 13.7                  |       |
|                          |       | $                  | 456.1      |                  | $          | 458.2 |   |
|                               |            |                    |            |                       |            |  |  |  |  |

 

**7.   GOODWILL:**

Below are goodwillbalances and activity by segment:
| ** **                                                | ** ** | ** **      | ** ** | ** **    | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium**  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|
| ** **                                                | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **    | ** ** | **Specialty**   | ** ** | **Dioxide**   | ** ** | **Advanced** | ** ** | **Groupe**   | ** ** | ** **  | ** ** |
| **($ in millions)**                             | ** ** | ** **      | ** ** | **Additives** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Total** | ** ** |
| Balance,  December 31, 2005                          |       | $               | 459.5      |          | $          | 109.2         |       | $               | 119.3      |          | $          | 538.8        |       | $            | 151.7      |        | $          | 187.5 |   | $ | 33.2 |   | $ | 1,599.2 |   |
| Other tax  adjustments                                    |       | —          |       | —        |       | —        |       | (1.0            | )          | —        |       | —       |       | —       |       | (1.0        | )          |
| Post-closing  consideration and other related adjustments |       | 1.7             |       | —        |       | —        |       | —          |       | —        |       | —       |       | —       |       | 1.7         |       |
| Foreign exchange  and other                               |       | 2.9             |       | 0.8           |       | 1.2           |       | 11.4            |       | 3.9           |       | 5.0          |       | (7.1         | )          | 18.1        |       |
| Balance, March  31, 2006                                  |       | $               | 464.1      |          | $          | 110.0         |       | $               | 120.5      |          | $          | 549.2        |       | $            | 155.6      |        | $          | 192.5 |   | $ | 26.1 |   | $ | 1,618.0 |   |
|                                                           |            |                 |            |               |            |               |            |                 |            |               |            |              |            |              |            |             |            |  |  |  |  |  |  |  |  |  |  |

 

The adjustments recordedduring the first quarter of 2006 as disclosed in Note 5, “Acquisitions,”are recorded in “foreign exchange and other” as reductions of goodwill within SpecialtyChemicals ($4.0 million) and Groupe Novasep ($7.7 million).

**8.    OTHER INTANGIBLE ASSETS:**

 

Other intangible assets, net consist of:

 
| ** **                               | ** ** | **As of March 31, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Gross**                                    | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                 | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | ** **                                   | ** ** | **Amount**                                      | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                            | 339.4      |                                            | $          | (66.5 | ) | $ | 272.9 |   | $ | 340.1 |   | $ | (64.3 | ) | $ | 275.8 |   |
| Trade names and  trademarks              |       | 119.4                                        |       | (11.0                                           | )          | 108.4 |   | 114.3 |   | (7.4 | ) | 106.9 |   |
| Customer  relationships                  |       | 197.5                                        |       | (24.1                                           | )          | 173.4 |   | 190.6 |   | (20.9 | ) | 169.7 |   |
| Other                                    |       | 34.4                                         |       | (6.9                                            | )          | 27.5 |   | 32.0 |   | (5.5 | ) | 26.5 |   |
| Total                                    |       | $                                            | 690.7      |                                            | $          | (108.5 | ) | $ | 582.2 |   | $ | 677.0 |   | $ | (98.1 | ) | $ | 578.9 |   |
|                                          |            |                                              |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization of otherintangible assets was $13.0 million and $14.1 million for the three monthsended March 31, 2006 and 2005. Estimated amortization expense for each of thefive succeeding fiscal years is as follows:
| ($ in millions) | ** ** | **Amortization** | ** ** |
|---------------------------|------------|------------------|------------|
| **Year ended**       | ** ** | **Expense**      | ** ** |
| 2006                      |       | $                | 47.6       |   |
| 2007                      |       | 45.8             |       |
| 2008                      |       | 45.3             |       |
| 2009                      |       | 45.0             |       |
| 2010                      |       | 43.9             |       |
|                           |            |                  |            |  |

 

16

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**9.   LONG-TERM DEBT**

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **($ and € in  millions)**                                                             | ** ** | ** **         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Senior secured credit  facilities:                                                               |       |               |       |                  |       |
| Tranche A-1  term loans (€37.2 and €39.1, respectively)                                |       | $                  | 45.0       |                  | $          | 46.1 |   |
| Tranche A-2  term loans (€161.9 and €170.4, respectively)                              |       | 195.9              |       | 201.0                 |       |
| Tranche E term  loans                                                                            |       | 1,133.6            |       | 1,139.3               |       |
| Tranche F term  loans (€272.1 and €273.4, respectively)                                |       | 329.2              |       | 322.5                 |       |
| Revolving  short-term loans (€20.0 and $1.0 as of March 31, 2006 and $30.0 million     |       |               |       |                  |       |
| as of  December 31, 2005)                                                                   |       | 25.2               |       | 30.0                  |       |
| 2011 Notes                                                                                       |       | 273.4              |       | 273.4                 |       |
| 2014 Notes (€375.0 and  $200.0 as of March 31, 2006 and December 31, 2005)        |       | 653.8              |       | 642.4                 |       |
| Other term loan  facilities                                                                      |       | 59.0               |       | 92.7                  |       |
| Capitalized lease  obligations (€50.9 and €51.0, respectively)                         |       | 62.6               |       | 61.2                  |       |
| Preferred stock of  subsidiary (£12.0 as of March 31, 2006 and December 31, 2005) |       | 20.8               |       | 20.6                  |       |
| Other (€12.3 and €12.2,  respectively)                                                 |       | 14.9               |       | 14.6                  |       |
|                                                                                             |       | 2,813.4            |       | 2,843.8               |       |
| Less current maturities                                                                          |       | (95.2              | )          | (113.1                | )          |
|                                                                                             |       | $                  | 2,718.2    |                  | $          | 2,730.7 |   |
|                                                                                                  |            |                    |            |                       |            |  |  |  |  |

 

**10.    TAXES ON INCOME:**

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the first quarter of 2006 is (7.8)% which is generallyattributable to the tax benefits associated with the sale of Rohner AG. Theglobal effective tax rate associated with first quarter 2006 ordinary operatingresults was 37.9% (which excluded the Rohner transaction), which is a functionof foreign and domestic earnings and their impact on the effective tax rate. Inthe first quarter of 2006, the Company reduced its worldwide valuationallowances by $24.8 million. As a majority of the reduction in the valuationallowance was the result of a decrease in the net deferred tax assets of RohnerAG, the change in the valuation allowance did not have a significant impact onthe effective tax rate during the quarter. The following table reflects theactivity in the valuation allowance for worldwide net operating losses andother deferred income tax assets:

 
|                                                          | ** ** | **Valuation** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                            | ** ** | ** **    | ** ** | **Allowance** | ** ** |
| Balance as of December 31, 2005 |       | $             | 41.1       |   |
| Reduction in deferred  tax assets of Rohner AG           |       | (26.4         | )          |
| Increase in  income tax expense                          |       | 0.2           |       |
| Increase in  other comprehensive income                  |       | 1.7           |       |
| Expired net  operating loss                              |       | (0.3          | )          |
| Balance as of  March 31, 2006                       |       | $             | 16.3       |   |
|                                                          |            |               |            |  |  |  |

 

In the first quarter of2006, based on the Company’s policy and steady-state analysis, we determinedthat we did not have sufficient positive evidence of future taxable income inorder to release the U.S. valuation allowance recorded in 2004. During thefirst quarter of 2006, our net deferred tax assets were maintained at a zerolevel, other than a noncurrent deferred tax liability relating to goodwill withan indefinite reversal period. It is the Company’s policy that the valuationallowance is reversed in the year management determines it is more likely thannot that the deferred tax assets will be realized.

17

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**11.    EMPLOYEE BENEFIT PLANS:**

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 132R, *Employers’ Disclosures aboutPensions and Other Postretirement Benefits — An Amendment of FASB Statements No. 87,88 and 106*:

 
| ** **                            | ** ** | **Three months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**         | ** ** | ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                          |       | $                                | 2.9        |   | $ | 2.8 |   |
| Interest cost                         |       | 5.8                              |       | 7.0 |   |
| Expected return on  assets            |       | (2.6                             | )          | (2.9 | ) |
| Net amortization of  actuarial losses |       | 0.7                              |       | 0.2 |   |
| Total pension  cost                   |       | $                                | 6.8        |   | $ | 7.1 |   |
|                                       |            |                                  |            |  |  |  |  |  |  |

 

**12.    SALE OF ROHNER AG:**

In late 2005, Rockwoodhad decided to substantially downsize the operations of Rohner AG (“Rohner”).This decision was driven by a number of factors, including, in particular,continued capacity utilization issues as a result of the loss of a key customerin 2003 and the inability to replace this lost volume with comparableprofitable volume. The downsizing included a review of Rockwood’s strategicoptions for this business including potential sale or closure. The Company hadrecorded a full impairment charge at the end of 2005 with respect to Rohner’slong-term assets, primarily property, plant and equipment, totaling $44.7million due to these actions.

On March 9, 2006,after exploring several alternatives, the Company sold all of the capital stockof Rohner for a nominal price. Until that time, Rohner, located in Pratteln,Switzerland, had been a subsidiary in the Company’s Groupe Novasep segment.Rohner produces chemicals on a custom-synthesis and toll manufacturing basisfor the pharmaceutical and agrochemical industries, specializing in transitionmetal catalysis.

The Company recorded anet pre-tax loss of $12.1 million on the sale of Rohner in the first quarter of2006, representing consideration given less the remaining net liabilities ofRohner, which have been transferred to the purchaser. The sale agreementcontains a potential favorable purchase price adjustment of up to €5.0 millionupon the achievement of certain operating targets of Rohner through 2008. Thesale agreement also contains a potential unfavorable purchase price adjustmentof €1.0 million. The Company has not included these potential purchase priceadjustments in its determination of its net loss on the sale of Rohner as theseadjustments are not probable at March 31, 2006.

Rockwood has reviewedwhether the above activity should result in Rohner being treated as adiscontinued operation and concluded that such treatment would not beappropriate as certain products will continue to be produced by other GroupeNovasep entities.

**13.    RESTRUCTURING LIABILITY:**

The Company recorded $1.2 million and $2.9 million of restructuring charges forthe three months ended March 31, 2006 and 2005, respectively. The Companyrecords restructuring liabilities from time to time that represent chargesincurred in connection with consolidations and cessations of certain of itsoperations, including operations from acquisitions, as well as headcountreduction programs. These charges consist primarily of write-offs of assets andseverance costs. Severance charges are based on various factors including theemployee’s length 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.

**2006 Restructuring Actions:**

During the three monthsended March 31, 2006, the Company expensed $1.2 million of restructuringcharges for miscellaneous restructuring actions, including $0.8 million for theannounced restructuring of the Wafer Reclaim business in the Electronics segment.The Company recorded severance and related costs for employees in connectionwith the closure of the Wafer Reclaim facilities (one each in the U.K. andU.S.). The Wafer Reclaim operating facility in the U.K. was closed in January 2006and the facility in the U.S. was closed in March 2006. In addition, $0.2million was recorded in the Specialty Chemicals segment and $0.2 million wasrecorded in the Performance Additives segment for miscellaneous headcountreductions and the announced closure of the Baulking, United Kingdom facilityfor our Clay-based Additives business in the Performance Additives segment.

18

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** **

**DynamitNobel Restructuring and Johnson Matthey Pigments and Dispersions Restructuring**

The Company began to assess and formulate specific plans toinvoluntarily terminate or relocate certain employees and/or exit certainactivities of the Dynamit Nobel businesses as of the Dynamit Nobel Acquisitiondate. This assessment led to certain restructuring measures being taken by theCompany as described below.

The Company closed theformer corporate office of Dynamit Nobel located in Troisdorf, Germany in thefourth quarter of 2004. The Company recorded restructuring charges related tothis closure including severance costs for 44 general and administrative personnelof the former Dynamit Nobel company, the closure costs on this building and therelocation costs for the remaining 27 employees who were relocated to theCompany’s new Frankfurt, Germany location. Also in 2004, as part of theacquisition of the Pigments and Dispersions business of Johnson Matthey, theCompany enacted a restructuring program and 40 positions were eliminated. Allof these employees were selling, general and administrative personnel.

For the 2006restructuring actions, the Company recorded a restructuring charge of $0.1million. This charge was utilized in the first quarter of 2006.

Selected information forthe 2005 restructuring actions follows:

** **
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | ** **    | ** ** | **Costs**    | ** ** | **Costs**  | ** ** | **Total** | ** ** |
| **2005**                                   |       |          |       |         |       |       |       |
| Liability balance,  December 31, 2005 |       | $             | 1.5        |         | $          | -          |       | $ | 1.5 |   |
| Restructuring charge                       |       | 0.3           |       | 0.6          |       | 0.9        |       |
| Utilized in 2006                           |       | (1.0          | )          | (0.6         | )          | (1.6       | )          |
| Foreign exchange and  other                |       | 0.6           |       | 0.4          |       | 1.0        |       |
| Liability balance,  March 31, 2006    |       | $             | 1.4        |         | $          | 0.4        |       | $ | 1.8 |   |
|                                            |            |               |            |              |            |            |            |  |  |  |  |  |

 

Selected information forthe 2004 restructuring actions follows:

** **
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | ** **    | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Costs**  | ** ** | **Total** | ** ** |
| **2004**                                   |       |          |       |         |       |           |       |       |       |
| Liability balance,  December 31, 2005 |       | $             | 10.6       |         | $          | 1.1            |       | $          | 0.4        |   | $ | 12.1 |   |
| Restructuring charge in  2006              |       | 0.2           |       | -            |       | -              |       | 0.2        |       |
| Utilized in 2006                           |       | (2.3          | )          | (0.1         | )          | -              |       | (2.4       | )          |
| Foreign exchange and  other                |       | (0.6          | )          | 0.1          |       | -              |       | (0.5       | )          |
| Liability balance,  March 31, 2006    |       | $             | 7.9        |         | $          | 1.1            |       | $          | 0.4        |   | $ | 9.4 |   |
|                                            |            |               |            |              |            |                |            |            |            |  |  |  |  |  |  |

 

**14.    COMMITMENTS AND 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 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.Although the Company expects to continue to pay legal fees in connection withcertain legal actions related to chromated copper arsenate and other productliability matters, based on currently available facts, the Company does notbelieve that these actions will have a material effect on the financialcondition, results of operations or liquidity of the Company. In accordancewith the Company’s policy, reserves in connection with such product liabilitymatters do not individually exceed $350,000 and in the aggregate $2.0 million.The Company’s reserve estimates are based on available facts, including damageclaims and input from its internal and external legal counsel, past experience,and, in some instances where defense costs are being paid by its insurer’sinsurance coverage, 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. In addition, the Company does not believethat there is any other individual legal proceeding that is likely to have amaterial adverse effect on its business or financial condition. However, theCompany cannot predict the outcome of any litigation or the potential forfuture litigation.

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***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 theSale and Purchase Agreement with mg technologies ag (now known as GEA GroupAktiengesellschaft) and its subsidiary MG North America Holdings, Inc., mgtechnologies is obligated to indemnify the Company for certain legal, tax and environmentalliabilities and obligations that relate to the period prior to the closing,subject to certain limits and exclusions. Pursuant to these agreements, theCompany has various claims for indemnification with Degussa and mgtechnologies. In addition, the Company may be subject to indemnity claimsrelating to properties or businesses it divested. In the opinion of management,and based upon information currently available, the ultimate resolution of anyindemnification obligations owed to the Company or by the Company will not havea material effect on the Company’s financial condition, results of operationsor cash flows.

**Safety,Health and Environmental Matters**

***General***

TheCompany is subject to extensive environmental, health and safety laws in theUnited States, the European Union (“EU”) and elsewhere at the international,national, state, and local levels. Many of these laws impose requirementsrelating to clean-up of contamination, and impose liability in the event ofdamage 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 and Environmental Systems***

TheCompany is committed to achieving and maintaining compliance with allapplicable safety, health and environmental (“SHE”) legal requirements, and theCompany’s subsidiaries have developed policies and management systems that areintended to identify the SHE legal requirements applicable to their operations,enhance compliance with such requirements, ensure the safety of the Company’semployees, contractors, community neighbors and customers and minimize theproduction and emission of wastes and other pollutants. Although SHE legalrequirements are constantly changing, these SHE management systems are designedto assist the Company in meeting its compliance goals and minimizing overallrisk.

***SHE Capital Expenditures***

TheCompany may incur future costs for capital improvements and general complianceunder SHE laws. For the year ended December 31, 2005, the capitalexpenditures for SHE matters totaled approximately $32.8 million,excluding costs to maintain and repair pollution control equipment. For 2006and 2007, the Company estimates capital expenditures for compliance with SHElaws to be at similar levels; however, because capital expenditures for thesematters are subject to changes in existing and new SHE laws, the Company cannotprovide assurance that its recent expenditures will be indicative of futureamounts required to comply with these laws.

***Regulatory Developments***

In October 2003,the European Commission adopted a proposal for a new EU framework for chemicalsknown as the Registration, Evaluation and Authorization of Chemicals, or REACHwhich will significantly expand the EU’s regulation of chemicals. As currentlyproposed, REACH would include requirements that certain manufacturers andimporters of chemicals register those chemicals, perform health andenvironmental risk analyses of those chemicals, and in certain instances,obtain authorizations for the use of the chemicals. As a specialty chemicalscompany, it is possible that the Company is the only manufacturer of one ormore substances to be regulated under REACH and thus could potentially bear thefull cost of compliance with REACH for some or all of the Company’s products.The Company estimates it has over 400 products that might be subject to REACH,which is scheduled to become an EU directive in early 2007; compliance withREACH will be required starting in 2008.

Underthe European Union Integrated Pollution Prevention and Control Directive (“IPPC”),EU member governments are to adopt rules and implement a cross-media (air,water and waste) environmental permitting program for individual facilities.IPPC requires a consistent application of Best Available Techniques, or BAT,throughout the EU. Generally, by 2007, facilities located within the EU must beoperating consistent with BAT. 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 

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permitprogram. Although it is not known with certainty what each IPPC permit willrequire, the Company believes, based upon its experience with the permitsreceived to date, that the costs of compliance with the IPPC permit programwill not be material to its results of operations, financial position or liquidity.

TheKyoto Protocol is an amendment to an international treaty on global warming.The Protocol establishes significant emission reduction targets for six gasesconsidered to have global warming potential, referred to as greenhouse gases.The Protocol was adopted in 1997 and became effective in February 2005 inover 140 countries that have ratified it. The EU, including Germany and othercountries where the Company has interests, ratified the Kyoto Protocol in 2002and, in doing so, agreed to enact regulation that reduces the emission ofgreenhouse gases or engage in a trading system covering carbon dioxideemissions by January 1, 2005. Such a system became effective at the startof 2005. The new regulation directly affects our power plants at the Duisburgand Langelsheim sites in Germany, as well as the power plant being operated bya third party on one of our sites. Rockwood and such third party may berequired to purchase carbon dioxide credits, which could result in increasedoperating costs, or may be required to develop additional cost-effectivemethods to reduce carbon dioxide emissions, which could result in increasedcapital expenditures. The new regulation indirectly affects our 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, we do not expect this to have a material impact on ourcash flow or results of operations.

***Remediation Liabilities***

Environmentallaws have a significant effect on the nature and scope of any clean-up ofcontamination at current and former operating facilities, the costs oftransportation and storage of chemicals and finished products and the costs ofthe storage and disposal of wastes. In addition, “Superfund” statutes in theUnited States as well as statutes in other jurisdictions impose strict, jointand several liability for clean-up costs on the entities that generated wasteand/or arranged for its disposal at contaminated third party sites, as well asthe 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.

Environmentalcontamination is known to exist at certain of the Company’s present and formerfacilities, including its facilities located in Turin, Italy; St. Fromond, St.Cheron and Sens, France; Hainhaussen, Troisdorf, Schlebusch, Stadeln, Duisburg,Plochingen, Marktredwitz, Ronnenberg-Empelde and Langelsheim, Germany; Oss, TheNetherlands; Kidsgrove, Sudbury and Barrow, U.K.; Boksburg East, South Africaand in the United States, in Valdosta, Georgia, Beltsville, Maryland,Harrisburg, North Carolina, Laurens, South Carolina, Silver Peak, Nevada and LaMirada, California. Soil contamination is also known to exist at the Company’sfacilities at Freeport, Texas, Chasse-sur-Rhone, France, Sudbury, U.K. andSumperk in Czech Republic; however, no further regulatory remedial actions arecurrently required for these facilities and any liabilities arising from suchcontamination is covered by indemnity obligations or the previous owners ofthese facilities with the exception of Freeport. The Company is currentlyoperating groundwater remediation systems at its Hainhaussen, Valdosta, andSilver Peak facilities. The Company also operates groundwater remediationsystems at its Schlebusch, Plochingen, Marktredwitz, Stadeln, Troisdorf, andLaurens facilities, for which prior owners or insurers have assumedresponsibility. The Company has recently completed a soil remediation projectat the Company’s facility in St. Cheron and is currently awaiting regulatoryapproval. The Company also continues to monitor groundwater at the Beltsvillefacility, which was previously the subject of a soil removal action.Groundwater is also monitored at the St. Fromond and Barrow facilities due toprior spills and at the Harrisburg facility due to a landfill closure. TheCompany is also required to monitor groundwater quality at its facility atMourenx, France. 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 and La Mirada. Furthermore, as aresult of facility closings, divestitures and offsite disposal activities, theCompany is responsible for the following other matters: contamination beneathdivested portions of the manufacturing facility in Troisdorf; a former disposalsite in Laurel, Maryland; contamination at a closed Specialty Chemicalsfacility in Houston, Texas; contamination at a former Specialty Chemicalsfacility in Sunbright, Virginia; groundwater remediation at Stadeln; and formersites operated by Dynamit Nobel’s previously divested explosives business. TheCompany is also a *de minimis*participant in several Superfund matters.

Althoughthe Company cannot provide assurances in this regard, the Company does notbelieve that these issues will have a material adverse effect on its businessor financial condition, but may have a material adverse effect on the resultsof operations or cash flows in any given quarterly or annual reporting period.Nonetheless, the discovery of contamination arising from present or historicalindustrial operations at some of the Company’s and the Company’s predecessor’sformer and present properties and/or at sites the Company and its predecessordisposed wastes could expose the Company to cleanup obligations and otherdamages in the future.

21

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**GovernmentEnforcement Proceedings and Civil Litigation**

Duringthe course of the Company’s business, the Company may receive notices ofviolation, enforcement and other complaints from regulatory agencies allegingnon-compliance with applicable SHE laws. Currently, the Company is a party to aconsent order with the Metropolitan Sewer District (“MSD”) in Saint Louis,Missouri to reduce ammonia concentrations in wastewater discharge to a citytreatment plant. MSD’s new National Pollution Discharge Elimination System (“NPDES”)permit will require the Company to reduce the facility’s ammonia discharge byan average of 50% by December 31, 2008. The Company is evaluating variousoptions to reduce the amount of ammonia discharge. Although the Company will berequired to make capital expenditures in connection with this matter, it doesnot believe that this issue will have a material adverse effect on its businessor financial condition.

**EnvironmentalIndemnities**

Pursuantto the environmental deed entered into in connection with the KKR Acquisition,Degussa, as successor to Laporte, is required to indemnify the Company and itssubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR Acquisition. The environmental deedprovides that Degussa will indemnify the Company and its subsidiaries forclaims for which notice is given within a period of two years for breaches ofrepresentations and warranties, which expired in 2002, and five years, whichexpired in September 2005, for claims related to the contamination of theCompany’s properties or its subsidiaries’ properties (inclusive ofcontamination which leaks or escapes from the Company’s properties or itssubsidiaries’ properties). These indemnity obligations are subject to a minimumper matter loss of $0.2 million and are further subject to a$5.0 million deductible for the indemnity to be available. In addition,the environmental deed provides that Degussa will indemnify Rockwood and itssubsidiaries for claims relating to properties that were formerly owned,occupied or used as of November 20, 2000, as well as properties owned bythird parties (inclusive of disposal of waste and certain other identifiedissues prior to November 20, 2000). The environmental deed provides thatin this instance, Degussa will be responsible for reasonable costs and expensesincurred.

Inaddition, pursuant to the sale and purchase agreement entered into inconnection with the Dynamit Nobel Acquisition, mg technologies ag (now known asGEA Group Aktiengesellschaft) and its subsidiary, MG North America Holdings, Inc.,are required to indemnify Rockwood and its subsidiaries for 50% of the excessamount of losses over the amount of the related reserves (in the case of knownclaims) and 50% of claims (in the case of unknown claims) related to thecontamination of the Company or its subsidiaries’ properties, if notifiedwithin ten years. If mg technologies and MG North America Holdings’responsibility for contamination matters cannot be proven, a sliding scalereduces the percentage further for each year during the five-year period fromyear six to ten. mg technologies and MG North America Holdings are alsoobligated to indemnify the Company for 85% of claims related to legacy sitematters, such as environmental matters relating to properties or businessesowned or operated by Dynamit Nobel prior to, but not on, the closing of DynamitNobel Acquisition, if notified within ten years. In addition, mg technologiesand MG North America Holdings are obligated to indemnify the Company for 50% ofthe excess amount of losses over the amount of the related reserves foroperational compliance matters, if notified by December 31, 2006, and 50%of the excess amount of losses over the amount of the related reserves (in thecase of known claims) and 50% of claims (in the case of unknown claims) relatedto certain environmental damage claims unknown at the time of the closing ofthe Dynamit Nobel Acquisition, if notified within ten years. All of theseindemnity obligations are subject to different minimum per-claim thresholdsdepending on whether the matter was disclosed or not, and on the subjectmatter, ranging between €100,000 and €750,000 ($121,020and $907,650 using the March 31, 2006 exchange rate of €1.00 = $1.2102)depending on the type of claim. The indemnity obligations are further subjectto certain deductibles, exclusions and limitations. Furthermore, mg technologiesand MG North America Holdings are obligated to indemnify the Company forcertain environmental risks arising from certain “shared site” structures for aduration of ten years. This indemnity obligation is not subject to thepercentages, *de minimis* exclusions,deductibles and thresholds described above, and it is not subject to most ofthe general limitations.

Inthe event the Company seeks indemnity under any of these agreements or throughother means, there can be no assurance that mg technologies, MG North AmericaHoldings, Degussa or any other party who may have obligations to indemnify theCompany will adhere to their obligations and the Company may have to resort tolegal action to enforce its rights under the indemnities. In addition, the Companymay be required to make indemnity payments in connection with certainenvironmental matters. However, the Company does not believe that resolution ofthe known environmental matters subject to indemnification obligations owed toit or by it will have a material adverse effect on the Company’s business orfinancial condition, but may have a material adverse effect on the results ofoperations or cash flow in any given quarterly or annual reporting period.

***Environmental Reserves***

TheCompany has established financial reserves relating to anticipatedenvironmental cleanup obligations, site reclamation and remediation and closurecosts. Liabilities are recorded when potential liabilities are either known orbelieved to be probable and can be reasonably estimated. The Company’sliability estimates are based upon available facts, existing technology, pastexperience and, in some instances insurance recoveries where the remediationcosts are being paid directly by the Company’s insurers, and are generated byseveral means, including State-mandated schedules, environmental consultantsand internal experts, depending on the 

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circumstances.On a consolidated basis, the Company accrued approximately $35.1 million and$44.8 million for known environmental liabilities as of March 31,2006 and December 31, 2005, respectively, all of which are classified asother non-current liabilities on the Company’s consolidated balance sheets forsuch periods. Included in the $35.1 millionand $44.8 million as of March 31, 2006 and December 31, 2005,respectively, is €6.5 million ($7.8 million using the March 31, 2006exchange rate of €1.00 = $1.2102) that is discounted using a 5.0% discount rate(undiscounted amount equals $12.0 million), and €1.9 million ($2.3 million)that is discounted using a 5.5% discount rate (undiscounted amount equals $3.0million). In certain cases, the Company’s remediation liabilities arepayable over periods of up to 30 years. AtDecember 31, 2005, the environmental reserve related to the Rohnerfacility within our Groupe Novasep segment was $10.5 million. As we announced,Rohner AG was sold in March 2006 (see Note 12, “Sale of Rohner AG,” forfurther detail).

TheCompany believes these accruals are adequate based on currently availableinformation. The Company may incur losses in excess of the amounts accrued;however, based on currently available information the Company does not believethe additional amount of potential losses would have a material effect on theCompany’s results of operations or financial condition, but may have a materialadverse effect on the results of operations or cash flow in any given quarterlyor annual reporting period. The Company is unable to estimate the amount orrange of any potential incremental charges should facts and circumstanceschange and may in the future revise its estimates based on new informationbecoming available.

The Company is obligated to undertake soil remediation attwo facilities 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 our other facilities with knowncontamination, regulatory authorities may impose more stringent requirements onus including soil remediation. The Company does not contemplate any such actionoccurring in the foreseeable future, as these facilities’ remaining lives areindefinite. Given the indeterminate useful life of these facilities and thecorresponding indeterminate settlement date of any soil remediationobligations, the Company does not have sufficient information to estimate arange of potential settlement dates for the obligations. Consequently, theCompany cannot employ a present value technique to estimate fair value and,accordingly, it has not accrued for any environmental related costs toremediate soil at these facilities.

TheCompany believes these environmental matters will not have a material adverseeffect on its business or financial condition. However, these matters may havea material adverse effect on its results of operations or cash flows in anygiven quarterly or annual reporting period.

**15.    CONSOLIDATING FINANCIAL INFORMATION:**

As described in Note 9, “Long-termDebt,” the Company issued the 2011 Notes in July 2003 and the 2014 Notesin November 2004. The following condensed consolidating financialstatements present the results of operations, financial condition and cashflows, in separate columns, of the parent company (Rockwood Specialties Group, Inc.),which is the issuer of the 2011 Notes and the 2014 Notes, guarantorsubsidiaries, non-guarantor subsidiaries, elimination adjustments, andconsolidated totals.

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONSTHREE MONTHS ENDED MARCH 31, 2006(Dollars in millions)**

 
| ** **                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| NET SALES                                         |       | $           | —     |             | $          | 238.7             |       | $                | 573.9      |   | $ | 812.6 |   |
| COST OF PRODUCTS SOLD                             |       | —      |       | 173.4            |       | 389.5             |       | 562.9            |       |
| GROSS PROFIT                                      |       | —      |       | 65.3             |       | 184.4             |       | 249.7            |       |
|                                              |       |        |       |             |       |              |       |             |       |
|                                              |       |        |       |             |       |              |       |             |       |
| SELLING, GENERAL  AND ADMINISTRATIVE  EXPENSES    |       | —      |       | 46.4             |       | 110.6             |       | 157.0            |       |
| RESTRUCTURING CHARGES,  net                       |       | —      |       | 0.1              |       | 1.1               |       | 1.2              |       |
| OPERATING INCOME                                  |       | —      |       | 18.8             |       | 72.7              |       | 91.5             |       |
|                                              |       |        |       |             |       |              |       |             |       |
| OTHER INCOME  (EXPENSES):                         |       |        |       |             |       |              |       |             |       |
| Intergroup interest,  net                         |       | 26.3        |       | (7.5             | )          | (18.8             | )          | -                |       |
| Interest expense, net                             |       | (33.6       | )          | (0.2             | )          | (5.3              | )          | (39.1            | )          |
| Intergroup other, net                             |       | -           |       | (0.7             | )          | 0.7               |       | -                |       |
| Foreign exchange gain  (loss), net                |       | 0.4         |       | 0.1              |       | (3.1              | )          | (2.6             | )          |
| Loss on sale of  business                         |       | —      |       | —           |       | (12.1             | )          | (12.1            | )          |
| Other, net                                        |       | —      |       | —           |       | 2.2               |       | 2.2              |       |
| Net                                               |       | (6.9        | )          | (8.3             | )          | (36.4             | )          | (51.6            | )          |
|                                              |       |        |       |             |       |              |       |             |       |
| (LOSS) INCOME BEFORE  TAXES AND MINORITY INTEREST |       | (6.9        | )          | 10.5             |       | 36.3              |       | 39.9             |       |
| INCOME TAX PROVISION  (BENEFIT)                   |       | —      |       | 2.6              |       | (5.7              | )          | (3.1             | )          |
|                                              |       |        |       |             |       |              |       |             |       |
| NET (LOSS) INCOME  BEFORE MINORITY INTEREST       |       | (6.9        | )          | 7.9              |       | 42.0              |       | 43.0             |       |
| MINORITY INTEREST                                 |       | —      |       | —           |       | (3.0              | )          | (3.0             | )          |
| NET (LOSS) INCOME                                 |       | $           | (6.9       | )                | $          | 7.9               |       | $                | 39.0       |   | $ | 40.0 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONSTHREE MONTHS ENDED MARCH 31, 2005(Dollars in millions)**

** **
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Subsidiaries** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|----------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Guarantor**        | ** ** | **Consolidated** | ** ** |
| NET SALES                                     |       | $           | —     |             | $          | 211.9                |       | $                | 557.8      |   | $ | 769.7 |   |
| COST OF PRODUCTS SOLD                         |       | —      |       | 152.2            |       | 391.9                |       | 544.1            |       |
| GROSS PROFIT                                  |       | —      |       | 59.7             |       | 165.9                |       | 225.6            |       |
|                                          |       |        |       |             |       |                 |       |             |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | —      |       | 39.4             |       | 110.8                |       | 150.2            |       |
| RESTRUCTURING CHARGES,  net                   |       | —      |       | —           |       | 2.9                  |       | 2.9              |       |
| OPERATING INCOME                              |       | —      |       | 20.3             |       | 52.2                 |       | 72.5             |       |
|                                          |       |        |       |             |       |                 |       |             |       |
| OTHER INCOME  (EXPENSES):                     |       |        |       |             |       |                 |       |             |       |
| Intergroup interest,  net                     |       | 36.8        |       | (10.6            | )          | (26.2                | )          | —           |       |
| Interest expense, net                         |       | (40.3       | )          | (0.2             | )          | (7.7                 | )          | (48.2            | )          |
| Intergroup other, net                         |       | —      |       | (0.8             | )          | 0.8                  |       | —           |       |
| Foreign exchange loss,  net                   |       | 37.3        |       | —           |       | 4.6                  |       | 41.9             |       |
| Net                                           |       | 33.8        |       | (11.6            | )          | (28.5                | )          | (6.3             | )          |
|                                          |       |        |       |             |       |                 |       |             |       |
| INCOME BEFORE TAXES AND  MINORITY INTEREST    |       | 33.8        |       | 8.7              |       | 23.7                 |       | 66.2             |       |
| INCOME TAX PROVISION                          |       | 6.7         |       | 7.9              |       | 10.3                 |       | 24.9             |       |
|                                          |       |        |       |             |       |                 |       |             |       |
| NET INCOME  BEFORE MINORITY INTEREST          |       | 27.1        |       | 0.8              |       | 13.4                 |       | 41.3             |       |
| MINORITY INTEREST                             |       | —      |       | —           |       | 0.8                  |       | 0.8              |       |
| NET INCOME                                    |       | $           | 27.1       |             | $          | 0.8                  |       | $                | 14.2       |   | $ | 42.1 |   |

 

 

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

**CONDENSED CONSOLIDATING BALANCE SHEET**

**MARCH 31, 2006**

**(Dollars inmillions)**
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| CURRENT ASSETS:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 301.4      |             | $          | (247.0            | )          | $                | (15.1      | )                | $          | — |   | $ | 39.3 |   |
| Accounts receivable, net                         |       | —      |       | 151.4            |       | 381.9             |       | —           |       | 533.3            |       |
| Inventories                                      |       | —      |       | 105.4            |       | 350.7             |       | —           |       | 456.1            |       |
| Deferred income taxes                            |       | (7.9        | )          | 19.4             |       | (3.5              | )          | —           |       | 8.0              |       |
| Prepaid expenses and  other current assets       |       | —      |       | 6.7              |       | 51.9              |       | —           |       | 58.6             |       |
| Total  current assets                            |       | 293.5       |       | 35.9             |       | 765.9             |       | —           |       | 1,095.3          |       |
| PROPERTY, PLANT AND  EQUIPMENT, net              |       | —      |       | 231.3            |       | 1,199.5           |       | —           |       | 1,430.8          |       |
| INVESTMENT IN  SUBSIDIARIES                      |       | 1,653.5     |       | 90.1             |       | —            |       | (1,743.6         | )          | —           |       |
| GOODWILL                                         |       | —      |       | 354.2            |       | 1,263.8           |       | —           |       | 1,618.0          |       |
| INTERGROUP RECEIVABLE                            |       | 1,604.7     |       | 801.0            |       | 3,985.1           |       | (6,390.8         | )          | —           |       |
| OTHER INTANGIBLE ASSETS,  net                    |       | —      |       | 59.5             |       | 522.7             |       | —           |       | 582.2            |       |
| DEFERRED DEBT ISSUANCE  COSTS, net               |       | 3.9         |       | 10.5             |       | 41.0              |       | —           |       | 55.4             |       |
| OTHER ASSETS                                     |       | 22.2        |       | 3.2              |       | 26.6              |       | —           |       | 52.0             |       |
| TOTAL  ASSETS                                    |       | $           | 3,577.8    |             | $          | 1,585.7           |       | $                | 7,804.6    |             | $          | (8,134.4 | ) | $ | 4,833.7 |   |
| **LIABILITIES AND STOCKHOLDER’S  EQUITY**   | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| CURRENT LIABILITIES:                             |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 78.9              |       | $                | 186.0      |             | $          | — |   | $ | 264.9 |   |
| Income taxes payable                             |       | (5.0        | )          | 5.3              |       | 23.6              |       | —           |       | 23.9             |       |
| Accrued compensation                             |       | —      |       | 16.4             |       | 91.1              |       | —           |       | 107.5            |       |
| Restructuring liability                          |       | —      |       | 0.7              |       | 10.5              |       | —           |       | 11.2             |       |
| Accrued expenses and  other current liabilities  |       | 53.1        |       | 28.5             |       | 133.9             |       | —           |       | 215.5            |       |
| Senior secured revolving  credit facility        |       | 1.0         |       | —           |       | 24.2              |       | —           |       | 25.2             |       |
| Long-term debt, current  portion                 |       | 20.7        |       | —           |       | 49.3              |       | —           |       | 70.0             |       |
| Total  current liabilities                       |       | 69.8        |       | 129.8            |       | 518.6             |       | —           |       | 718.2            |       |
| LONG-TERM DEBT                                   |       | 2,414.3     |       | —           |       | 303.9             |       | —           |       | 2,718.2          |       |
| PENSION AND RELATED  LIABILITIES                 |       | —      |       | 11.2             |       | 342.6             |       | —           |       | 353.8            |       |
| INTERGROUP PAYABLE                               |       | 70.1        |       | 1,087.1          |       | 5,233.6           |       | (6,390.8         | )          | —           |       |
| DEFERRED INCOME TAXES                            |       | (20.4       | )          | 32.3             |       | (0.7              | )          | —           |       | 11.2             |       |
| OTHER LIABILITIES                                |       | 1.2         |       | 19.1             |       | 74.0              |       | —           |       | 94.3             |       |
| Total  liabilities                               |       | 2,535.0     |       | 1,279.5          |       | 6,472.0           |       | (6,390.8         | )          | 3,895.7          |       |
| MINORITY INTEREST                                |       | —      |       | —           |       | 28.8              |       | —           |       | 28.8             |       |
| STOCKHOLDER’S EQUITY:                       |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.8            |       | 164.5             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,005.4     |       | 294.6            |       | 1,091.7           |       | (1,388.3         | )          | 1,003.4          |       |
| Accumulated other  comprehensive income          |       | 27.7        |       | (5.0             | )          | 69.6              |       | —           |       | 92.3             |       |
| Accumulated deficit                              |       | 9.7         |       | (174.1           | )          | (22.0             | )          | —           |       | (186.5           | )          |
| Total  stockholder’s equity                 |       | 1,042.8     |       | 306.2            |       | 1,303.8           |       | (1,743.6         | )          | 909.2            |       |
| TOTAL LIABILITIES AND  STOCKHOLDER’S EQUITY |       | $           | 3,577.8    |             | $          | 1,585.7           |       | $                | 7,804.6    |             | $          | (8,134.4 | ) | $ | 4,833.7 |   |

 

26

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

**CONDENSED CONSOLIDATING BALANCE SHEET**

**DECEMBER 31, 2005**

**(Dollars in millions)**
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| CURRENT ASSETS:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 109.4      |             | $          | (26.5             | )          | $                | 15.2       |             | $          | — |   | $ | 98.1 |   |
| Accounts  receivable, net                        |       | —      |       | 124.7            |       | 359.5             |       | —           |       | 484.2            |       |
| Inventories                                      |       | —      |       | 102.3            |       | 355.9             |       | —           |       | 458.2            |       |
| Deferred income  taxes                           |       | (7.9        | )          | 18.7             |       | 6.9               |       | —           |       | 17.7             |       |
| Prepaid expenses  and other current assets       |       | —      |       | 5.9              |       | 62.2              |       | —           |       | 68.1             |       |
| Total current assets                             |       | 101.5       |       | 225.1            |       | 799.7             |       | —           |       | 1,126.3          |       |
| PROPERTY, PLANT  AND EQUIPMENT, net              |       | —      |       | 232.3            |       | 1,174.2           |       | —           |       | 1,406.5          |       |
| INVESTMENT IN  SUBSIDIARIES                      |       | 1,653.5     |       | 90.1             |       | —            |       | (1,743.6         | )          | —           |       |
| GOODWILL                                         |       | —      |       | 353.7            |       | 1,245.5           |       | —           |       | 1,599.2          |       |
| INTERGROUP  RECEIVABLE                           |       | 1,801.2     |       | 896.8            |       | 3,883.9           |       | (6,581.9         | )          | —           |       |
| OTHER INTANGIBLE  ASSETS, net                    |       | —      |       | 60.0             |       | 518.9             |       | —           |       | 578.9            |       |
| DEFERRED DEBT  ISSUANCE COSTS, net               |       | 4.1         |       | 10.9             |       | 41.6              |       | —           |       | 56.6             |       |
| OTHER ASSETS                                     |       | 17.1        |       | 4.1              |       | 22.8              |       | —           |       | 44.0             |       |
| TOTAL ASSETS                                     |       | $           | 3,577.4    |             | $          | 1,873.0           |       | $                | 7,686.6    |             | $          | (8,325.5 | ) | $ | 4,811.5 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| CURRENT  LIABILITIES:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 75.9              |       | $                | 219.8      |             | $          | — |   | $ | 295.7 |   |
| Income taxes  payable                            |       | —      |       | (1.2             | )          | 20.1              |       | —           |       | 18.9             |       |
| Accrued  compensation                            |       | —      |       | 18.7             |       | 73.3              |       | —           |       | 92.0             |       |
| Restructuring  liability                         |       | —      |       | 0.8              |       | 12.8              |       | —           |       | 13.6             |       |
| Accrued expenses  and other current liabilities  |       | 20.5        |       | 31.5             |       | 136.8             |       | —           |       | 188.8            |       |
| Senior secured  revolving credit facility        |       | 30.0        |       | —           |       | —            |       | —           |       | 30.0             |       |
| Long-term debt,  current portion                 |       | 19.3        |       | —           |       | 63.8              |       | —           |       | 83.1             |       |
| Total current liabilities                        |       | 69.8        |       | 125.7            |       | 526.6             |       | —           |       | 722.1            |       |
| LONG-TERM DEBT                                   |       | 2,404.4     |       | —           |       | 326.3             |       | —           |       | 2,730.7          |       |
| PENSION AND  RELATED LIABILITIES                 |       | —      |       | 11.7             |       | 349.9             |       | —           |       | 361.6            |       |
| INTERGROUP  PAYABLE                              |       | 81.1        |       | 1,382.4          |       | 5,118.4           |       | (6,581.9         | )          | —           |       |
| DEFERRED INCOME  TAXES                           |       | (23.5       | )          | 35.5             |       | 20.7              |       | —           |       | 32.7             |       |
| OTHER LIABILITIES                                |       | 2.1         |       | 19.2             |       | 85.0              |       | —           |       | 106.3            |       |
| Total liabilities                                |       | 2,533.9     |       | 1,574.5          |       | 6,426.9           |       | (6,581.9         | )          | 3,953.4          |       |
| MINORITY INTEREST                                |       | —      |       | —           |       | 25.2              |       | —           |       | 25.2             |       |
| STOCKHOLDER’S  EQUITY:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.8            |       | 164.5             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,005.4     |       | 294.4            |       | 1,091.9           |       | (1,388.3         | )          | 1,003.4          |       |
| Accumulated other  comprehensive income          |       | 21.6        |       | (4.7             | )          | 39.1              |       | —           |       | 56.0             |       |
| Accumulated  deficit                             |       | 16.5        |       | (182.0           | )          | (61.0             | )          | —           |       | (226.5           | )          |
| Total stockholder’s equity                  |       | 1,043.5     |       | 298.5            |       | 1,234.5           |       | (1,743.6         | )          | 832.9            |       |
| TOTAL LIABILITIES  AND STOCKHOLDER’S EQUITY |       | $           | 3,577.4    |             | $          | 1,873.0           |       | $                | 7,686.6    |             | $          | (8,325.5 | ) | $ | 4,811.5 |   |

 

27

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

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31, 2006**

** (Dollars in millions)**
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net (loss) income                                                                                        |       | $           | (6.9       | )                | $          | 7.9               |       | $                | 39.0       |   | $ | 40.0 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Depreciation and amortization                                                                            |       | —      |       | 8.7              |       | 43.4              |       | 52.1             |       |
| Deferred financing costs amortization                                                                    |       | 0.2         |       | 0.4              |       | 1.7               |       | 2.3              |       |
| Foreign exchange (gain) loss                                                                             |       | (0.4        | )          | (0.1             | )          | 3.1               |       | 2.6              |       |
| Loss on sale of business, net of cash                                                                    |       | —      |       | —           |       | 11.3              |       | 11.3             |       |
| Gains related to asset sales                                                                             |       | —      |       | —           |       | (0.6              | )          | (0.6             | )          |
| Fair value adjustment of derivatives                                                                     |       | (9.9        | )          | —           |       | (1.0              | )          | (10.9            | )          |
| Bad debt provision                                                                                       |       | —      |       | 0.4              |       | 0.2               |       | 0.6              |       |
| Deferred income taxes                                                                                    |       | 5.0         |       | (3.7             | )          | (16.8             | )          | (15.5            | )          |
| Minority interest                                                                                        |       | —      |       | —           |       | 3.0               |       | 3.0              |       |
| Changes in assets  and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                      |       | —      |       | (27.1            | )          | (21.7             | )          | (48.8            | )          |
| Inventories, including inventory write-up reversal                                                       |       | —      |       | (3.1             | )          | (3.0              | )          | (6.1             | )          |
| Prepaid expenses and other assets                                                                        |       | (0.3        | )          | 0.2              |       | 7.1               |       | 7.0              |       |
| Accounts payable                                                                                         |       | —      |       | 3.9              |       | (19.6             | )          | (15.7            | )          |
| Income taxes payable                                                                                     |       | (5.0        | )          | 6.5              |       | 8.2               |       | 9.7              |       |
| Accrued expenses and other liabilities                                                                   |       | 30.3        |       | (6.8             | )          | (6.9              | )          | 16.6             |       |
| Other operating activities, net                                                                          |       | 217.3       |       | (199.5           | )          | (17.8             | )          | —           |       |
| **Net cash provided by (used in) operating  activities**                                                 |       | 230.3       |       | (212.3           | )          | 29.6              |       | 47.6             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (8.2             | )          | (37.4             | )          | (45.6            | )          |
| Proceeds on sale  of property, plant and equipment                                                       |       | —      |       | —           |       | 2.5               |       | 2.5              |       |
| **Net cash used in investing activities**                                                                |       | —      |       | (8.2             | )          | (34.9             | )          | (43.1            | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Proceeds from  senior secured credit facilities                                                          |       | 21.0        |       | —           |       | 24.2              |       | 45.2             |       |
| Repayment of  senior secured credit facilities                                                           |       | (59.7       | )          | —           |       | (10.4             | )          | (70.1            | )          |
| Payments on other  long-term debt                                                                        |       | —      |       | —           |       | (37.3             | )          | (37.3            | )          |
| **Net cash used in financing activities**                                                                |       | (38.7       | )          | —           |       | (23.5             | )          | (62.2            | )          |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                                 |       | 0.4         |       | —           |       | (1.5              | )          | (1.1             | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                    |       | 192.0       |       | (220.5           | )          | (30.3             | )          | (58.8            | )          |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 109.4       |       | (26.5            | )          | 15.2              |       | 98.1             |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                |       | $           | 301.4      |             | $          | (247.0            | )          | $                | (15.1      | ) | $ | 39.3 |   |

 

28

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

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31, 2005**

**(Dollars inmillions)**
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **                        | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|-----------------------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated**                  | ** ** |
| ** **                                                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | **As restated  See Note 16** | ** ** |
| ** **                                                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **                        | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **                        | ** ** |
| Net income                                                                                               |       | $           | 27.1       |             | $          | 0.8               |       | $                                 | 14.2       |   | $ | 42.1 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities:             |       |        |       |             |       |              |       |                              |       |
| Depreciation and amortization                                                                            |       | —      |       | 7.5              |       | 45.7              |       | 53.2                              |       |
| Deferred financing costs amortization                                                                    |       | 0.1         |       | 0.6              |       | 1.8               |       | 2.5                               |       |
| Foreign exchange gain                                                                                    |       | (37.3       | )          | —           |       | (4.6              | )          | (41.9                             | )          |
| Fair value adjustment of derivatives                                                                     |       | (6.5        | )          | —           |       | (1.1              | )          | (7.6                              | )          |
| Bad debt provision                                                                                       |       | —      |       | 0.2              |       | —            |       | 0.2                               |       |
| Deferred income taxes                                                                                    |       | 6.7         |       | 6.3              |       | 5.2               |       | 18.2                              |       |
| Minority interest                                                                                        |       | —      |       | —           |       | (0.8              | )          | (0.8                              | )          |
| Changes in assets  and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |                              |       |
| Accounts receivable                                                                                      |       | —      |       | (11.5            | )          | —            |       | (11.5                             | )          |
| Inventories, including inventory write-up reversal                                                       |       | —      |       | (8.8             | )          | (3.1              | )          | (11.9                             | )          |
| Prepaid expenses and other assets                                                                        |       | —      |       | 0.9              |       | (13.8             | )          | (12.9                             | )          |
| Accounts payable                                                                                         |       | —      |       | 10.8             |       | (0.2              | )          | 10.6                              |       |
| Income taxes payable                                                                                     |       | —      |       | 1.3              |       | (0.3              | )          | 1.0                               |       |
| Accrued expenses and other liabilities                                                                   |       | 35.4        |       | (43.7            | )          | (21.8             | )          | (30.1                             | )          |
| **Net cash provided by (used in) operating  activities**                                                 |       | 25.5        |       | (35.6            | )          | 21.2              |       | 11.1                              |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **                        | ** ** |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (5.5             | )          | (48.6             | )          | (54.1                             | )          |
| Proceeds on sale  of property, plant and equipment                                                       |       | —      |       | —           |       | 0.2               |       | 0.2                               |       |
| **Net cash used in investing activities**                                                                |       | —      |       | (5.5             | )          | (48.4             | )          | (53.9                             | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **                        | ** ** |
| Capital  contribution                                                                                    |       | (0.5        | )          | —           |       | 0.5               |       | —                            |       |
| Proceeds from  senior secured credit facilities                                                          |       | 260.0       |       | —           |       | —            |       | 260.0                             |       |
| Repayment of  senior secured credit facilities                                                           |       | (85.0       | )          | —           |       | —            |       | (85.0                             | )          |
| Payments on other  long-term debt                                                                        |       | —      |       | —           |       | (5.9              | )          | (5.9                              | )          |
| **Net cash provided by (used in) financing  activities**                                                 |       | 174.5       |       | —           |       | (5.4              | )          | 169.1                             |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                                 |       | (2.8        | )          | —           |       | 2.4               |       | (0.4                              | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                    |       | 197.2       |       | (41.1            | )          | (30.2             | )          | 125.9                             |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 79.0        |       | 48.2             |       | (15.8             | )          | 111.4                             |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                |       | $           | 276.2      |             | $          | 7.1               |       | $                                 | (46.0      | ) | $ | 237.3 |   |

 

29

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**16. RESTATEMENT:**

The condensedconsolidated statements of cash flows as reported for the three months ended March 31,2005, contained a classification error in the treatment of costs of property,plant and equipment included in accounts payable. In accordance with SFAS No. 95,*Statement of Cash Flows,*thesecosts should be reported within cash flows from investing activities when paid.The Company was reporting capital expenditures in its condensed consolidatedstatements of cash flows on an accrual basis rather than on a cash basis, andas a result, was reporting capital expenditures in the period in which theCompany acquired legal title to the related property, plant and equipmentrather than when the Company actually paid for such property, plant andequipment. Further, the unpaid portion of the transaction should be disclosedas a non-cash investing activity in the supplemental disclosure of cash flow information. Asa result, the Company restated the condensed consolidated statement of cashflows for the three months ended March 31, 2005. The restatement doesnot change the Company’s condensed consolidated statements of operations, thecondensed consolidated balance sheets or cash and cash equivalents reported atthe end of the period in the condensed consolidated statements of cash flows forany of the periods presented.

The classification errorchanged cash flow from operating activities and investing activities for thethree months ended March 31, 2005 as follows (in millions):
| ** **                                                     | ** ** | **As Originally** | ** ** | ** **   | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|--------------|------------|
| **Description**                                                | ** ** | ** **             | ** ** | **Reported** | ** ** | **As Restated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                     |       |                   |       |         |       |
| Accounts payable                                               |       | $                      | (7.8       | )            | $          | 10.6 |   |
| Net cash (used  in) provided by operating activities           |       | (7.3                   | )          | 11.1         |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                     |       |                   |       |         |       |
| Capital  expenditures, excluding capital leases                |       | (35.7                  | )          | (54.1        | )          |
| Net cash used in  investing activities                         |       | (35.5                  | )          | (53.9        | )          |
| **NON-CASH  INVESTING ACTIVITIES:**                            |       |                   |       |         |       |
| Net decrease in  liabilities for property, plant and equipment |       | —                 |       | (18.4        | )          |
|                                                                |            |                        |            |              |            |  |  |  |  |

 

The Company also revisedthe reconciliation of net cash provided by (used in) operating activities toAdjusted EBITDA and the disclosures in the “Liquidity and Capital Resources”section of Item 2, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” related to cash flows from operating and investingactivities for the three months ended March 31, 2005.

**Item2.          Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

The following discussioncontains forward-looking statements that involve numerous risks anduncertainties. Our actual results could differ materially from those discussedin the forward-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 2005 Form 10-K. You should read the following discussionand analysis together with our condensed consolidated financial statements andthe notes to those statements that appear elsewhere in this Quarterly Report.Amounts may not recalculate due to rounding differences. The followingmanagement’s discussion and analysis of financial condition and results ofoperations gives effect to the restatement as described in Note 16, “Restatement.”

**General**

We are a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-added specialty chemicals and advanced materials. We serve more than60,000 customers across a wide variety of industries and geographic areas.Since the completion of the Dynamit Nobel Acquisition, we operate through sevenbusiness segments: (1) Performance Additives; (2) SpecialtyCompounds; (3) Electronics; (4) Specialty Chemicals; (5) TitaniumDioxide Pigments; (6) Advanced Ceramics; and (7) Groupe Novasep. Ofthese seven segments, we acquired Specialty Chemicals, Titanium DioxidePigments, Advanced Ceramics and Groupe Novasep (then known as our CustomSynthesis segment) in the Dynamit Nobel Acquisition.

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

Our cost of products soldconsists of variable and fixed components. Our variable costs are proportionalto volume and consist principally of raw materials, packaging and relatedsupplies, certain energy costs, and certain distribution costs includinginbound, outbound, and internal shipping and transfer costs. Our fixed costsare not significantly impacted by production volume and consist principally ofcertain fixed manufacturing costs and other distribution network costs,including warehousing. Fixed manufacturing costs comprise headcount-relatedcosts and overhead, including depreciation, periodic maintenance costs, purchasingand receiving costs, inspection costs and certain energy costs.

Our selling, general andadministrative expenses include research and development costs, sales andmarketing, divisional management expenses and corporate services including cashmanagement, legal, benefit plan administration and other administrative andprofessional services.

 

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Weare focused on growth, productivity, cost reduction, margin expansion and debtreduction. In connection with this focus, among other things:

·                  wereduced overhead costs and eliminated management redundancies. We have cutcosts, reduced overhead and eliminated duplicative positions in the acquiredDynamit Nobel businesses and the acquired pigments and dispersions business ofJohnson Matthey Plc. For example, we closed the former headquarters of DynamitNobel in Troisdorf, Germany and closed the New Lebanon, New York manufacturingfacility of our Advanced Ceramics segment. In the Wafer Reclaim business in ourElectronics segment, we closed a facility in the U.K. in January 2006 andclosed a facility in the U.S. in March 2006. We also implemented otherrestructuring measures in our other segments. In addition, we eliminated 40positions in connection with the acquisition of the pigments and dispersionsbusiness;

·                  wereduced our net working capital as a percentage of net sales by implementingmore effective systems to monitor working capital, augmenting further our “just-in-time”inventory management and creating incentives for managers to focus on workingcapital management; and

·                  weimplemented stringent controls to help ensure that maintenance capitalexpenditures are appropriate and that expansion capital is in line with bothcapacity and market demands. We closely monitor capital expenditures in all ofour segments.

**Factors Which Affect Our Results ofOperations**

**Our Markets**

Because the businesses in our segments generally servemany unrelated end-use markets, we discuss the principal market conditions on asegment basis rather than a consolidated basis. The principal market conditionsin our segments and regions in which we operate that impacted our results ofoperations during the periods presented include the following:

###### ***Performance Additives***

·                  Thegrowth in demand in certain North American end-use markets, such asconstruction, favorably impacted our Color Pigments and Services businessduring the periods presented. In particular, a continuing trend towards theincreased use of colored concrete products in the North American constructionmarket has had a positive effect on our Color Pigments and Services businessline. The Timber Treatment Chemicals business also benefited from high levelsof activity in home improvement areas; however, demand for treated wood hasbeen negatively impacted in 2006 by the increasing use of wood substitutes.

·                  Demandin certain European end-use markets over the last few years has slowed. Thisaffected sales of Color Pigments and Services in the construction market,particularly in Germany. We experienced a decrease in European constructionvolumes in our Color Pigments and Services business in 2005. However, Europeanconstruction sales in our Color Pigments and Services business increased in thefirst quarter of 2006 versus the same period in the prior year on highervolumes and selling prices.

·                  Thechange in the market to environmentally advanced wood treatment chemicalproducts, such as ACQ, and the phase out of chromated copper arsenate, or CCA,for residential use had a positive impact on our Timber Treatment Chemicalsbusiness in 2005, which is a leading supplier of these higher margin products.In the Timber Treatment Chemicals business, our ACQ market position is expectedto be negatively impacted by a weaker competitive position, in particularmarket share losses to new competition, competitive pricing pressure and theexpiration of the ACQ patent in 2007.

·                  Inrecent years, we exited a number of lower margin product lines in ourClay-based Additives business, which negatively impacted our net sales. We arenow focusing on increasing high margin specialty applications to offset theselost sales. For 2006, the major drivers of expected growth in the Clay-basedAdditives business is the acquisition of the Süd-Chemie businesses acquired on December 30,2005 and oilfield sales.

·                  Rawmaterial costs increased in general in the Performance Additives segment in2005 and continue to trend upward, particularly in the Color Pigments andServices business, the Timber Treatment Chemicals business and the Clay-basedAdditives business. In the Color Pigments and Services business, selling priceincreases were initiated in 2005 to partially offset the increases in rawmaterial and energy costs; however, this business was not able to pass on allsuch cost increases to its customers. Raw material costs are expected tocontinue to increase in 2006. In the Timber Treatment Chemicals business,increased raw material costs for copper, which are at record highs, andmono-ethanolamine, primary components in the ACQ production process, areexpected to continue to increase in the near future. Increases in sellingprices for ACQ products are not expected to offset higher average raw materialcosts. In the Clay-based Additives business, price increases were implemented

 

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                        in2005 in selective product lines and continued in the first quarter of 2006 in amajority of product lines to partially offset raw material and energy costincreases. Our ability to pass on some or all of these increases is uncertainin all businesses.

***SpecialtyCompounds***

·                  Ourlargest product line in the Specialty Compounds segment is wire and cablecompounds. Sales within this product line are dependent upon thetelecommunications market and related sectors, specifically demand for high-endvoice and data communication wire and cable, for which our Specialty Compoundssegment is a significant provider of sheathing materials. In 2005, weexperienced increased demand for these products which continued in the firstquarter of 2006 and is expected to continue to increase throughout 2006. Newlydeveloped non-halogen products for wire and cable data communication, militaryand other applications have expanded business in North America and createdopportunities in Europe.

·                  Mostof the other end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product, but many are also applicationspecific. Our net sales in these markets were up slightly in 2005 and the firstquarter of 2006. We are focusing more of our efforts towards increasing highmargin specialty products to offset this impact, in particular, thermoplasticelastomers, and less of our efforts in regulated packaging and footwear.

·                  Rawmaterial costs trended upward in 2005; in particular, the Specialty Compoundssegment experienced a spike in raw material costs as a result of HurricanesKatrina and Rita. This is particularly true with respect to polyvinyl chloride(“PVC”) resin and plasticizers, primary components in the production of wireand cable products. Also, the price of ammonium octamolybdate (“AOM”), anotherkey raw material used in the production of wire and cable products, increasedin 2005. We expect the price of these raw materials to be volatile in 2006. Asa result, we entered into a contract with a fixed price that expires in December 2007.Selling price increases were successfully initiated in 2005 to help offset theraw materials price increase, and may continue to be implemented in 2006 tohelp compensate for the higher raw material costs. However, the ability to passon some or all of these increases is uncertain.

***Electronics***

·                  Demandfor our Electronics products generally follows the activity levels ofsemiconductor and printed circuit board manufacturers. The global semiconductorand printed circuit board (“PCB”) markets are cyclical in nature. Worldwidesales of semiconductors increased in the first quarter of 2006 over 2005 and weexpect sales to continue to rise in 2006 driven by strong demand for consumerelectronics and PC’s. The printed circuit board industry in the United Statesand Europe continued to decline in 2005 while the market in Asia experiencedsignificant growth. Despite the declines in the United States and Europe,volumes in our electronic chemicals business increased in 2005, and areexpected to increase in 2006, particularly in Asia, which provides nearly halfof the global market. In the first quarter of 2006, volumes in our electronicchemicals business were up in Asia, the United States and Europe.

·                  Theprice of certain of our products is insulated to some degree from the effect ofchanges in the price of semiconductors and printed circuit boards due to thefact that the cost of these products is generally a small component of the costof the end product. Despite this, in 2005 and continuing into 2006, there hasbeen heavy pricing pressure in certain businesses, particularly wafer reclaim,and, to a lesser extent, photomasks, due to very aggressive competition. Weexpect that this pricing pressure will continue during the rest of 2006 for thewafer reclaim and photomasks businesses.

***SpecialtyChemicals***

·                  Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aerospace industries. In 2005, we benefited from agrowth in demand for most of the markets and regions we serve, especially inthe aerospace and automotive industry which continued in the first quarter of2006. Despite the less favorable automotive conditions in the U.S., we havebeen able to sustain sales growth in our global automotive business due tomarket penetration as our business primarily focuses on the European automobileindustry market. Growth in the Surface Treatment business occurred in the firstquarter of 2006 and is expected to continue throughout 2006 in most markets asprice and volume increases and productivity improvements are expected to offsetraw material cost increases.

·                  Demandfor our lithium products in the Fine Chemical business line of our SpecialtyChemicals segment is generally driven in part by demand of lithium carbonate inindustrial applications, the aluminum business, glass ceramics, cement andhigher general demand in China. Sales of lithium products specifically used inlife science applications depend on the trends in drug development and growthin pharmaceuticals markets as well as generic competition. Market conditionsfor lithium products in the industries served provided increasing price trendsfor lithium salts in 2005. Growth in the Fine Chemicals business occurred

 

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                        inthe first quarter of 2006 and is expected to continue in 2006 in all marketsegments, especially driven by lithium salt applications through priceincreases. Tight supplies in the global market and unfavorable weatherconditions at our lithium ponds in Chile have lead to shortages in lithiumsalts as a raw material and customer demand for lithium carbonate will not becompletely satisfied in the short term. During 2005, we experienced priceincreases related to a key raw material used in producing metal sulfides, whichis expected to continue in 2006.

***TitaniumDioxide Pigments***

·                  Demandfor our titanium dioxide products in anatase grade is driven mainly by demandin the synthetic fiber industry, while demand for titanium dioxide products inrutile grade and our functional additives is driven by demand in the coatings,paper and plastics industries. We experienced an unexpected decrease in volumeof our titanium dioxide products in anatase grade in 2005 due, in part, to thelower cost of cotton, which negatively affected demand for synthetic fibers andin turn our products. Volumes in the fiber anatase business increased in thefirst quarter of 2006 and are expected to continue to increase in 2006 onhigher demand and increased market share.

·                  Throughout2005, we experienced pricing pressure from global suppliers in Asia,specifically Chinese suppliers related to titanium dioxide products in anatasegrade. We also experienced pricing pressures on our titanium products in rutilegrade. Sales of titanium dioxide products in rutile grade increased in thefirst quarter of 2006 on higher volumes and selling prices and are expected tocontinue to increase in 2006 due to general price increases.

***AdvancedCeramics***

·                  Demandfor our ceramic medical devices is mainly tied to the aging population inEurope and the United States. As a result of this demographic as well as ourmarket share penetration, the volume of our products used in medical deviceapplications sold has experienced double-digit growth each year since2001. Demand for ceramic components in artificial hip joints increased in thefirst quarter of 2006 and we expect this to continue in 2006.

·                  Weexperienced some pricing pressure in our electronic products business in 2005,which occurred in the first quarter of 2006 and is expected to continue in2006. Similarly, sales of ceramic products for use in cutting tool products andmechanical systems were negatively impacted by strong pricing pressure fromAsian competitors in 2005, which occurred in the first quarter of 2006 and isexpected to continue in 2006. We also experienced lower market growth as theseapplications are for more mature industries.

***Groupe Novasep***

·                  Demand for ourcustom synthesis chemistries and processes depend to a large extent on thepipeline and lifecycles of pharmaceutical products. The decrease of annual FDAapprovals in recent years reflects the slowdown of the development of newmolecules in the life-sciences industry. In addition, the average developmenttime of a new drug has increased in recent years, despite pharmaceuticalmanufacturers’ attempts to decrease this development period. Further, mergerand acquisition activity in the pharmaceutical industry and overcapacity in thecustom synthesis industry has adversely affected the demand for and prices ofour products. We also expect demand to be adversely affected by the migrationof certain manufacturing processes to China. This trend toward lower demand hasbeen partially offset in recent years, however, by increased demand forpharmaceuticals caused by a growing population worldwide, increased demand forgeneric drugs and an aging population in the United States.

##### **GlobalExposure**

We operate a geographically diverse business. Of our 2005net sales, 51% were shipments to Europe, 33% to North America (predominantlythe United States) and 16% to the rest of the world. For a geographicdescription of the origin of our net sales and location of our long-livedassets, see Note 3, “Segment Information,” in our 2005 Form 10-K.

Weestimate that we sold to customers in more than 60 countries during thisperiod. Currently, we serve our diverse and extensive customer base with 100manufacturing 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 inU.S. dollars or euros. Our results of operations and financial condition havebeen historically impacted by the fluctuation of the euro against our reportingcurrency, the U.S. dollar. For the three month period ended March 31,2006, the weakening of the euro against the U.S. dollar compared to the sameperiod in 2005, negatively impacted our net sales, gross profit and operatingincome. The euro was stronger at March 31, 2006 compared to December 31,2005, which in turn had a

 

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negative impact on the “foreign exchange gain (loss), net”component of “other income (expenses)” as a result of accounting for a portionof our euro-denominated debt. The majority of this debt was designated as a netinvestment hedge as of October 1, 2005. Historically, however, ouroperating margins have not been significantly impacted by currency fluctuationsbecause, in general, sales and costs of products sold are generated or incurredin the same currency, subject to certain exceptions, particularly in our GroupeNovasep segment.

**RawMaterials**

Raw materials constituted approximately 49% of our 2005cost of products sold. We have a broad raw material base, with the cost of nosingle raw material representing more than 2% of our cost of products sold in2005. Nonetheless, the significant price fluctuations our raw materials haveexperienced in the past during periods of high demand have had an adverseimpact on our results of operations. We cannot accurately predict the impact ofany future price increases for raw materials or any raw material shortages onour business as a whole or in specific geographic regions. In addition, we maynot be able to pass on raw material price increases to our customers.

**EnergyCosts**

In 2005, energy purchases represented approximately 5% ofour cost of products sold. However, within certain business lines, such as ourTitanium Dioxide Pigments segment and the Color Pigments and Services andClay-based Additives businesses of our Performance Additives segment, energycosts are more significant. The cost of products sold for certain of ourbusinesses, including Color Pigments and Services and Clay-based Additives,increases when the price of natural gas in North America rises. Natural gasprices in North America increased in 2005, due in part to political conditionsand extreme weather conditions, including Hurricanes Katrina and Rita. Naturalgas prices have been relatively stable thus far in 2006. In contrast, naturalgas prices in Europe, where our Titanium Dioxide Pigments segment is located,have historically been relatively stable, although prices rose in the firstquarter of 2006.

**IncomeTaxes**

Theeffective tax rate for the first quarter of 2006 was a benefit of (7.8)% andwas primarily driven by the tax benefit associated with the sale of Rohner AG.The effective tax rate associated with first quarter 2006 ordinary operatingresults was 37.9% which excluded the Rohner transaction. In the first quarterof 2006, the worldwide valuation allowance decreased by $24.8 million. As amajority of the reduction in the valuation allowance was the result of adecrease in the net deferred tax assets of Rohner AG, the change in thevaluation allowance did not have a significant impact on the effective tax rateduring the quarter.

**SpecialCharges and Credits**

Duringthe periods presented, we incurred certain special charges, along with certainother items, substantially in connection with the establishment of thepost-acquisition corporate entity that incorporates the four business segmentsacquired in the Dynamit Nobel Acquisition as well as in connection with theIPO. These items include systems/organization establishment expenses,restructuring and related charges, foreign exchange gains and losses andinventory write-up reversals. See “Items excluded from Adjusted EBITDA” sectionin Note 4, “Segment Information,” for a discussion of special charges andcredits recorded in the three months ended March 31, 2006 and 2005.

**SpecialNote Regarding Non-GAAP Financial Measures**

Anon-GAAP financial measure is generally defined by the SEC as one that purportsto measure historical or future financial performance, financial position orcash flows but excludes or includes amounts that would not be so adjusted inthe most comparable U.S. GAAP measure. From time to time in this management’sdiscussion and analysis, we disclose non-GAAP financial measures, primarilyAdjusted EBITDA, as defined below.

**Definition of Adjusted EBITDA**

All presentations ofconsolidated Adjusted EBITDA contained in this report are calculated using thedefinition set forth in the senior secured credit agreement. Adjusted EBITDA,which is referred to under the senior secured credit agreement as “ConsolidatedEBITDA,” is defined in the senior secured credit agreement as consolidated earnings(which, as defined in the senior secured credit agreement, equals income (loss)before the deduction of income taxes of Rockwood Specialties Group, Inc.and the Restricted Subsidiaries (as such term is defined in the senior securedcredit agreement), excluding extraordinary items) plus:

·                  interestexpense;

·                  depreciationexpense;

·                  amortizationexpense, including amortization of deferred financing fees;

·                  extraordinarylosses and non-recurring charges;

·                  non-cashcharges;

 

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·                  losseson asset sales;

·                  restructuringcharges or reserves (including severance, relocation costs and one-timecompensation charges and costs relating to the closure of facilities);

·                  expensespaid by us or any of our subsidiaries in connection with the Dynamit NobelAcquisition, the senior secured credit agreement, the granting of liens underthe security documents (as such term is defined in the senior secured creditagreement), the indenture governing the 2014 Notes and the offering of the 2014Notes and any other related transactions;

·                  anyexpenses or charges incurred in connection with any issuance of debt or equitysecurities;

·                  anyfees and expenses related to permitted acquisitions;

·                  anydeduction for minority interest expense; and

·                  itemsarising in connection with CCA litigation related to our Timber TreatmentChemicals business of our Performance Additives segment;

less:

·                  extraordinarygains and non-recurring gains;

·                  non-cashgains; and

·                  gainson asset sales,

inall cases, subject to certain exclusions.

With respect to entities acquired, we include Adjusted EBITDAfor such entities in calculating our pro forma Adjusted EBITDA. The adjustmentsmade to the income from continuing operations before income taxes andextraordinary items of such entities directly correlate to the adjustments tonet income in calculating Adjusted EBITDA on a consolidated basis pursuant tothe senior secured credit agreement.

Forpresentation purposes within this report, we consistently use the computationprescribed under our senior secured credit agreement as described above.Specifically, calculation of Adjusted EBITDA according to the indenturesunderlying our 2011 Notes and 2014 Notes excludes certain adjustmentsprescribed within the senior secured credit agreement. Given that borrowings underthe senior secured credit agreement are secured by most of our assets and giventhat the calculation does not materially differ from the calculation ofAdjusted EBITDA for performance measurement purposes, we believe this is themost appropriate computation of Adjusted EBITDA to present.

**Management’s Uses**

Weuse 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 vest,both of which are tied to Adjusted EBITDA targets.

Wealso use Adjusted EBITDA on a consolidated basis as a liquidity measure. Webelieve this financial measure on a consolidated basis is important inanalyzing our liquidity because our senior secured credit agreement andindentures governing the 2011 Notes and 2014 Notes contain financial covenantsthat are determined based on Adjusted EBITDA. These covenants are materialterms of these agreements, which are material because they govern substantiallyall of our long-term debt, which in turn represents a substantial portion ofour capitalization. Non-compliance with these financial covenants under oursenior secured credit facilities—our maximum total leverage ratio and ourminimum interest coverage ratio, in particular—could result in the lendersrequiring us to immediately repay all amounts borrowed. Any such accelerationcould also lead to the noteholders accelerating the maturity of the 2011 Notesand the 2014 Notes. In addition, if we cannot satisfy these financial covenantsin the indentures governing the 2011 Notes and 2014 Notes, we cannot engage incertain activities, such as incurring additional indebtedness or making certainpayments. Consequently, Adjusted EBITDA is critical to our assessment of ourliquidity.

Wealso use Adjusted EBITDA on a segment basis as the primary measure used by ourchief operating decision maker to evaluate the ongoing performance of ourbusiness segments and reporting units. On a segment basis, we define AdjustedEBITDA as operating income excluding depreciation and amortization, certainnon-cash gains and charges, certain other special gains and charges determinedby our senior management to be non-recurring gains and charges and certainitems deemed by our senior management to have little or no bearing on theday-to-day operating performance of our business segments and reporting units.The adjustments made to operating income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the senior secured credit agreement.

 

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**Limitations**

Adjusted EBITDA haslimitations as an analytical tool, and should not be viewed in isolation and isnot a substitute for U.S. GAAP measures of earnings and cash flows. Materiallimitations associated with making the adjustments to our earnings and cashflows to calculate Adjusted EBITDA, and using this non-GAAP financial measureas compared to the most directly comparable U.S. GAAP financial measures,include:

·                  thecash portion of interest expense, net, income tax provision (benefit), and restructuringas well as non-recurring charges related to securities issuance, acquisitionactivities, and systems/organization establishment, generally represent charges(gains) which may significantly affect funds available to use in our operating,investing and financing activities;

·                  non-operatingforeign exchange gains (losses), although not immediately affecting cash usedin investing activities, may affect the amount of funds needed to service ourdebt if those currency impacts remain in place as we meet our future principalrepayment obligations; and

·                  depreciation,amortization, non-cash (gains) charges and impairment charges, though notdirectly affecting our current cash position, represent the wear and tearand/or reduction in value of the plant, equipment and intangible assets whichpermit us to manufacture and/or market our products; these items may beindicative of future needs for capital expenditures, for development oracquisition of intangible assets or relevant trends causing asset value changes.

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a morecomplete understanding of the factors and trends affecting our business.

AdjustedEBITDA is not an alternative to net income (loss) or income (loss) before taxesand minority interest or operating income or cash flows from operatingactivities as calculated and presented in accordance with U.S. GAAP. You shouldnot rely on Adjusted EBITDA as a substitute for any such U.S. GAAP financialmeasures. We strongly urge you to review the reconciliations of Adjusted EBITDAto GAAP financial measures and other financial information, in each caseincluded elsewhere in this report. We also strongly urge you not to rely on anysingle financial measure to evaluate our business.

**Resultsof Operations**

**ActualResults of Operations**

Thefollowing table presents the major components of our operations on an actualbasis and Adjusted EBITDA (the reconciliation to net income is set forthin—Reconciliation of Net Income to Adjusted EBITDA for the three months ended March 31,2006 and 2005), including as a percentage of net sales, for the periodspresented. See Note 4, “Segment Information,” for segment information anda reconciliation to net income on a consolidated basis and a reconciliation toincome before taxes and minority interest on a segment basis.

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| ** **                                     | ** ** | ** Three months ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------|------------|
| **($ in millions)**                  | ** ** | ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statement  of operations data:**             |       |                                                       |       |   |   |
| **Net  sales:**                                |       |                                                       |       |   |   |
| Performance  Additives                         |       | $                                                          | 182.5      |   | $ | 159.5 |   |
| Specialty  Compounds                           |       | 63.2                                                       |       | 58.1 |   |
| Electronics                                    |       | 49.4                                                       |       | 42.8 |   |
| Specialty  Chemicals                           |       | 228.1                                                      |       | 220.0 |   |
| Titanium Dioxide  Pigments                     |       | 108.2                                                      |       | 104.5 |   |
| Advanced  Ceramics                             |       | 92.7                                                       |       | 91.9 |   |
| Groupe Novasep                                 |       | 88.5                                                       |       | 92.9 |   |
| Total net sales                                |       | 812.6                                                      |       | 769.7 |   |
| Gross profit                                   |       | 249.7                                                      |       | 225.6 |   |
|                                           |       | 30.7                                                       | %          | 29.3 | % |
| Selling, general  and administrative expenses  |       | 157.0                                                      |       | 150.2 |   |
|                                           |       | 19.3                                                       | %          | 19.5 | % |
| Restructuring  charges, net                    |       | 1.2                                                        |       | 2.9 |   |
| **Operating  income (loss):**                  |       |                                                       |       |   |   |
| Performance  Additives                         |       | 24.0                                                       |       | 23.0 |   |
|                                           |       | 13.2                                                       | %          | 14.4 | % |
| Specialty  Compounds                           |       | 5.3                                                        |       | 5.9 |   |
|                                           |       | 8.4                                                        | %          | 10.2 | % |
| Electronics                                    |       | 3.5                                                        |       | 0.7 |   |
|                                           |       | 7.1                                                        | %          | 1.6 | % |
| Specialty  Chemicals                           |       | 39.2                                                       |       | 30.8 |   |
|                                           |       | 17.2                                                       | %          | 14.0 | % |
| Titanium Dioxide  Pigments                     |       | 11.9                                                       |       | 11.7 |   |
|                                           |       | 11.0                                                       | %          | 11.2 | % |
| Advanced  Ceramics                             |       | 15.1                                                       |       | 13.9 |   |
|                                           |       | 16.3                                                       | %          | 15.1 | % |
| Groupe Novasep                                 |       | 7.5                                                        |       | (1.5 | ) |
|                                           |       | 8.5                                                        | %          | -1.6% |   |
| Corporate costs                                |       | (15.0                                                      | )          | (12.0 | ) |
| Total operating  income                        |       | 91.5                                                       |       | 72.5 |   |
| **Other  income (expenses):**                  |       |                                                       |       |   |   |
| Interest  expense, net                         |       | (39.1                                                      | )          | (48.2 | ) |
| Foreign exchange  (loss) gain, net             |       | (2.6                                                       | )          | 41.9 |   |
| Loss on sale of  business                      |       | (12.1                                                      | )          | - |   |
| Other, net                                     |       | 2.2                                                        |       | - |   |
| **Income  before taxes and minority interest** |       | 39.9                                                       |       | 66.2 |   |
| Income tax  (benefit) provision                |       | (3.1                                                       | )          | 24.9 |   |
| Income before  minority interest               |       | 43.0                                                       |       | 41.3 |   |
| Minority  interest                             |       | (3.0                                                       | )          | 0.8 |   |
| Net income                                     |       | $                                                          | 40.0       |   | $ | 42.1 |   |
| **Adjusted  EBITDA:**                          |       |                                                       |       |   |   |
| Performance  Additives                         |       | 33.3                                                       |       | 34.2 |   |
|                                           |       | 18.2                                                       | %          | 21.4 | % |
| Specialty  Compounds                           |       | 7.3                                                        |       | 7.3 |   |
|                                           |       | 11.6                                                       | %          | 12.6 | % |
| Electronics                                    |       | 8.6                                                        |       | 5.8 |   |
|                                           |       | 17.4                                                       | %          | 13.6 | % |
| Specialty  Chemicals                           |       | 51.4                                                       |       | 43.0 |   |
|                                           |       | 22.5                                                       | %          | 19.5 | % |
| Titanium Dioxide  Pigments                     |       | 20.9                                                       |       | 20.9 |   |
|                                           |       | 19.3                                                       | %          | 20.0 | % |
| Advanced  Ceramics                             |       | 23.6                                                       |       | 21.4 |   |
|                                           |       | 25.5                                                       | %          | 23.3 | % |
| Groupe Novasep                                 |       | 15.9                                                       |       | 10.2 |   |
|                                           |       | 18.0                                                       | %          | 11.0 | % |
| Corporate costs                                |       | (12.3                                                      | )          | (9.6 | ) |
| Total Adjusted  EBITDA                         |       | $                                                          | 148.7      |   | $ | 133.2 |   |
|                                                |            |                                                            |            |  |  |  |  |  |  |

 

37

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The followingtable presents the changes in the major components of our operations on ahistorical basis in dollars and percentages:
| ** **                                             | ** ** | **Change: Three months ended March 31, 2006 versus 2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **($ in millions)**                          | ** ** | ** **                                                                                        | ** ** | **Total** | ** ** | **%  Change** | ** ** | **FX  Effect(a)** | ** ** | **Organic** | ** ** |
| **Statement  of operations data:**                     |       |                                                                                              |       |   |   |   |   |   |   |
| **Net  sales:**                                        |       |                                                                                              |       |   |   |   |   |   |   |
| Performance  Additives                                 |       | $                                                                                                 | 23.0       |   | 14.4 | % | $ | (4.1 | ) | $ | 27.1 |   |
| Specialty  Compounds                                   |       | 5.1                                                                                               |       | 8.8 |   | (1.0 | ) | 6.1 |   |
| Electronics                                            |       | 6.6                                                                                               |       | 15.4 |   | (1.8 | ) | 8.4 |   |
| Specialty  Chemicals                                   |       | 8.1                                                                                               |       | 3.7 |   | (14.0 | ) | 22.1 |   |
| Titanium Dioxide  Pigments                             |       | 3.7                                                                                               |       | 3.5 |   | (10.2 | ) | 13.9 |   |
| Advanced  Ceramics                                     |       | 0.8                                                                                               |       | 0.9 |   | (7.4 | ) | 8.2 |   |
| Groupe Novasep                                         |       | (4.4                                                                                              | )          | (4.7 | ) | (8.4 | ) | 4.0 |   |
| Total net sales                                        |       | 42.9                                                                                              |       | 5.6 |   | (46.9 | ) | 89.8 |   |
| Gross profit                                           |       | 24.1                                                                                              |       | 10.7 |   | (14.6 | ) | 38.7 |   |
| Selling, general  and administrative expenses          |       | 6.8                                                                                               |       | 4.5 |   | (8.9 | ) | 15.7 |   |
| Restructuring  charges                                 |       | (1.7                                                                                              | )          |   |   |   |   | (1.7 | ) |
| Total operating  expenses                              |       | 5.1                                                                                               |       | 3.3 |   | (8.9 | ) | 14.0 |   |
| **Operating  income (loss):**                          |       |                                                                                              |       |   |   |   |   |   |   |
| Performance Additives                                  |       | 1.0                                                                                               |       | 4.3 |   | (0.3 | ) | 1.3 |   |
| Specialty  Compounds                                   |       | (0.6                                                                                              | )          | (10.2 | ) | — |   | (0.6 | ) |
| Electronics                                            |       | 2.8                                                                                               |       | 400.0 |   | (0.1 | ) | 2.9 |   |
| Specialty  Chemicals                                   |       | 8.4                                                                                               |       | 27.3 |   | (2.4 | ) | 10.8 |   |
| Titanium Dioxide  Pigments                             |       | 0.2                                                                                               |       | 1.7 |   | (1.1 | ) | 1.3 |   |
| Advanced  Ceramics                                     |       | 1.2                                                                                               |       | 8.6 |   | (1.3 | ) | 2.5 |   |
| Groupe Novasep                                         |       | 9.0                                                                                               |       | 600.0 |   | (0.8 | ) | 9.8 |   |
| Corporate costs                                        |       | (3.0                                                                                              | )          | 25.0 |   | 0.3 |   | (3.3 | ) |
| Total                                                  |       | 19.0                                                                                              |       | 26.2 |   | (5.7 | ) | 24.7 |   |
| **Other  income (expenses):**                          |       |                                                                                              |       |   |   |   |   |   |   |
| Interest  expense, net                                 |       | 9.1                                                                                               |       | (18.9 | ) | 2.2 |   | 6.9 |   |
| Foreign exchange  (loss) gain, net                     |       | (44.5                                                                                             | )          |   |   |   |   |   |   |
| Loss on sale of  business                              |       | (12.1                                                                                             | )          |   |   |   |   |   |   |
| Other                                                  |       | 2.2                                                                                               |       |   |   |   |   |   |   |
| **Income  (loss) before taxes and minority interest:** |       |                                                                                              |       |   |   |   |   |   |   |
| Performance  Additives                                 |       | 2.8                                                                                               |       |   |   |   |   |   |   |
| Specialty  Compounds                                   |       | (0.6                                                                                              | )          |   |   |   |   |   |   |
| Electronics                                            |       | 1.6                                                                                               |       |   |   |   |   |   |   |
| Specialty  Chemicals                                   |       | 13.1                                                                                              |       |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                             |       | 3.3                                                                                               |       |   |   |   |   |   |   |
| Advanced  Ceramics                                     |       | 3.1                                                                                               |       |   |   |   |   |   |   |
| Groupe Novasep                                         |       | (1.7                                                                                              | )          |   |   |   |   |   |   |
| Corporate costs                                        |       | (47.9                                                                                             | )          |   |   |   |   |   |   |
| Total                                                  |       | (26.3                                                                                             | )          |   |   |   |   |   |   |
| Income tax  (benefit) provision                        |       | (28.0                                                                                             | )          |   |   |   |   |   |   |
| Net income  before minority interest                   |       | 1.7                                                                                               |       |   |   |   |   |   |   |
| Minority  interest                                     |       | (3.8                                                                                              | )          |   |   |   |   |   |   |
| Net income                                             |       | $                                                                                                 | (2.1       | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                  |       |                                                                                              |       |   |   |   |   |   |   |
| Performance  Additives                                 |       | $                                                                                                 | (0.9       | ) | (2.6 | )% | $ | (0.6 | ) | $ | (0.3 | ) |
| Specialty  Compounds                                   |       | —                                                                                            |       | — |   | (0.1 | ) | 0.1 |   |
| Electronics                                            |       | 2.8                                                                                               |       | 48.3 |   | (0.3 | ) | 3.1 |   |
| Specialty Chemicals                                    |       | 8.4                                                                                               |       | 19.5 |   | (3.1 | ) | 11.5 |   |
| Titanium Dioxide  Pigments                             |       | —                                                                                            |       | — |   | (1.9 | ) | 1.9 |   |
| Advanced  Ceramics                                     |       | 2.2                                                                                               |       | 10.3 |   | (2.1 | ) | 4.3 |   |
| Groupe Novasep                                         |       | 5.7                                                                                               |       | 55.9 |   | (1.4 | ) | 7.1 |   |
| Corporate costs  and eliminations                      |       | (2.7                                                                                              | )          | 28.1 |   | 0.2 |   | (2.9 | ) |
| Total Adjusted  EBITDA                                 |       | $                                                                                                 | 15.5       |   | 11.6 | % | $ | (9.3 | ) | $ | 24.8 |   |
|                                                        |            |                                                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |

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(a) The foreignexchange effect was calculated based on the change in the euro to U.S. dollarexchange rate for the applicable period.

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***Three months ended March 31, 2006 compared to threemonths ended March 31, 2005***

**Overview**

Net sales increased $42.9million in the first quarter of 2006 compared with the same period in the prioryear as a result of general strong demand and the favorable impact of theacquisition of the Süd-Chemie businesseson December 30, 2005. This increase was partially offset by the impact ofcurrency changes ($46.9 million) primarily due to the weakening of the euroagainst the U.S. dollar for the three month period ended March 31, 2006compared to the same period in 2005. See further discussion by segment below.

Operating incomeincreased $19.0 million in the first quarter of 2006 compared with the sameperiod in the prior year primarily in the Specialty Chemicals, Groupe Novasepand Electronics segments (aggregating $20.2 million) on higher sales, partiallyoffset by higher raw material and energy costs.

Adjusted EBITDA increased$15.5 million in the first quarter of 2006 compared with the same period in theprior year primarily due to the impact of the sales increases noted above,partially offset by higher raw material and energy costs.

Net income decreased $2.1million in the first quarter of 2006 compared with the same period in the prioryear primarily due to a decrease in foreign currency gains reflecting thenon-cash currency impact on our euro-denominated debt and higher raw materialand energy costs partially offset by higher sales and the favorable taxtreatment on the Rohner AG sale.

**Net sales**

*PerformanceAdditives*. Net sales for our Performance Additives segmentincreased $23.0 million over the prior year period primarily due to highervolumes and selling prices, partially offset by the impact of currency changes($4.1 million). Volumes were up primarily in the Clay-based Additives, ColorPigments and Services and Water Treatment Chemicals businesses. In theClay-based Additives business, volumes were up on increased sales to thecarbonless paper and rheological additives markets primarily from theacquisition of the Süd-Chemiebusinesses on December 30, 2005 and increased oilfield sales. Volumes wereup in the Color Pigments and Services business primarily from higher demand forconstruction products in both North America and Europe. In the Water TreatmentChemicals business, volumes were higher on increased sales of pool and spachemical products. Higher selling prices of $4.3 million were primarilyreported in the Color Pigments and Services and Clay-based Additives businessesto offset higher raw material and energy costs.

*SpecialtyCompounds*. Net sales for our Specialty Compounds segmentincreased $5.1 million over the prior year period primarily due to the impactof higher selling prices ($4.7 million) to offset higher raw material costs, partiallyoffset by lower sales volumes and the impact of currency changes ($1.0million). Lower volumes of automotive and footwear products were partiallyoffset by stronger sales volumes in our wire and cable compounds and medicalapplications businesses.

*Electronics*.Net sales for our Electronics segment increased $6.6 million over the prioryear period primarily due to higher volumes in our Electronic Chemicals andPhotomasks businesses in Asia, the United States and Europe on sales to theprinted circuit board and semiconductor markets. This increase was partiallyoffset by lower volumes in the Wafer Reclaim business and the impact ofcurrency changes ($1.8 million).

*SpecialtyChemicals*. Net sales for our Specialty Chemicals segmentincreased $8.1 million over the prior year period, primarily on higher volumesand prices in both the Surface Treatment and Fine Chemicals businesses. Salesin the Surface Treatment business were favorably impacted by growth in allmarkets, particularly in aerospace, automotive and steel applications. Stronglithium applications, particularly sales of butyllithium and specialty productsto the pharmaceutical industry, continued to have a favorable impact on salesin the Fine Chemicals business. The increase in sales was partially offset bythe impact of currency changes ($14.0 million).

*TitaniumDioxide**Pigments*.Net sales for our Titanium Dioxide Pigments segment increased $3.7 million overthe prior year period. The increase was primarily due to increased volumes andhigher selling prices of our titanium dioxide products in rutile and anatasegrade, as well as volume increases in our functional additives products relatedto the introduction of new applications. The increase in sales was partiallyoffset by the impact of currency changes ($10.2 million).

*AdvancedCeramics*. Net sales for our Advanced Ceramics segmentincreased $0.8 million over the prior year period. The increase was due toincreased sales in all businesses, particularly from increased volumes ofmedical products, mechanical systems, mechanical applications and electronicapplications. In addition, a better product mix of Piezo applications had afavorable impact on sales. This was partially offset by selling price declinesof $0.8 million primarily in Piezo and electronic applications and the impactof currency changes ($7.4 million).

39

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*GroupeNovasep*. Net sales for our Groupe Novasep segment decreased$4.4 million over the prior year primarily due to the impact of  currency changes ($8.4 million), partiallyoffset by increased volumes and a favorable product mix.

##### **Grossprofit**

Gross profit increased$24.1 million over the prior year primarily due to the sales increases noted above.This was partially offset by raw material cost increases, including $7.3million in the Performance Additives segment, including the impact of recordhigh copper costs in our Timber Treatment Chemicals business, $4.3 million inthe Specialty Compounds segment primarily due to PVC resin and AOM costincreases and $4.1 million in the Titanium Dioxide Pigments segment. Inaddition, higher energy and manufacturing costs partially offset the increasein gross profit.

Gross profit as apercentage of net sales was 30.7% in the first quarter of 2006 versus 29.3% inthe first quarter of 2005 due to the reasons noted above.

##### **Selling,general and administrative expenses**

Selling, general andadministrative expenses, or SG&A, increased $6.8 million primarily due to higherCorporate costs to meet the requirements of being a public equity company aswell as external and internal audit costs of Section 404 ofSarbanes-Oxley. In addition, higher SG&A costs in a number of our segmentswere related to increased sales volumes. The impact of currency changesdecreased SG&A by $8.9 million over the prior year. SG&A expenses as apercentage of net sales were 19.3% in the first quarter of 2006 as compared to19.5% for the first quarter of 2005.

##### **Restructuringcharge, net**

We recorded $1.2 millionof restructuring charges in the first quarter of 2006 for miscellaneousrestructuring actions in the Electronics, Performance Additives and SpecialtyChemicals segments for miscellaneous headcount reductions and facility closures.We recorded $2.9 million of restructuring charges in the first quarter of 2005for miscellaneous restructuring actions in the Performance Additives segmentfor the announced closure of the Baulking, United Kingdom facility in theClay-based Additives business and in the Specialty Chemicals segment formiscellaneous headcount reductions (See Note 13,”Restructuring Liability,” forfurther detail).

##### **Operatingincome**

*PerformanceAdditives*. Operating income increased $1.0 million over theprior year period primarily from increased sales volumes, higher selling pricesof $4.3 million and lower restructuring charges of $2.2 million. This increasewas partially offset by higher raw material costs ($7.3 million), particularlyrecord high copper costs in the Timber Treatment Chemicals business that are atrecord highs and higher energy and raw material costs in the Color Pigments andServices business. Higher manufacturing costs of $4.7 million and the impact ofcurrency changes ($0.3 million) had an unfavorable impact on operating income.

*SpecialtyCompounds*. Operating income decreased $0.6 million primarilydue to higher PVC resin and AOM raw material costs of $4.2 million, highermanufacturing costs and lower sales volumes. This decrease was partially offsetby higher selling prices of $4.7 million.

*Electronics*.Operating income increased $2.8 million primarily due to increased salesvolumes of $5.3 million, primarily due to growth in Asia, the United States andEurope to the printed circuit board and semiconductor markets. This waspartially offset by increased selling, general and administrative expenses of$1.2 million, higher manufacturing costs of $0.9 million and increasedrestructuring costs of $0.8 million.

*SpecialtyChemicals*. Operating income for our Specialty Chemicalssegment increased $8.4 million primarily due to higher sales volumes andselling prices in both the Surface Treatment and Fine Chemicals businesses.This was partially offset by higher selling, general and administrativeexpenses of $3.0 million related to the increased sales volumes and the impactof currency changes ($2.4 million).

*TitaniumDioxide**Pigments*.Operating income for our Titanium Dioxide Pigments segment increased $0.2million versus the prior year period primarily due to increased volumes andhigher selling prices of our titanium dioxide products in anatase and rutilegrade, as well as volume increases in our functional additives products. Thiswas partially offset by higher raw material costs of $4.1 million and theimpact of currency changes ($1.1 million).

*AdvancedCeramics*. Operating income for our Advanced Ceramics segmentincreased $1.2 million over the prior year period primarily due to increasedsales in all businesses, particularly from higher volumes of medical products,

40

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mechanical systems,mechanical applications and electronic applications. In addition, a better mixof Piezo applications had a favorable impact on results. This increase waspartially offset by the impact of currency changes ($1.3 million) and sellingprice declines primarily in Piezo and electronic applications.

*GroupeNovasep*. Operating income increased $9.0 million over theprior year period primarily due to losses incurred in the first quarter of 2005related to capacity utilization issues at the Rohner plant. As we announced, Rohner AG was sold in March 2006(see Note 12, “Sale of Rohner AG,” for further detail).

*Corporate*.Operating loss at Corporate increased $3.0 million primarily due to higherCorporate costs to meet the requirements of being a public equity company aswell as external and internal audit costs of Section 404 ofSarbanes-Oxley.

**Otherincome (expenses)**

*Interestexpense, net*. Interest expense, net, decreased $9.1 millionin the first quarter of 2006 compared to the same period in 2005. The firstquarter of 2006 and 2005 included a gain of $10.9 million and $7.6 million,respectively, representing the movement in the mark-to-market valuation of ourinterest rate and cross-currency hedging instruments as well as $2.3 millionand $2.5 million, respectively, of amortization expense related to deferredfinancing costs. The remaining decrease of $5.6 million was primarily due to lowerinterest expense related to debt repaid with IPO proceeds.

*Foreignexchange gain (loss), net*. In the first quarter of 2006, wehad foreign exchange losses of $2.6 million compared to foreign exchange gainsof $41.9 million recorded in the first quarter of 2005. The euro strengthenedfrom the beginning of the first quarter of 2006 to the end of the first quarterof 2006 causing a loss related to the unhedged portion of our euro-denominateddebt at one of our U.K. subsidiaries. In the prior year, foreign exchange gainswere recorded reflecting the non-cash currency impact on our euro-denominateddebt on our U.S. and U.K. subsidiaries balance sheets due to the weaker euro asof March 31, 2005 versus December 31, 2004.

We have designated theportion of our euro-denominated debt that is recorded on our U.S. subsidiariesbalance sheet (€684.2 million or $828.0 million using the March 31, 2006 exchange rate of €1.00 = $1.2102) asa net investment hedge as of October 1, 2005. As a result, foreigncurrency gains and losses resulting from changes in the U.S. dollar to the euroare now recorded in accumulated other comprehensive income within stockholders’equity and are not reported in the statement of operations as long as the hedgeremains effective. We also have €161.9 million (or $195.9 million using the March 31, 2006 exchange rate of €1.00= $1.2102) of euro-denominated debt on our U.K. subsidiaries’ balancesheet at March 31, 2006 that is not designated as a net investment hedge.

*Loss onsale of business*. In connection with the sale of Rohner AG inMarch 2006, the Company recorded a pre-tax loss of $12.1 million for thethree months ended March 31, 2006 (see Note 12, “Sale of Rohner AG,” forfurther detail).

*Other,net*. For the three months ended March 31, 2006, werecorded $2.2 million of income primarily related to the correction of animmaterial error related to a previously unrecorded asset in the TitaniumDioxide segment ($1.6 million) and gains related to fixed asset sales ($0.6million).

##### **Provisionfor income taxes**

The effective income taxrate for the first quarter of 2006 and 2005 was (7.8)% and 37.6%, respectively.The 2006 rate included a tax benefit of $21.8 million related to the favorabletax treatment on the sale of Rohner AG. However, this tax benefit is a one-timeitem and will not be reported in subsequent quarters of 2006. Absent a reversalof the U.S. valuation allowance in accordance with the Company’s policy, weexpect a more normalized effective tax rate for the remainder of 2006, whichwill be dependent on the mix of foreign and domestic earnings. The effectivetax rate in the first quarter of 2005 was favorably impacted by the reversal of$5.1 million of valuation allowances related to U.S. federal income generated.The effective tax rate in both periods was impacted by the recording ofvaluation allowances in certain other jurisdictions, as well as the impact offoreign tax rate differentials.

##### **Minorityinterest**

Minority interestrepresents the minority interest portion of the Groupe Novasep segment netincome and net loss in the three months ended March 31, 2006 and 2005,respectively.

##### **Netincome**

Net income for the firstquarter of 2006 was $40.0 million as compared to net income of $42.1 millionfor the first quarter of 2005 for the reasons described above.

41

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##### **AdjustedEBITDA**

*PerformanceAdditives*. Adjusted EBITDA for our Performance Additivessegment decreased $0.9 million over the prior year period primarily due tohigher raw material costs of $7.3 million, particularly record high coppercosts in the Timber Treatment Chemicals business and higher energy and raw materialcosts in the Color Pigments and Services business. Higher manufacturing costsof $4.7 million and the impact of currency changes ($0.6 million) also had anunfavorable impact on Adjusted EBITDA. This decrease was partially offset byincreased sales volumes and higher selling prices of $4.3 million.

*SpecialtyCompounds*. Adjusted EBITDA for our Specialty Compoundssegment was flat over the prior year period as higher selling prices of $4.7million were offset by higher raw material costs of $4.2 million, primarily dueto PVC resin and AOM cost increases, higher manufacturing costs and lower salesvolumes.

*Electronics*.Adjusted EBITDA for our Electronics segment increased $2.8 million primarilydue to increased sales volumes of $5.3 million, primarily in growth in Asia,the United States and Europe to the printed circuit board and semiconductormarkets. This was partially offset by increased selling, general andadministrative expenses of $1.2 million, higher manufacturing costs of $0.9 million,the impact of currency changes ($0.3 million) and lower selling prices of $0.2million.

*SpecialtyChemicals*. Adjusted EBITDA for our Specialty Chemicalssegment increased $8.4 million over the prior period primarily due to highersales volumes and selling prices in both the Surface Treatment and FineChemicals businesses. This was partially offset by higher selling, general andadministrative expenses of $3.0 million related to the increased sales volumesand the impact of currency changes ($3.1 million).

*TitaniumDioxide**Pigments*.Adjusted EBITDA for our Titanium Dioxide Pigments segment was flat as increasedvolumes and higher selling prices were offset by higher raw material costs of$4.1 million and the impact of currency changes ($1.9 million).

*AdvancedCeramics*. Adjusted EBITDA for our Advanced Ceramics segmentincreased $2.2 million over the prior year period primarily due to increasedsales in all businesses, particularly from higher volumes of medical products, mechanicalsystems, mechanical applications and electronic applications. In addition, abetter product mix of Piezo applications had a favorable impact on results.This increase was partially offset by the impact of currency changes ($2.1million) and selling price declines primarily in Piezo and electronicapplications.

*GroupeNovasep*. Adjusted EBITDA for our Groupe Novasep segmentincreased $5.7 million over the prior year period primarily due to losses inthe first quarter of 2005 related to capacity utilization issues at the Rohnerplant. As we announced, Rohner AG was soldin March 2006 (see Note 12, “Sale of Rohner AG,” for further detail).This increase was partially offset by the impact of currency changes ($1.4million).

*Corporate*.Adjusted EBITDA loss at Corporate increased $2.7 million primarily due tohigher Corporate costs to meet the requirements of being a public equitycompany as well as external and internal audit costs of Section 404 ofSarbanes-Oxley.

42

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***Reconciliation of Net Income to Adjusted EBITDA***

Because we viewAdjusted EBITDA on both a consolidated basis and segment basis as an operatingperformance measure, we use net income as the most comparable U.S. GAAP measureon a consolidated basis. The following table, which sets forth the applicablecomponents of Adjusted EBITDA, presents a reconciliation of net income toAdjusted EBITDA on a consolidated basis:
| ** **                                   | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in millions)**                | ** ** | ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                   |       | $                                                    | 40.0       |   | $ | 42.1 |   |
| Income tax  provision                        |       | (3.1                                                 | )          | 24.9 |   |
| Minority  interest                           |       | 3.0                                                  |       | (0.8 | ) |
| Income before  taxes and minority interest   |       | 39.9                                                 |       | 66.2 |   |
| Interest  expense, net (a)                   |       | 39.1                                                 |       | 48.2 |   |
| Depreciation and  amortization               |       | 52.1                                                 |       | 53.2 |   |
| Restructuring  and related charges           |       | 1.2                                                  |       | 2.9 |   |
| CCA litigation  defense costs                |       | 0.3                                                  |       | 0.4 |   |
| Systems/organization  establishment expenses |       | 1.9                                                  |       | 1.2 |   |
| Cancelled  acquisition and disposal costs    |       | 0.6                                                  |       | 0.2 |   |
| Inventory  write-up reversal                 |       | 0.8                                                  |       | 2.8 |   |
| Gains related to  asset sales                |       | (0.6                                                 | )          | — |   |
| Loss from  disposed businesses               |       | 12.1                                                 |       | — |   |
| Foreign exchange  loss (gain)                |       | 2.6                                                  |       | (41.9 | ) |
| Other                                        |       | (1.3                                                 | )          | — |   |
| Total Adjusted EBITDA                        |       | $                                                    | 148.7      |   | $ | 133.2 |   |
|                                              |            |                                                      |            |  |  |  |  |  |  |

----

(a)             Includesgains of $10.9 million and $7.6 million for the three months ended March 31,2006 and 2005, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

**Liquidityand Capital Resources**

**CashFlows**

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at March 31, 2006 exchange rates.*

*OperatingActivities*. Net cash provided by operating activities was$47.6 million and $11.1 million for the three months ended March 31, 2006and 2005, respectively. Net cash from operating activities increased in 2006from higher Adjusted EBITDA and a lower increase in operating working capital inthe first quarter of 2006. 

*InvestingActivities*. Net cash used in investing activities was $43.1 millionand $53.9 million for the three months ended March 31, 2006 and 2005,respectively. Investing activities for the three months ended March 31,2006 and 2005 primarily was comprised of capital expenditures. Net cash used ininvesting activities for the three months ended March 31, 2006 were lowerprimarily from decreased capital expenditures in the Advanced Ceramics segmentrelated to the expansion of our medical products production facility.

*FinancingActivities*. Net cash (used in) provided by financingactivities was ($62.2) million and $169.1 million for the three months ended March 31,2006 and 2005, respectively. Net cash used in financing activities in the firstquarter of 2006 was primarily due to the repayment of long-term debt. Activityin the first quarter of 2005 primarily represented $175.0 million, net borrowedagainst our senior secured revolving credit facility for short-term liquidityneeds.

**Liquidity**

On August 22, 2005,Holdings, our ultimate parent company completed an IPO of 23,469,387 shares ofour common stock, which included 3,061,224 shares issued and sold as a resultof the underwriters’ exercise of the over-allotment option. As a result,Holdings received net proceeds of approximately $435.7 million (net ofunderwriting discounts and commissions and estimated offering expensesaggregating $33.6 million).

For the three monthperiod ended March 31, 2005, interest expense on the debt paid off withIPO proceeds was $2.8 million.

Our primary source ofliquidity has been and will continue to be cash generated from operations ofour subsidiaries. Our primary liquidity requirements are working capital, debtservice, capital expenditures and acquisitions. Our debt service requirementsand other contractual obligations and commitments over the next several yearsare significant and are substantially higher than historical amounts. Webelieve that our currently available sources of liquidity will be sufficientfor these needs. Furthermore, any future major acquisitions, businesscombinations or similar transactions will likely require additional capitalresources. If our present operating 

43

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performance and currentmarket conditions continue, we believe that such resources will be available tous for certain transactions. We would need access to alternative sources ofliquidity for larger acquisitions such as through additional borrowings, equityissuances or other sources. We may not have access to these sources of cash fora variety of reasons. See Item 1A, “Risk Factors,” in our 2005 Form 10-K.

We believe that based oncurrent and anticipated levels of operations and conditions in our industry andmarkets, cash flows from operations and borrowings available under ourrevolving credit facility will be adequate for 2006 and the foreseeable futureto make required payments of principal and interest on our debt and fund ourworking capital and capital expenditure requirements. We are taking actions toreduce overhead and excess or unprofitable manufacturing capacity, in part toimprove our long-term liquidity. As noted in Item 2, “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” “General,”above, we are also applying the same initiatives used after the KKRAcquisition—reducing net working capital as a percentage of net sales throughimproved systems and manager incentives as well as implementation of stringentcontrols to help ensure that maintenance capital expenditures are appropriateand that expansion capital expenditures are in line with both capacity andmarket demands. We expect this to further improve our short and long-termliquidity. If our cash flow from operations and available borrowings under ourrevolving credit facility were to be insufficient to fund our currentlyexisting liquidity requirements, we may be forced to use other means availableto us, such as reduce or delay capital expenditures and seek additionalcapital. We may not have adequate capital for working capital, futureacquisitions, business combinations or similar transactions. Also, see Item 1A,“Risk Factors,” in our 2005 Form 10-K.

As of March 31,2006, we had actual total indebtedness of $2,813.4 million.

*Seniorsecured credit facilities*. The senior secured creditfacilities, as amended, consist of:

·                  trancheA-1 term loans in an aggregate principal amount of €37.2 million (orapproximately $45.0 million at March 31, 2006) and tranche A-2term loans in an aggregate principal amount of €161.9 million (or approximately$195.9 million at March 31, 2006), each maturing on July 30, 2011 andbearing interest at Adjusted EURIBOR plus 2.25%;

·                  trancheE term loans in an aggregate principal amount of $1,133.6 million at March 31,2006, maturing on July 30, 2012 and bearing interest at the Company’soption of either (i) Adjusted LIBOR plus 2.00% or (ii) ABR plus0.75%;

·                  trancheF term loans in an aggregate principal amount of €272.1 million (orapproximately $329.2 million at March 31, 2006) maturing on July 30,2012 and bearing interest of Adjusted LIBOR plus 2.75%; and

·                  arevolving credit facility in an aggregate principal amount of$250.0 million maturing on July 30, 2010, bearing interest at theCompany’s option of either (i) Adjusted LIBOR plus 2.25% or (ii) ABRplus 1.00%. As of March 31, 2006, we had €20.0 million ($24.2 million) and$1.0 million outstanding under this facility and had outstanding letters ofcredit of $22.5 million that reduced our availability under the creditfacility. As of May 12, 2006, we had €60.0 million ($77.4 million using the May 12, 2006 exchange rate of €1.00= $1.29) outstanding under this facility.

The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on March 31, 2006 of €1.00=$1.2102. In each case, the interest ratesper year are subject to step-downs determined by reference to a performancetest. Adjusted LIBOR is the London inter-bank offered rate adjusted forstatutory reserves. ABR is the alternate base rate, which is the highest ofCredit Suisse’s prime rate and the federal funds effective rate plus 0.5%.Tranche A-1 and tranche A-2 term loans are payable in January andJuly of each year at escalating percentages of the original principalamount. Tranche E and tranche F term loans are payable in January and July ofeach year at amounts equal to 0.5% of the original principal amount of theformer tranche C term loans and tranche D term loans, respectively, with theremainder due at the final maturity date.

The Company’s borrowingsand the borrowings of Rockwood Specialties Limited under the senior securedcredit facilities are guaranteed and secured by assets and pledges of capitalstock.

In addition to thefinancial covenants described below under “Covenant Compliance,” the Company’ssenior secured credit facilities contain various affirmative and restrictivecovenants. The restrictive covenants limit our ability to, among other things, incurindebtedness and other liabilities; create liens; merge or consolidate; disposeof assets; make investments; pay dividends and make payments to shareholders;make payments on certain indebtedness or to amend documents related to certainindebtedness and to enter into sale leaseback transactions.

*2011Notes and 2014 Notes*. The Company’s 2011 Notes had anaggregate principal amount of $273.4 million at March 31, 2006, and matureon May 15, 2011 and the 2014 Notes have an aggregate principal amount of €375.0million ($453.8 million) in the case of the Euro notes and $200.0 million inthe case of the U.S. Dollar notes, and mature on November 15, 2014. Inconnection with the IPO, 

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$101.6 million, or 27%,of the 2011 Notes were redeemed. Interest on both the 2011 Notes and 2014 Notesis payable semi-annually on May 15 and November 15. Interest on the2011 Notes accrues at the rate of 10.625% per year, and interest on the 2014Notes accrues at the rate of 7.625% in the case of Euro notes and 7.500% in thecase of U.S. Dollar notes. Certain of our domestic subsidiaries guarantee the2011 Notes and 2014 Notes on a senior subordinated unsecured basis. The Companymay redeem up to 35% of the initial aggregate principal amount of the 2011Notes at a redemption price equal to 110.625% of the aggregate principal amountthereof, plus accrued and unpaid interest thereon, if any, to the redemptiondate at any time prior to May 15, 2006, with the net proceeds of one ormore equity offerings. Thereafter, the Company may redeem the 2011 Notes inwhole or in part, at a premium, which declines annually through maturity.

The Company’s 2011 Notesand 2014 Notes contain various affirmative and restrictive covenants. Therestrictive 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 (as described belowunder “Covenant Compliance”); make investments or other restricted payments (asdescribed below under “Covenant Compliance”); create liens; transfer or sellassets; restrict dividends or other payments to us; engage in transactions withaffiliates; and merge or consolidate with other companies or sell substantiallyall of our assets.

*Covenantcompliance*. In addition to the affirmative and restrictivecovenants, the Company’s senior secured credit agreement contains the followingfinancial covenants that are determined based on our Adjusted EBITDA:

·                  amaximum total leverage ratio: for the twelve-month period ended March 31,2006, net debt to Adjusted EBITDA must be less than 6.50 to 1; for such period,our ratio equaled 4.74 to 1; and

·                  aminimum interest coverage ratio: for the twelve-month period ended March 31,2006, Adjusted EBITDA to cash interest expense (interest expense, net excludingdeferred debt issuance cost amortization and the movements in themark-to-market value of our interest rate and cross-currency interest ratederivatives) must be at least 1.75 to 1; for such period, our ratio equaled2.96 to 1.

These covenants arematerial terms of the senior secured credit agreement. Non-compliance withthese covenants could result in a default under the senior secured creditagreement and the lenders could elect to declare all amounts borrowedimmediately due and payable. Any such acceleration would also result in adefault under the indentures governing the 2011 Notes and the 2014 Notes, whichcould lead to the note holders electing to declare the principal, premium, ifany, and interest on the then outstanding notes immediately due and payable.

The indentures governingthe 2011 Notes and 2014 Notes prohibit us from incurring additional debt,subject to certain permitted incurrences, unless the fixed charge coverageratio, which is the ratio of Adjusted EBITDA (as defined therein excludingcertain adjustments permitted under the senior secured credit agreement) tofixed charges (as defined therein), for the most recently ended four fiscalquarters is at least 2.00 to 1. In addition, the indentures prohibit us frommaking restricted payments (such as dividends or other equity distributions,repurchases of capital stock or restricted investments), subject to certain permittedpayments, unless, among other things, the fixed charge coverage ratio for themost recently ended four fiscal quarters is at least 2.00 to 1. For the fourfiscal quarter period ending March 31, 2006, the fixed charge coverageratio equaled 2.96 to 1. These covenants are material terms of the indenturesgoverning the 2011 Notes and 2014 Notes.

We were in compliancewith all of the above covenants as of March 31, 2006 and December 31,2005.

Given our use of AdjustedEBITDA (see “Special Note Regarding Non-GAAP Financial Measures” for thedefinition of Adjusted EBITDA and management’s uses of adjusted EBITDA) as aliquidity measure, the following table presents a reconciliation of net cashprovided by operating activities to Adjusted EBITDA:

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| ** **                                                                                                             | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in millions)**                                                                                          | ** ** | ** **                                           | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Net cash  provided by operating activities                                                                             |       | $                                                    | 47.6       |   | $ | 11.1 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 37.3                                                 |       | 57.6 |   |
| Current portion  of income tax provision                                                                               |       | 12.4                                                 |       | 6.7 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 47.7                                                 |       | 53.3 |   |
| Restructuring  and related charges                                                                                     |       | 1.2                                                  |       | 2.9 |   |
| CCA litigation  defense costs                                                                                          |       | 0.3                                                  |       | 0.4 |   |
| Systems/organization  establishment expenses                                                                           |       | 1.9                                                  |       | 1.2 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.6                                                  |       | 0.2 |   |
| Bad debt  provision                                                                                                    |       | (0.6                                                 | )          | (0.2 | ) |
| Other                                                                                                                  |       | 0.3                                                  |       | — |   |
| Total Adjusted EBITDA                                                                                                  |       | $                                                    | 148.7      |   | $ | 133.2 |   |
|                                                                                                                        |            |                                                      |            |  |  |  |  |  |  |

 

*Assumeddebt*. Certain of our subsidiaries acquired in the DynamitNobel Acquisition are borrowers under nine euro-denominated term loanfacilities that provide aggregate outstanding borrowings of approximately €23.8million ($28.8 million) as of March 31, 2006. These term loans maturebetween 2006 and 2019 and bear annual interest rates ranging between 1.00% and4.27% or EURIBOR plus 1.45% or LIBOR plus 0.39%. In addition, certain of oursubsidiaries acquired in the Dynamit Nobel Acquisition are borrowers underthree term loan facilities denominated in other foreign currencies, includingTaiwanese Dollars, Chinese Renminbi and Japanese Yen, providing for borrowingsof an aggregate U.S. dollar equivalent amount of approximately $2.2 million asof March 31, 2006 ($33.9 million of these term loans were paid in January 2006).These term loans mature in 2008 and bear annual interest rates ranging between2.50% and 5.50%. The term loan facilities described above contain customaryevents of default and some of them are secured by mortgages or accountsreceivables.

Additionally, GroupeNovasep (including subsidiaries) has three tranches of bank debt at the Novasepparent level totaling €10.8 million ($13.1 million) and $9.0 million($22.1 million in total), each with a maturity date of 2010 and interestrates of EURIBOR plus 1.75% in the case of two of the tranches, and LIBOR plus1.75% for the remaining tranche. In addition, there is bank debt at the GroupeNovasep subsidiary level totaling €4.8 million ($5.8 million)maturing in 2010 and interest rates of EURIBOR plus 1.25%. The remaining amountof assumed debt of €14.6 million ($17.6 million) consists primarily ofcapital leases with maturity dates ranging from 2006 to 2013.

“Assumed debt” includescertain capitalized lease obligations, a full recourse receivables factoringarrangement and subsidiary preferred stock in addition to the long-term debtdescribed in the preceding two paragraphs.

***Contractual Obligations***

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, andunconditional purchase obligations. A discussion of these contractualobligations is included in the Company’s 2005 Form 10-K. There havebeen no significant changes to these contractual obligations as of March 31,2006.

***Capital Expenditures***

Rockwood’s capitalexpenditures in 2005 and the first quarter of 2006 consisted primarily ofreplacements of worn, obsolete or damaged equipment as well as investments innew equipment, mostly for our Advanced Ceramics, Specialty Chemicals, TitaniumDioxide Pigments and Groupe Novasep segments. Capital expenditures in ourAdvanced Ceramics segment primarily related to expanding our medical productsproduction facility. In our Specialty Chemicals segment, we made a significantinvestment in connection with Lithium production. Capital expendituresconsisted of expansion of current Good Manufacturing Practice production linesand new equipment relating to multi-column chromatography in our Groupe Novasepsegment.

For the three monthsended March 31, 2006 and 2005, our capital expenditures, excluding capitalleases, were $29.8 million and $35.7 million ($45.6 million and $54.1 millionon a cash basis), respectively. The capital expenditures of Rockwood haveaveraged $115.4 million ($199.2 million in 2005, $112.8 million in 2004and $34.3 million in 2003) per year over the last three years.

 

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We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2005, ourcapital expenditures for SHE matters totaled approximately $32.8 million,excluding costs to maintain and repair pollution control equipment. For 2006,we estimate capital expenditures for compliance with SHE laws to be at similarlevels; however, because capital expenditures for these matters are subject tochanges in and new SHE laws, we cannot provide assurance that our recentexpenditures will be indicative of future amounts required to comply with theselaws.

We are applying ourcapital discipline and stringent controls to reduce our future capitalexpenditures as compared to historical levels for the acquired businesses ofDynamit Nobel. Our annual capital expenditures will increase in amount, but wedo not believe they will change significantly from current levels in proportionto the size of the combined entity or as a percentage of net sales.

***Foreign currency related transactions***

As of March 31,2006, $1,173.4 million of the debt outstanding is denominated in euros.

***Management and transaction fees***

KKR and DLJ MerchantBanking III, Inc. previously provided us with consulting and managementadvisory services for an aggregate annual fee of $2.1 million, increasing 5%annually. In connection with the IPO, the parties agreed to terminate themanagement services agreement with the affiliates of KKR and DLJMB for anaggregate consideration of $10.0 million.

**Off-Balance SheetArrangements**

None.

**CriticalAccounting Policies and Estimates**

The discussion and analysis of our financial condition andresults of operations are based upon our 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 valuesof assets acquired and liabilities assumed in business combinations;

·                  the use andrecoverability of inventory;

·                  the valuation ofdeferred tax assets;

·                  impairment ofgoodwill, property, plant and equipment and other intangible assets; and

·                  the useful livesof tangible and intangible assets.

We evaluate our estimateson an ongoing basis, based on historical experience and various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

The significantaccounting policies of the Company are described in Note 1,”Description ofBusiness and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in theCompany’s 2005 Form 10-K. There have been no significant changes tothese critical accounting policies and estimates as of March 31, 2006.

##### **Commitmentsand Contingencies**

See Note 14, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments andContingencies.

##### **Acquisitions**

See Note 5, “Acquisitions,”for a discussion of the acquisition of the Süd-Chemiebusinesses on December 30, 2005.

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**RecentAccounting Pronouncements**

See Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” for a discussionof recent accounting pronouncements.

**Forward-Looking Statements**

This documentcontains forward-looking statements. Forward-looking statements are notstatements of historical fact and may involve a number of risks anduncertainties. Forward-looking statements give our current expectations orforecasts of future events and estimates of amounts not yet determinable. Wehave used the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”“believe,” “predict,” “could,” “may” and other words and terms of similarmeaning, including references to assumptions, in this report to identifyforward-looking statements. These forward-looking statements are made based onexpectations and beliefs concerning future events affecting us and are subjectto uncertainties and factors relating to our operations and business environment,all of which are difficult to predict and many of which are beyond our control,that could cause our actual results to differ materially from those expressedin or implied by these forward-looking statements. In particular, these factorsinclude, among other things:

·                  our businessstrategy;

·                  competitivepricing or product development activities affecting demand for our products;

·                  fluctuations ininterest rates, exchange rates and currency values;

·                  availability andpricing of raw materials;

·                  fluctuations inenergy prices;

·                  changes in theend-use markets in which our products are sold;

·                  changes in thegeneral economic conditions in North America and Europe and in other locationsin which we currently do business;

·                  technologicalchanges affecting production of our materials;

·                  our high levelof indebtedness;

·                  governmental andenvironmental regulations and changes in those regulations;

·                  hazardsassociated with chemicals manufacturing;

·                  risks associatedwith negotiating, consummating and integrating acquisitions;

·                  risks associatedwith competition and the introduction of new competing products, especially inthe Asia-Pacific region; and

·                  risks associatedwith international sales and operations.

You should keep inmind that any forward-looking statements made by us in this document orelsewhere speak only as of the date on which we make them. New risks anduncertainties come up from time to time, and it is impossible for us to predictthese events or how they may affect us. We disclaim any obligation to update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.

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

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes.

A discussion and analysisof the Company’s market risk is included in the Company’s Form 10-K.There have been no significant changes to these market risks as of March 31,2006.

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**Item4. Controls and Procedures**

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of March 31, 2006.

Our disclosure controlsand procedures are designed to ensure that (a) information required to bedisclosed in our reports under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (b) such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, to allow timely decisions regarding required disclosures. Any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives.

As a result of thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of March 31,2006.

Subsequent to the issuanceof the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005 and as part of the preparation of this Quarterly Reporton Form 10-Q, the Company determined that its condensed consolidatedstatement of cash flows included in its Quarterly Reports on Form 10-Q forthe quarterly periods ended March 31, 2005, June 30, 2005 andSeptember 30, 2005 should be restated. The restatement, which has beenmade in this Quarterly Report on Form 10-Q, was due to a classificationerror in the statement of cash flows regarding the treatment of acquisitioncosts of property, plant and equipment included in accounts payable and accruedexpenses and other liabilities. In accordance with SFAS No. 95, *Statement of Cash Flows,* these costs should be reported withincash flows from investing activities when paid. The Company was reportingcapital expenditures in its condensed consolidated statements of cash flows onan accrual basis rather than on a cash basis, and as a result, was reportingcapital expenditures in the period in which the Company acquired legal title tothe related property, plant and equipment rather than when the Company actuallypaid for such property, plant and equipment. Further, the unpaid portion of thetransaction should be disclosed as a non-cash investing activities in thesupplemental disclosure of cash flow information. We also revised the reconciliationof net cash provided by (used in) operating activities to Adjusted EBITDA andthe disclosures in the “Liquidity and Capital Resources” section ofItem 2, “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” related to cash flows from operating and investingactivities for these periods.

This restatement was aresult of a material weakness in internal control over financial reporting asthe control over the proper classification of acquisition costs of property,plant and equipment included in accounts payable and accrued expenses and otherliabilities did not operate effectively during 2005. Subsequent to the filingof the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005, we enacted additional procedures in the preparation andreview of the consolidated statement of cash flows to properly capture thisinformation. We believe that as of March 31, 2006 we have remediated thisweakness.

Other than as describedabove, there have been no significant changes in the Company’s internal controlover financial reporting during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

The Company’s global taxdepartment has been established and staffed at our corporate headquarters andthe tax software system that we implemented has significantly strengthened theincome tax accounting function. However, as these actions were implemented latein 2005, some of the planned improvements in internal control in this area havenot been fully implemented. During 2006, we have begun to fully implement andtrain our accounting personnel worldwide in our new income tax accountingsoftware system. Additionally, we have begun to continue to improve the design,documentation and implementation of our controls to ensure that our employeesenhance their understanding and knowledge of the significant applicable taxmatters which affect the Company in an effort to further strengthen thefinancial reporting process related to income taxes.

We are currentlyperforming the system and process evaluation of our internal controls overfinancial reporting in order to allow management to report on, and ourindependent auditors to attest to, our internal controls over financialreporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002,which we refer to as Section 404. The requirements of Section 404will initially apply to us in connection with our annual report on Form 10-Kfor the year ended December 31, 2007. In connection with our preliminaryevaluation, we have identified other areas of internal controls that may needimprovement, such as internal controls related to the segregation of duties atcertain smaller locations, system access and user security profiles, operatingpolicies and procedures and in each case particularly with respect to newlyacquired businesses. We have begun the testing necessary to permit themanagement certification and auditor attestation required to comply with Section 404in 2006. As we complete the evaluation and testing required by Section 404,we may identify conditions that may be categorized as significant deficienciesor material weaknesses in the future.

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**PART II— OTHER INFORMATION**

**Item1. Legal Proceedings.**

We are involved invarious legal proceedings, including commercial, product liability,intellectual property and environmental matters of a nature considered normalto our business. However, we do not believe that there is any individual legalproceeding that is likely to have a material adverse effect on our business orfinancial condition. We cannot predict the outcome of any litigation or thepotential for future litigation.

**Item1A. Risk Factors.**

A discussion of theCompany’s risk factors is included in the Company’s 2005 Form 10-K. Therehave been no significant changes to these risk factors as of March 31,2006.

**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.**

During the three months ended March 31, 2006, no matters were submittedto a vote of security holders.

**Item5. Other Information.**

As discussed in Note 16, “Restatement,”the condensed consolidated statement of cash flows for the three months ended March 31,2005 was restated as a result of a classification error in the treatment ofacquisition costs of property, plant and equipment. As a result, we willalso restate the condensed consolidated statements of cash flows for the sixmonth period ended June 30, 2005 and the nine month period ended September 30,2005. The restatements for these periods will be reported when the Form 10-Q’sfor the six months ended June 30, 2006 and for the nine months ended September 30,2006 are filed. The effects of this matter on the consolidated financialstatements as of and for the year ended December 31, 2005 are notmaterial.

The classification errorswill be reported as follows (in millions) in the condensed consolidatedstatements of cash flows:

For the six months ended June 30, 2005:
| **Description**                                                | ** ** | **As Originally  Reported** | ** ** | **As  Restated** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                     |       |                             |       |             |       |
| Accounts payable                                               |       | $                                | 29.4       |             | $          | 43.2 |   |
| Accrued expenses  and other liabilities                        |       | (58.0                            | )          | (56.2            | )          |
| Net cash  provided by operating activities                     |       | 63.1                             |       | 78.7             |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                      |       |                             |       |             |       |
| Capital  expenditures, excluding capital leases                |       | (76.8                            | )          | (92.4            | )          |
| Net cash used in  investing activities                         |       | (76.6                            | )          | (92.2            | )          |
| **NON-CASH  INVESTING ACTIVITIES**                             |       |                             |       |             |       |
| Net decrease in  liabilities for property, plant and equipment |       | —                           |       | (15.6            | )          |
|                                                                |            |                                  |            |                  |            |  |  |

 

Forthe nine months ended September 30, 2005:
| **Description**                                                | ** ** | **As Originally  Reported** | ** ** | **As  Restated** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                     |       |                             |       |             |       |
| Accounts payable                                               |       | $                                | 20.6       |             | $          | 35.2 |   |
| Accrued expenses  and other liabilities                        |       | (22.9                            | )          | (21.2            | )          |
| Net cash  provided by operating activities                     |       | 181.0                            |       | 197.3            |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                      | ** ** |                             |       |             |       |
| Capital  expenditures, excluding capital leases                |       | (123.0                           | )          | (139.3           | )          |
| Net cash used in  investing activities                         |       | (138.9                           | )          | (155.2           | )          |
| **NON-CASH  INVESTING ACTIVITIES**                             |       |                             |       |             |       |
| Net decrease in  liabilities for property, plant and equipment |       | —                           |       | (16.3            | )          |
|                                                                |            |                                  |            |                  |            |  |  |

 

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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 SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|        |   | ROCKWOOD SPECIALTIES GROUP, INC. |
|--------|--------|---------------------------------------|
|   |   |                                  |   |   |
|   |   | By:                                   |   | /s/ SEIFI GHASEMI |
|   |   |                                  |   | Seifi Ghasemi  Chairman of the Board and Chief Executive Officer  Date: May 15, 2006 |
|   |   |                                  |   |   |
|   |   | ROCKWOOD SPECIALTIES GROUP, INC. |
|   |   |                                  |   |   |
|   |   | By:                                   |   | /s/ ROBERT J. ZATTA |
|   |   |                                  |   | Robert J. Zatta  Senior Vice President and Chief Financial Officer  Date: May 15, 2006 |
|        |        |                                       |  |  |  |

 

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