**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 
| **ý**                                                  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                                  | ** **                                                                                    |
| **For  the quarterly period ended September 30, 2004** |
| ** **                                                  | ** **                                                                                    |
| **or**                                                      |
| ** **                                                  | ** **                                                                                    |
| **o**                                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number   33-109686**

 

**RockwoodSpecialties Group, Inc.**

(Exact name of Registrantas specified in its charter)

 

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

 

**100Overlook Center, Princeton, New Jersey 08540**

(Address of principalexecutive offices) (Zip Code)

 

**(609)-514-0300**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.     ý  Yes     o  No

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).     o  Yes   ý  No

 

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

 

As of November 12, 2004, there were outstanding 382,000 shares ofcommon stock, par value $0.01 per share, of the Registrant.

 

 

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**TABLE OFCONTENTS**

**FORM10-Q**

 
|   | PART I- FINANCIAL  INFORMATION                                                                                    |   |
|--------|-------------------------------------------------------------------------------------------------------------------|--------|
| Item 1 | Financial Statements (Unaudited)                                                                                  |   |
|   | Condensed Consolidated  Statements of Operations for the three and nine months ended September 30,  2004 and 2003 |   |
|   | Condensed Consolidated Balance Sheets as  of September 30, 2004 and December 31, 2003                             |   |
|   | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2004 and 2003           |   |
|   |                                                                                                              |   |
|   | 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 2 | Unregistered Sales of Equity  Securities and Use of Proceeds                                                      |   |
| Item 3 | Defaults Upon Senior Securities                                                                                   |   |
| Item 4 | Submission of Matters to a Vote of  Security Holders                                                              |   |
| Item 5 | Other Information                                                                                                 |   |
| Item 6 | Exhibits                                                                                                          |   |
|   |                                                                                                              |   |
|   | Signatures                                                                                                        |   |

 

2

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**PART I – FINANCIAL INFORMATION**

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                    | ** ** | **Three Months ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| NET SALES                                     |       | $                                    | 533.6      |                                | $          | 199.8 |   | $ | 1,027.9 |   | $ | 592.7 |   |
| COST OF PRODUCTS  SOLD                        |       | 403.0                                |       | 144.9                               |       | 756.3 |   | 431.7 |   |
|                                          |       |                                 |       |                                |       |   |   |   |   |
| GROSS PROFIT                                  |       | 130.6                                |       | 54.9                                |       | 271.6 |   | 161.0 |   |
|                                          |       |                                 |       |                                |       |   |   |   |   |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | 106.1                                |       | 31.6                                |       | 177.2 |   | 89.0 |   |
| RESTRUCTURING  CHARGE, net                    |       | 0.1                                  |       | 0.2                                 |       | 0.1 |   | 1.3 |   |
|                                          |       |                                 |       |                                |       |   |   |   |   |
| OPERATING INCOME                              |       | 24.4                                 |       | 23.1                                |       | 94.3 |   | 70.7 |   |
|                                          |       |                                 |       |                                |       |   |   |   |   |
| OTHER INCOME  (EXPENSES):                     |       |                                 |       |                                |       |   |   |   |   |
| Interest, net                                 |       | (45.1                                | )          | (19.7                               | )          | (74.2 | ) | (62.9 | ) |
| Refinancing  expenses                         |       | (1.8                                 | )          | (36.9                               | )          | (1.8 | ) | (36.9 | ) |
| Foreign exchange  (loss) gain, net            |       | (40.9                                | )          | 1.1                                 |       | (32.2 | ) | (19.1 | ) |
| Other, net                                    |       | —                               |       | —                              |       | (4.0 | ) | — |   |
| Net                                           |       | (87.8                                | )          | (55.5                               | )          | (112.2 | ) | (118.9 | ) |
|                                          |       |                                 |       |                                |       |   |   |   |   |
| LOSS BEFORE  TAXES                            |       | (63.4                                | )          | (32.4                               | )          | (17.9 | ) | (48.2 | ) |
| INCOME TAX  (BENEFIT) PROVISION               |       | (13.4                                | )          | (9.4                                | )          | 6.3 |   | (14.2 | ) |
|                                          |       |                                 |       |                                |       |   |   |   |   |
| NET LOSS                                      |       | $                                    | (50.0      | )                                   | $          | (23.0 | ) | $ | (24.2 | ) | $ | (34.0 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **September 30,  2004** | ** ** | **December 31,   2003** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                                                                                |       |                    |       |                    |       |
| **ASSETS**                                                                                          |       |                    |       |                    |       |
| CURRENT ASSETS:                                                                                     |       |                    |       |                    |       |
| Cash and cash  equivalents                                                                          |       | $                       | 181.9      |                    | $          | 42.7 |   |
| Accounts  receivable, net                                                                           |       | 431.1                   |       | 138.3                   |       |
| Inventories                                                                                         |       | 410.7                   |       | 87.8                    |       |
| Deferred income  taxes                                                                              |       | 19.9                    |       | 2.8                     |       |
| Prepaid expenses  and other current assets                                                          |       | 48.0                    |       | 12.5                    |       |
| Total current  assets                                                                               |       | 1,091.6                 |       | 284.1                   |       |
|                                                                                                |       |                    |       |                    |       |
| PROPERTY, PLANT  AND EQUIPMENT, net                                                                 |       | 1,413.7                 |       | 418.6                   |       |
| GOODWILL                                                                                            |       | 1,629.1                 |       | 683.9                   |       |
| OTHER INTANGIBLE  ASSETS, net                                                                       |       | 572.7                   |       | 25.7                    |       |
| DEFERRED DEBT  ISSUANCE COSTS                                                                       |       | 78.8                    |       | 14.0                    |       |
| OTHER ASSETS                                                                                        |       | 73.0                    |       | 6.7                     |       |
| TOTAL ASSETS                                                                                        |       | $                       | 4,858.9    |                    | $          | 1,433.0 |   |
|                                                                                                |       |                    |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                      |       |                    |       |                    |       |
| CURRENT  LIABILITIES:                                                                               |       |                    |       |                    |       |
| Accounts payable                                                                                    |       | $                       | 210.9      |                    | $          | 98.6 |   |
| Income taxes  payable                                                                               |       | 23.7                    |       | 12.0                    |       |
| Accrued expenses  and other current liabilities                                                     |       | 383.9                   |       | 51.2                    |       |
| Long-term debt,  current portion                                                                    |       | 59.5                    |       | 9.1                     |       |
| Total current  liabilities                                                                          |       | 678.0                   |       | 170.9                   |       |
| LONG-TERM DEBT                                                                                      |       | 2,887.2                 |       | 823.9                   |       |
| PENSION AND  RELATED LIABILITIES                                                                    |       | 322.6                   |       | 26.1                    |       |
| DEFERRED INCOME  TAXES                                                                              |       | 33.9                    |       | 7.3                     |       |
| OTHER  LIABILITIES                                                                                  |       | 122.4                   |       | 51.2                    |       |
| Total  liabilities                                                                                  |       | 4,044.1                 |       | 1,079.4                 |       |
|                                                                                                |       |                    |       |                    |       |
| STOCKHOLDERS’  EQUITY:                                                                         |       |                    |       |                    |       |
| Common stock  ($.01 par value, 1,000,000 shares authorized; 382,000 shares issued and  outstanding) |       | —                  |       | —                  |       |
| Paid-in capital                                                                                     |       | 871.8                   |       | 468.3                   |       |
| Accumulated  other comprehensive income                                                             |       | 168.3                   |       | 86.4                    |       |
| Accumulated  deficit                                                                                |       | (225.3                  | )          | (201.1                  | )          |
| Total  stockholders’ equity                                                                    |       | 814.8                   |       | 353.6                   |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                    |       | $                       | 4,858.9    |                    | $          | 1,433.0 |   |
|                                                                                                     |            |                         |            |                         |            |  |  |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                               | ** ** | **For the Nine Months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
|                                                                                                     |       |                                         |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |                                         |       |   |   |
| Net loss                                                                                                 |       | $                                            | (24.2      | ) | $ | (34.0 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:                         |       |                                         |       |   |   |
| Depreciation and  amortization                                                                           |       | 60.4                                         |       | 37.6 |   |
| Deferred  financing costs amortization                                                                   |       | 3.2                                          |       | 3.9 |   |
| Write-off of  deferred debt issuance costs                                                               |       | 1.8                                          |       | 36.9 |   |
| Foreign exchange  loss                                                                                   |       | 20.4                                         |       | 19.1 |   |
| Fair value  adjustment of derivatives                                                                    |       | (6.8                                         | )          | 2.7 |   |
| Bad debt  provision                                                                                      |       | 1.2                                          |       | 0.2 |   |
| Deferred income  taxes                                                                                   |       | (4.7                                         | )          | (19.7 | ) |
| Changes in assets  and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |                                         |       |   |   |
| Accounts  receivable                                                                                     |       | (12.7                                        | )          | (2.6 | ) |
| Inventories,  including fair value write-up charge                                                       |       | 32.1                                         |       | (2.0 | ) |
| Prepaid expenses  and other assets                                                                       |       | 5.3                                          |       | (1.1 | ) |
| Accounts payable                                                                                         |       | (13.7                                        | )          | 3.0 |   |
| Income taxes  payable                                                                                    |       | (1.5                                         | )          | (3.3 | ) |
| Accrued expenses  and other liabilities                                                                  |       | 26.1                                         |       | (2.0 | ) |
| Other operating  activities, net                                                                         |       | (0.5                                         | )          | 4.4 |   |
| Net cash  provided by operating activities                                                               |       | 86.4                                         |       | 43.1 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |                                         |       |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | (2,058.5                                     | )          | (14.1 | ) |
| Capital  expenditures                                                                                    |       | (38.8                                        | )          | (26.8 | ) |
| Proceeds on sale  of property, plant and equipment                                                       |       | 0.8                                          |       | 0.2 |   |
| Insurance  proceeds from fire damage, net                                                                |       | —                                       |       | 3.3 |   |
| Net cash used in  investing activities                                                                   |       | (2,096.5                                     | )          | (37.4 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |                                         |       |   |   |
| Equity  contributions                                                                                    |       | 404.0                                        |       | 95.0 |   |
| Payments on  long-term debt                                                                              |       | (563.3                                       | )          | (897.6 | ) |
| Proceeds from  long-term debt, net of issuance costs paid                                                |       | 2,307.1                                      |       | 801.0 |   |
| Net cash  provided by (used in) financing activities                                                     |       | 2,147.8                                      |       | (1.6 | ) |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                                 |       | 1.5                                          |       | 4.5 |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                                               |       | 139.2                                        |       | 8.6 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 42.7                                         |       | 42.9 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                |       | $                                            | 181.9      |   | $ | 51.5 |   |
|                                                                                                     |       |                                         |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                                      |       |                                         |       |   |   |
| Interest paid,  net                                                                                      |       | $                                            | 69.3       |   | $ | 56.5 |   |
| Income taxes  paid, net of refunds                                                                       |       | $                                            | 12.4       |   | $ | 9.0 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**Notes To C****ondensed Consolidated Financial Statements (Unaudited)**

 

**1.     DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES:**

 

***BusinessDescription, Background***—Rockwood SpecialtiesGroup, Inc. and Subsidiaries (“Rockwood” or the “Company”) is a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials used for industrial and commercial purposes.

 

The Company is an indirectwholly-owned subsidiary of Rockwood Holdings, Inc. (“Holdings”), an entitycontrolled by Kohlberg Kravis Roberts & Co. L.P. (“KKR”), and wasformed in connection with an acquisition of certain assets, stock andbusinesses from Laporte plc (“Laporte”) on November 20, 2000. The cost ofthe acquisition (the “KKR Acquisition”), along with related fees and expenses,was financed using aggregate proceeds of $1,227.0 million, consisting of a$382.0 million equity contribution made to the Company by its parent companieswith $100.0 million in borrowings by Rockwood Specialties Consolidated, Inc.under a payment-in-kind (“PIK”) subordinated loan facility (“PIK Notes”) and$282.0 million equity investment in Holdings by affiliates of KKR and $845.0million of borrowings under senior secured credit facilities and a seniorsubordinated loan facility. These borrowings were refinanced in July 2003 (the “July2003 Refinancing”).

 

On July 31, 2004, the Companycompleted the acquisition of four businesses of Dynamit Nobel from mgtechnologies ag. The businesses acquired are focused on highly specializedmarkets and consist of: white pigments; surface treatment and lithiumchemicals; ceramics; and pharmaceutical intermediates.  The cost of theacquisition (the “Dynamit Nobel Acquisition”), along with related fees andexpenses, as well as the repayment of the borrowings under the Company’s thenexisting senior secured facilities (the “2003 Senior Secured Credit Facilities”)and $20.0 million of the pay-in-kind notes issued by Rockwood SpecialtiesConsolidated was financed using new equity contributions from affiliates of KKRand affiliates of DLJ Merchant Banking Partners III, L.P. (“DLJMB”), andborrowings under the new senior secured credit facilities (the “Senior SecuredCredit Facilities”) and the new senior subordinated loan facility (the “SeniorSubordinated Loan Facility”) (collectively, the “Acquisition Financing”) fromcertain lending institutions including CSFB. Certain components of theseborrowings were refinanced subsequently (the “Refinancing”). See Note 2 –Acquisitions,Note 8 - Long Term Debt and Note 14 - Subsequent Events for a more completedescription of the Dynamit Nobel Acquisition, the Acquisition Financing and theRefinancing.

 

Since the KKR Acquisition, KKR hasprovided consulting and management advisory services to Rockwood for an annualfee of $0.6 million. Effective with the Dynamit Nobel Acquisition, KKR andDLJMB have agreed to provide the Company with consulting and managementadvisory services for an annual fee of $2.0 million, which amount will beincreased by 5% each year.

 

***Basis ofPresentation*** — The accompanying condensed consolidatedbalance sheets and the related condensed consolidated statements of operationsand cash flows of Rockwood are presented on a consolidated basis. Allsignificant intercompany accounts and transactions have been eliminated.

 

The interim financial statements included herein are unaudited. Thecondensed consolidated financial statements are presented based upon accountingprinciples generally accepted in the United States of America (“US GAAP”),except that certain information and footnote disclosures, normally included infinancial statements prepared in accordance with US GAAP, have been condensedor omitted. The accompanying condensed consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and the notesthereto contained in the Company’s Annual Report on Form 10-K for the yearended December 31, 2003.  In the opinionof management, this information contains all adjustments, consisting of normalrecurring accruals, along with the adjustments related to the Dynamit NobelAcquisition, necessary for a fair presentation of the results for the periodspresented.

 

The results of operations and cash flows sinceJuly 31, 2004 of the businesses acquired in the Dynamit Nobel Acquisition areincluded in the condensed consolidated financial statements for the three andnine-month periods ended September 30, 2004 along with the financial positionof such operations as of September 30, 2004. See Note 2 — Acquisitions.  The accompanying condensedconsolidated financial statements should be read in conjunction with: 1) theaudited combined financial statements of Dynamit Nobel as of and for the yearsended September 30, 2001 and 2002, the three months ended December 31, 2002 andfor the year ended December 31, 2003 and the notes thereto; and 2) theunaudited condensed combined financial statements of Dynamit Nobel as of June30, 2004 and for the six months ended June 30, 2003 and 2004 and the notesthereto, as contained in the Company’s Amendment No. 2 to Form 8-K/A filed onOctober 20, 2004.

 

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

 

6

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***Nature ofOperations/ Segment Reporting***—The Company is a leadingglobal developer, manufacturer and marketer of high value- added specialtychemicals and advanced materials. The Company operates in various businesslines within its seven reportable segments consisting of: (1) PerformanceAdditives, which includes iron oxide pigments, timber treatment chemicals,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) Pigments, which consistsof titanium dioxide pigments, and zinc- and barium-based compounds, (6)Advanced Ceramics, which includes ceramic-on-ceramic ball head and linearcomponents used in hip-joint prostheses systems, ceramics cutting tools and arange of other ceramic components, and (7) Custom Synthesis, which includeshazardous chemistry and chiral technologies for the synthesis of pharmaceuticalcompounds.

 

The basis for determining an enterprise’s operating segments is themanner in which financial information is used internally by the enterprise’schief operating decision maker and other key decision makers. See Note 3 —Segment Information for further segment reporting information.

 

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

 

These estimates include assessing the collectibility of accountsreceivable, the use and recoverability of inventory, the valuation of deferredtax assets, impairment of goodwill as well as property, plant and equipment andother intangible assets, and the useful lives of tangible and intangibleassets, among others. Actual results could differ from those estimates.

 

Such estimates also include the fair value of assets acquired andliabilities assumed allocated to the purchase price of business combinationsconsummated.  See Note 2 - Acquisitions.

 

***Major Customers andConcentration of Credit***—The Company has a number of majorend-user, retail and original equipment manufacture customers in Europe, NorthAmerica and Asia. No single customer accounted for more than 10% of net salesduring any of the periods presented. The Company does not believe a materialpart of its business is dependent upon any single customer, the loss of whichwould have a material long-term impact on the business of the Company. However,the loss of one or more of the Company’s largest customers would most likelyhave a negative short-term impact on the Company’s results of operations.Financial instruments which potentially subject the Company to concentrationsof credit risk consist primarily of accounts receivable and derivativecontracts. See Note 8 — Long-Term Debt.

 

***Accounts Receivable***—Theallowance for doubtful accounts is estimated at each reporting date based onfactors such as receivable age, customer liquidity status and previouswrite-off history. The Company performs ongoing credit evaluations of customersand generally does not require collateral. Allowance is maintained foraggregate expected credit losses. Write-offs are charged to the allowance whentaken, net of recoveries.

 

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

 

***Revenue Recognition***—TheCompany recognizes revenue when the earnings process is complete. Thisgenerally occurs when products are shipped to the customer in accordance withthe terms of the contract of sale, title and risk of loss have beentransferred, collectibility is reasonably assured, and pricing is fixed ordeterminable. Accruals are made for sales returns and other allowances based onthe Company’s experience. Revenue under service agreements is realized when theservice is performed.

 

***Foreign CurrencyTranslation***—The functional currency of each of theCompany’s foreign subsidiaries is primarily the respective local currency.Balance sheet accounts of the foreign operations are translated into U.S.dollars at period-end exchange rates and income and expense accounts aretranslated at average exchange rates during the period. Translation gains andlosses related to net assets located outside the U.S. are shown as a componentof accumulated other comprehensive income. Gains and losses resulting fromforeign currency transactions (transactions denominated in a currency otherthan the entity’s functional currency), other than certain intercompanytransactions that are of a long-term investment nature, are included in theconsolidated statements of operations.

 

7

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***Research andDevelopment***—Research and development costs are charged toexpense, as incurred. Such costs were $7.5 million and $12.3 million for thethree and nine months ended September 30, 2004, respectively and $2.2 millionand $6.6 million for the three and nine months ended September 30, 2003.

 

***Accounting forShipping and Handling Costs***—The Company records shippingand handling costs in cost of sales and records shipping and handling costsbilled to customers in net sales in accordance with the Emerging Issues TaskForce’s (“EITF”) guidance (EITF 00-10:*Classificationof Shipping and Handling Costs*).

 

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

 

***Inventories***—Inventoriesare stated at the lower of cost or market. Cost is determined primarily onaverage cost or the first-in, first-out method. Inventory quantities on handare regularly reviewed, and where necessary, provisions for excess and obsoleteinventory are recorded based primarily on either the Company’s estimatedforecast of product demand and production requirements or historical usage. SeeNote 4- Inventories.

 

***Property, Plant andEquipment***—Property, plant and equipment are stated atcost less accumulated depreciation. Depreciation is determined using thestraight-line method over the various asset classes. Estimated lives range from20-30 years for buildings and improvements (including land improvements),7-12 years for machinery and equipment, 3-5 years for furniture andfixtures and 14-50 years for mining rights. See Note 5- Property, Plant andEquipment.

 

The estimated useful lives of leasehold improvements are the lesser ofthe estimated life of the improvement or the term of the lease.

 

Major renewals and improvements arecapitalized and minor replacements, maintenance and repairs are charged tocurrent operations as incurred. Upon retirement or disposal of assets, the costand related accumulated depreciation are removed from the balance sheet and anygain or loss is reflected in the statement of operations.

 

***Deferred DebtIssuance Costs***—Costs related to the July 2003 Refinancingand the Acquisition Financing have been capitalized and are being amortizedusing the effective interest rate method over the term of the debt outstanding.This amortization is reflected in interest expense. See Note 8 — Long-TermDebt.

 

***Goodwill***—Goodwillis tested for impairment, at least annually. See Note 6 - Goodwill fordetail of goodwill accounting by segment.

 

***Other IntangibleAssets***—Other intangible assets consists of patents, tradenames and trademarks, customer relationships and other intangible assets.Patents are recorded at their estimated fair values at the time of acquisitionand are being amortized over their estimated remaining useful lives, rangingfrom 4 to 20 years. Trade names and trademarks are being amortized over 25years, and customer relationships are amortized from 7 to 15 years. See Note 7 —Other Intangible Assets.

 

***ImpairmentAccounting***—The recoverability of long-lived tangible andintangible assets is reviewed when events or changes in circumstances occurindicating the carrying value of the assets may not be recoverable. The measurementof possible impairment is based upon the ability to recover the carrying valueof the asset through the expected future undiscounted cash flows from the useof the asset and its eventual disposition. An impairment loss, equal to thedifference between the asset’s fair value and its carrying value, is recognizedwhen the estimated future undiscounted cash flows are less than its carryingamount.

 

***FinancialInstruments***—Management believes the carrying amount offinancial instruments, including accounts receivable, accounts payable anddebt, approximates fair value, except as described in Note 8- Long-TermDebt.

 

***Derivatives***—TheCompany accounts for derivatives based on Statement of Financial AccountingStandard (“SFAS”) 133, *Accounting forDerivative Instruments and Hedging Activities*, as amended andinterpreted. SFAS 133 requires that all derivatives be recognized aseither assets or liabilities at fair value. Changes in the fair value ofderivatives not designated as hedging instruments are recognized currently inearnings. The Company uses derivative instruments to manage its exposure tomarket risks associated with fluctuations in interest rates and foreigncurrency exchange rates. The Company does not enter into derivative contractsfor trading purposes nor does it use leveraged or complex instruments.

 

***Pension,Postemployment and Postretirement Costs***—Defined benefitcosts and liabilities have been determined in accordance with SFAS 87, *Employers’ Accounting for Pensions*.Postretirement benefit costs and liabilities have been determined in accordancewith 

 

8

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SFAS 106, *Employers’ Accountingfor Postretirement Benefits Other Than Pensions*. Postemploymentbenefit costs and liabilities have been determined in accordance withSFAS 112, *Employers’ Accounting forPostemployment Benefits*.

 

***Income Taxes***—Theasset and liability approach is used to recognize deferred tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the carrying amounts and the tax basis of assets and liabilities. SeeNote 9- Taxes.

 

The Company records a valuation allowance to reduce deferred tax assetswhen management believes it is more likely than not that the related taxbenefits will not be realized.

 

***ComprehensiveIncome***—Comprehensive income includes unrealized gains andlosses from foreign currency translation and from certain intercompanytransactions that are of a long-term investment nature as well as minimumpension liability adjustments that are recorded directly into a separatesection of stockholders’ equity in the balance sheets. These items are referredto as other comprehensive income items. Comprehensive income includes netincome and the other comprehensive income components which primarily representadjustments for foreign currency translation and intercompany foreign currencytransactions. Foreign currency translation amounts are not adjusted for incometaxes since they relate to indefinite length investments in non-U.S. subsidiaries.

 
| ** **                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                           |       | $                                     | (50.0      | )                                    | $          | (23.0 | ) | $ | (24.2 | ) | $ | (34.0 | ) |
| Other  comprehensive income        |       | 91.2                                  |       | 5.7                                  |       | 81.9 |   | 39.7 |   |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Total comprehensive  income (loss) |       | $                                     | 41.2       |                                 | $          | (17.3 | ) | $ | 57.7 |   | $ | 5.7 |   |

 

***Accounting forEnvironmental Liabilities***—In the ordinary course ofbusiness, Rockwood is subject to extensive and changing federal, state, localand foreign environmental laws and regulations, and has made provisions for theestimated financial impact of environmental cleanup related costs. Rockwood’spolicy has been to accrue costs of a non-capital nature related toenvironmental clean-up when those costs are believed to be probable and can bereasonably estimated. Expenditures that extend the life of the related propertyor mitigate or prevent future environmental contamination are capitalized andexpenditures related to existing conditions resulting from past or presentoperations and from which no current or future benefit is discernible areimmediately expensed. The quantification of environmental exposures requires anassessment of many factors, including changing laws and regulations,advancements in environmental technologies, the quality of informationavailable related to specific sites, the assessment stage of each siteinvestigation and the length of time involved in remediation or settlement. Insome matters, Rockwood could share costs with other parties. Rockwood does notinclude anticipated recoveries from insurance carriers or other third partiesin its accruals for environmental liabilities.

 

***Reclassifications***—Certainprior year amounts have been reclassified to conform to current yearclassification.

 

***Recent AccountingPronouncements***—On July 31, 2004 the Company implementedthe SFAS and the FASB interpretation (“FIN”) listed below. Implementation ofthese accounting standards has had no significant impact on the Company’sfinancial position, results of operations, or cash flows. The Company implementedthese as a result of the completion of the Dynamit Nobel Acquisition on thatsame date; the Company did not previously implement these because they were notrelevant prior to the Dynamit Nobel Acquisition.

 
| SFAS 150 | Accounting for Certain Financial Instruments with  Characteristics of both Liabilities and Equity |
|----------|---------------------------------------------------------------------------------------------------|
| FIN 46R  | Consolidation of Variable Interest Entities –an  Interpretation of ARB No. 51 (revised)      |

 

SFAS 150 establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity. These instruments are reported as a liability andaccounted for at their fair value. Stock options and convertible bonds issuedas remuneration are exempted from this standard. SFAS 150 is applicable tofinancial instruments issued or modified after May 31, 2003. The valuationrules pertaining to certain financial instruments are not applicable untilfurther notice owing to FASB Staff Position No. 150-3 *Effective Date Disclosures, and Transition forMandatorily Redeemable Financial Instruments of Certain Nonpublic Entities andCertain Mandatorily Redeemable Noncontrolling Interest under FASB Statement No.150, Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity*.

 

FIN 46R provides guidance on the identification ofentities for which control is achieved though means other than through votingrights (“variable-interest entity”) and how to determine when an entity is theprimary beneficiary and required to consolidate a variable interest entity.

 

9

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***Stock-BasedCompensation***—At September 30, 2004, the Company had inplace the Amended and Restated 2004 Stock Purchase and Option Plan of RockwoodHoldings, Inc. (the “Plan”). The Company accounts for the Plan under therecognition and measurement principles of APB Opinion 25,*Accounting for Stock Issued to Employees*,and related interpretations. No stock-based employee compensation is reflectedin net loss related to this Plan, as all options granted had an exercise priceat least equal to the market value of the underlying common stock on the dateof the grant. The following table illustrates the effect on net loss if theCompany had applied the fair value recognition provisions of SFAS 123,*Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 
| ** **                                                                                       | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                       | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss, as  reported                                                                           |       | $                                     | (50.0      | )                                    | $          | (23.0 | ) | $ | (24.2 | ) | $ | (34.0 | ) |
| Stock-based  employee compensation expense determined under fair value based method, net  of tax |       | (0.1                                  | )          | (0.1                                 | )          | (0.3 | ) | (0.4 | ) |
|                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Pro forma net  loss                                                                              |       | $                                     | (50.1      | )                                    | $          | (23.1 | ) | $ | (24.5 | ) | $ | (34.4 | ) |

** **

**2.     ACQUISITIONS:**

 

**Dynamit Nobel**

 

On July 31, 2004, the Company consummated theDynamit Nobel Acquisition. The Company paid approximately €1,635.0 million(or $1,968.5 million) (excluding repayment of certain assumed debt) incash to mg technologies ag for the businesses acquired, subject to possiblepost-closing adjustments. The four divisions of Dynamit Nobel acquired byRockwood are (i) Chemetall, or Specialty Chemicals; (ii) SachtlebenChemie, or Pigments; (iii) CeramTec, or Advanced Ceramics and(iv) DNES Custom Synthesis (consisting of Dynamit Nobel Special Chemistry,Finorga, S.A. and Rohner A.G.), or Custom Synthesis. Through this acquisition,the Company believes it has created a portfolio of distinct specialty chemicalsand advanced performance materials businesses, with diversified geographic andend-use markets, strong market positions and margins, and limited exposure toindividual raw material fluctuations.

 

Approximate sources and uses of the fundsrelating to the Dynamit Nobel Acquisition and the related Acquisition Financingare shown on the table below. Information presented in the following table hasbeen calculated using the U.S. dollars per euro exchange rate at July 31,2004.

 
| **(millions)**                                                      | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| **Sources**                                                         |       |       |       |
| New senior  secured credit facilities (a) (€389.7 and $985.0)  |       | $          | 1,454.2    |   |
| New senior  subordinated loan facility (a) (€419.1 and $350.0) |       | 854.5      |       |
| Equity  contribution (b)                                            |       | 404.0      |       |
| **Total  sources**                                                  |       | $          | 2,712.7    |   |
|                                                                |       |       |       |
| **Uses**                                                            |       |       |       |
| Cash purchase  price (c)                                            |       | $          | 1,968.5    |   |
| Repayment of old  senior credit facilities                          |       | 442.2      |       |
| Repayment of  assumed debt (d)                                      |       | 129.0      |       |
| Cash settlement  of derivative transactions                         |       | 20.0       |       |
| Estimated fees  and expenses                                        |       | 139.0      |       |
| Cash on hand                                                        |       | 14.0       |       |
| **Total  uses**                                                     |       | $          | 2,712.7    |   |

 

----

(a)          See Note 8 – Long-Term Debt for more detailed information concerning theCompany’s debt facilities.

(b)         Represents an equity contribution to the Company from the proceeds ofequity contributions of $425.0 million to Holdings from affiliates of KKRand DLJMB, less a $20.0 million repayment of a portion of the additionalPIK notes issued in connection with interest payments on the $70.0 millioninitial principal amount of PIK notes issued in connection with the KKRAcquisition, and related fees of $1.0 million.

(c)          The cash purchase price (which does not include the assumed debtdescribed in note (d) below) is subject to possible post-closingadjustments, including adjustments related to Closing Net Financial Debt andClosing Working Capital (as each term is defined in the Sale and PurchaseAgreement dated April 19, 2004). This amount includes $16.0 million oftransaction fees that were unpaid as of September 30, 2004.

 

10

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(d)         Represents assumed debt which the Company repaid at or shortly after theclosing of the Dynamit Nobel Acquisition and expect to repay in the future. Inaddition, the Company assumed €154.6 million (or $186.1 million),which remains outstanding under existing arrangements. See Note 8 – Long-Term Debt.

 

The Dynamit Nobel Acquisition is accounted forusing the purchase method of accounting as required by SFAS No. 141, *Business Combinations*(“SFAS 141”).  Accordingly, the Company is in the process ofdetermining the estimated fair value of the assets acquired and liabilitiesassumed. The excess of the purchase price over the fair value of Dynamit Nobel’sidentifiable assets acquired and liabilities assumed has been recorded asgoodwill. The condensed consolidated statements of operations for the three andnine months ended September 30, 2004 reflect the results of Dynamit Nobel sinceJuly 31, 2004. See Note 6 — Goodwill and Note 7 — Other Intangible Assets.

 

As of the date of this filing, the Company hasnot finalized the purchase accounting for the Dynamit Nobel Acquisitionincluding the completion of the valuation studies estimating the fair values ofcertain assets acquired and liabilities assumed and identification of theadjustments, if any, necessary to conform Dynamit Nobel’s historical accountingpolicies to Rockwood’s. The Company has allocated the total estimated purchaseprice, calculated as described below, to the assets acquired and liabilitiesassumed of Dynamit Nobel based on preliminary estimates of their fair values.Independent valuation specialists are assisting the Company in determining thefair value of a significant portion of these assets, including property, plantand equipment and identifiable intangible assets.  Therefore, the allocation of the purchaseprice is preliminary and the final allocation may differ from that reflectedherein.

 

Estimated fair value of assets acquired andliabilities assumed has been allocated to the estimated purchase price as ofJuly 31, 2004 as follows:

 
| **(millions)**                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Estimated  purchase price (including fees and expenses)                                    |       |       |       | $          | 2,035.5    |   |
|                                                                                       |       |       |       |       |       |
| Net assets  acquired                                                                       |       | $          | 1,059.2    |       |       |   |
| *Adjustments  to net assets acquired:*                                                     |       |       |       |       |       |
| Existing  goodwill                                                                         |       | (401.1     | )          |       |       |
| Existing  intangibles                                                                      |       | (19.2      | )          |       |       |
| Deferred tax  asset                                                                        |       | (442.0     | )          |       |       |
| Deferred tax  liability—current                                                       |       | 0.8        |       |       |       |
| Deferred tax  liability—non-current                                                   |       | 89.6       |       |       |       |
| Liabilities to  related parties                                                            |       | 308.4      |       |       |       |
|                                                                                       |       |       |       |       |       |
| Adjusted net  assets acquired                                                              |       |       |       | 595.7      |       |
|                                                                                       |       |       |       |       |       |
| Estimated  purchase price in excess of net assets acquired                                 |       |       |       | 1,439.8    |       |
|                                                                                       |       |       |       |       |       |
| *Estimated  fair value in excess of book value of assets acquired and liabilities assumed* |       |       |       |       |       |
| Inventory                                                                                  |       | $          | 49.7       |       |       |   |
| Property, plant  and equipment                                                             |       | 22.9       |       |       |       |
| Intangible  assets identified                                                              |       | 539.7      |       |       |       |
| Pension  liabilities                                                                       |       | (28.5      | )          |       |       |
| Deferred tax  liability, net                                                               |       | (16.6      | )          |       |       |
| Restructuring  programs and other liabilities                                              |       | (39.9      | )          |       |       |
|                                                                                       |       |       |       |       |       |
| Total fair value  in excess of book value of identifiable net assets acquired              |       |       |       | 527.3      |       |
|                                                                                       |       |       |       |       |       |
| Estimated  goodwill                                                                        |       |       |       | $          | 912.5      |   |

 

•                  The estimated fair value of finishedgoods and work in process inventories, which were stepped up to selling priceless direct selling cost, was partially recognized in cost of goods sold duringthe third quarter of 2004 for the portion of acquired inventory sold during thethird quarter; the balance will be recognized during the fourth quarter of2004.

•                  The fair value of property, plant andequipment and identified intangibles other than goodwill will be amortized overtheir estimated useful lives. Estimated lives for property, plant and equipmentrange from 20-30 years for buildings and improvements (including landimprovements), 7-12 years for machinery and equipment, 3-5 years for furnitureand fixtures and 14-50 years for mining rights. Estimated useful lives for intangible assets identified are: 4-20 yearsfor patents, 25 years for trademarks and trade names, and 7-15 years forcustomer relationships.

•                  Preliminary identified intangible assetsinclude customer relationships, intellectual property, trademarks and tradenames.

•                  Pension liabilities represent the estimatedunrecognized pension obligation in accordance with SFAS No. 141.

•                  Restructuring programs and other liabilitiesincludes the estimated costs of restructuring programs for which a plan hasbeen formulated relating to certain Dynamit Nobel operations.

•      Managementbelieves that most of the estimated goodwill above is deductible for German taxpurposes over a period of 15 years.

•      Liabilitiesassumed were as follows:

 
| Fair value of assets acquired | ** ** | $       | 3,034.5 | ** ** |
|-------------------------------|------------|---------|---------|------------|
| Cash purchase  price          |       | 2,035.5 |    |
|                          |       | $       | 999.0   |       |

 

The following unaudited pro forma financial information has beenprepared as if the Dynamit Nobel Acquisition had occurred at the

 

11

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beginning of each period presented. The pro forma amounts includecertain adjustments to historical results of operations including depreciationand amortization expense (based upon the estimated fair values and useful livesof stepped-up values of inventory, property, plant and equipment and intangibleassets other than goodwill, as determined by preliminary appraisal), anincrease in interest expense resulting from the Acquisition Financing, plus theamortization of new deferred financing costs and reduction of amortization ofdeferred financing costs for long-term debt subsequently repaid.

 

Such pro forma information does not purport tobe indicative of the results of operations that would have been achieved hadthe transactions for which we are giving pro forma effect actually occurred onthe date referred to above or the results of operations that may be expected inthe future.

 
| ** **         | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **(millions)**     | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|               |       |                                 |       |                                |       |   |   |   |   |
| Net sales          |       | $                                    | 678.3      |                                | $          | 588.3 |   | $ | 2,058.2 |   | $ | 1,781.2 |   |
|               |       |                                 |       |                                |       |   |   |   |   |
| Net (loss)  income |       | $                                    | (30.8      | )                                   | $          | (39.2 | ) | $ | 8.3 |   | $ | (33.3 | ) |

 

**Johnson Matthey Pigments andDispersions Business**

 

On September 2, 2004 the Company completed theacquisition of the Pigments and Dispersions business of Johnson Matthey PLC forapproximately $50.0 million, subject to post-closing adjustments. Theacquisition expands the Company’s global iron oxide pigments’ businessspecifically within transparent iron oxide pigments and dispersions, colorconcentrates and complex inorganic color pigments for the surface and woodcoatings, plastics, building materials and printing inks markets. Theacquisition includes manufacturing facilities in Kidsgrove, U.K., Sudbury,U.K., and Braeside, Victoria, Australia. The Company utilized the remainingundrawn funds from the term loan portion of its senior credit facilities tofinance this transaction (see Note 8- Long-Term Debt). This acquisition isaccounted for using the purchase method of accounting. This acquisition is notsignificant on a pro forma basis and therefore, pro forma information is notprovided.

 

**3.     SEGMENT INFORMATION:**

 

Rockwood operates in seven reportable segments according to the natureand economic characteristics of its products and services as well as the mannerin which the information is used internally by the Company’s key decisionmakers. The seven segments are: (1) Performance Additives, which consistsof iron oxide pigments, timber treatment chemicals, clay-based additives andwater treatment chemicals business lines; (2) Specialty Compounds;(3) Electronics, which consists of electronic chemicals, wafer reclaim andphotomasks business lines; (4) Specialty Chemicals; (5) Pigments; (6) AdvancedCeramics; and (7) Custom Synthesis.

 

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

 
| **(millions)**                             | ** ** | **Performance  Additives** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Specialty  Chemicals** | ** ** | **Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Custom  Synthesis** | ** ** | **Corporate  and  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------|------------|--------------------------|------------|--------------|------------|------------------------|------------|-----------------------|------------|----------------------------------|------------|------------------|------------|
| **Three  months ended September 30, 2004** |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net sales                                  |       | $                          | 158.3      |                     | $          | 52.0            |       | $                        | 43.2       |         | $          | 116.6                  |       | $                     | 68.9       |                             | $          | 56.6             |       | $ | 38.0 |   | $ | — |   | $ | 533.6 |   |
| Operating income  (loss)                   |       | 27.2                       |       | 5.9                      |       | 2.4             |       | 0.7                      |       | 6.3          |       | (4.8                   | )          | (2.6                  | )          | (10.7                            | )          | 24.4             |       |
| Adjusted EBITDA                            |       | 35.5                       |       | 7.3                      |       | 7.6             |       | 21.1                     |       | 14.1         |       | 13.3                   |       | 5.2                   |       | (9.0                             | )          | 95.1             |       |
|                                       |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Three  months ended September 30, 2003** |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net sales                                  |       | $                          | 119.8      |                     | $          | 45.3            |       | $                        | 34.7       |         | $          | —                 |       | $                     | —     |                             | $          | —           |       | $ | — |   | $ | — |   | $ | 199.8 |   |
| Operating income  (loss)                   |       | 22.3                       |       | 4.7                      |       | 0.5             |       | —                   |       | —       |       | —                 |       | —                |       | (4.4                             | )          | 23.1             |       |
| Adjusted EBITDA                            |       | 28.9                       |       | 6.2                      |       | 6.0             |       | —                   |       | —       |       | —                 |       | —                |       | (3.4                             | )          | 37.7             |       |
|                                       |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Nine  months ended September 30, 2004**  |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net sales                                  |       | $                          | 470.5      |                     | $          | 152.5           |       | $                        | 124.8      |         | $          | 116.6                  |       | $                     | 68.9       |                             | $          | 56.6             |       | $ | 38.0 |   | $ | — |   | $ | 1,027.9 |   |
| Operating income  (loss)                   |       | 91.2                       |       | 18.2                     |       | 6.1             |       | 0.7                      |       | 6.3          |       | (4.8                   | )          | (2.6                  | )          | (20.8                            | )          | 94.3             |       |
| Adjusted EBITDA                            |       | 114.2                      |       | 22.3                     |       | 21.6            |       | 21.1                     |       | 14.1         |       | 13.3                   |       | 5.2                   |       | (17.5                            | )          | 194.3            |       |
|                                       |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Nine  months ended September 30, 2003**  |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net sales                                  |       | $                          | 352.0      |                     | $          | 135.4           |       | $                        | 105.3      |         | $          | —                 |       | $                     | —     |                             | $          | —           |       | $ | — |   | $ | — |   | $ | 592.7 |   |
| Operating income  (loss)                   |       | 62.0                       |       | 14.3                     |       | 7.6             |       | —                   |       | —       |       | —                 |       | —                |       | (13.2                            | )          | 70.7             |       |
| Adjusted EBITDA                            |       | 81.9                       |       | 18.7                     |       | 17.9            |       | —                   |       | —       |       | —                 |       | —                |       | (10.5                            | )          | 108.0            |       |
|                                       |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| ** **                                 | ** ** | **Performance  Additives** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Specialty  Chemicals** | ** ** | **Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Custom  Synthesis** | ** ** | **Corporate  and  Eliminations** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of:                |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| September 30,  2004                        |       | $                          | 1,117.1    |                     | $          | 272.9           |       | $                        | 311.0      |         | $          | 1,400.5                |       | $                     | 594.0      |                             | $          | 679.8            |       | $ | 482.3 |   | $ | 1.3 |   | $ | 4,858.9 |   |
| December 31, 2003                          |       | $                          | 1,015.6    |                     | $          | 254.2           |       | $                        | 318.6      |         | $          | —                 |       | $                     | —     |                             | $          | —           |       | $ | — |   | $ | (155.4 | ) | $ | 1,433.0 |   |

 

The following table represents summarized geographic information withnet sales based on location:

 
| **(millions)**                   | ** ** | **Three months ended September 30** | ** ** | **Nine months ended September 30** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales:                       |       |                                |       |                               |       |   |   |   |   |
| United States                    |       | $                                   | 212.6      |                               | $          | 133.1 |   | $ | 544.0 |   | $ | 388.5 |   |
| Rest of world,  primarily Europe |       | 321.0                               |       | 66.7                               |       | 483.9 |   | 204.2 |   |
|                             |       | $                                   | 533.6      |                               | $          | 199.8 |   | $ | 1,027.9 |   | $ | 592.7 |   |

 

As discussed in Note 2 - Acquisitions the Company has not finalized theallocation of purchase price related to the Dynamit Nobel Acquisition.

 

The summary of segment information above includes “Adjusted EBITDA”, afinancial measure used by senior management to evaluate the operatingperformance of each segment.

 

12

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***Components ofAdjusted EBITDA***

 

The process ofrefocusing and restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe Dynamit Nobel Acquisition, resulted in a number of charges that haveaffected Rockwood’s historical results. These charges, along with certain otheritems, are added to or subtracted from net loss to derive Adjusted EBITDA, asdefined below.  The more significant ofthese items include the following:

 

•                  *Restructuring and Related Charges*.  Additional restructuring charges wererecorded during the three and nine months ended September 30, 2004,respectively for miscellaneous restructuring activities.

 

•                  *Systems/Organization Establishment Expenses*.  These expenses include costs that arose inconnection with the KKR Acquisition and the resulting organization as astand-alone company.  In 2003, theseexpenses primarily relate to the amortization of sign-on compensationarrangements for key executives previously hired.  For the three and nine months ended September30, 2004, these expenses also include certain costs related to the integrationof the business acquired in the Dynamit Nobel Acquisition, as well asprofessional fees incurred regarding systems and internal control documentationin connection with the Sarbanes-Oxley Act of 2002.  These expenses are reflected in the “corporateand eliminations” column when Rockwood’s results are presented on a segmentbasis.

 

•                  *Cancelled Acquisition and Disposal Costs*.  Such costs were incurred in connection withnon-consummated acquisitions and dispositions.

 

•                  *Stamp duty tax*.  During the nine-months ended September 30,2004, the Company paid a stamp duty tax on certain assets transferred in theUnited Kingdom in connection with the KKR Acquisition.

 

•                  *Business Interruption and Insurance Recovery*.  Rockwood recorded gains in the three andnine-months ended September 30, 2003 for fire insurance settlements.

 

•                  *Inventory Write-Up Reversal*.  Under SFAS 141, all inventories acquired inan acquisition must be revalued to “fair value.”  In connection with the Dynamit NobelAcquisition, the Company allocated approximately $49.7 million of the totalpurchase price to inventory to reflect manufacturing profit in inventory at thedate of the acquisition.  This resultedin a consequential reduction in gross profit of $34.2 million in the three andnine-month periods ended September 30, 2004, as the inventory was sold in thenormal course of business. Also included for the periods presented herein isthe impact of inventory step-ups from certain acquisitions in the PerformanceAdditives segment.

 

•                  *Write-off of deferred debt issuance costs*.  In July 2003, the Company wrote off $36.9million of deferred debt issuance costs related to previous long-term debt thatwas repaid as part of the July 2003 Refinancing.  In December 2003, the Company incurred $1.4million of expenses in connection with a further modification of the thensenior credit agreement resulting in a 75 basis point interest rate reductionon $290.0 million of senior debt. In July 2004 the Company wrote off $1.8million of deferred debt issuance costs related to previous long-term debt thatwas repaid as part of the Dynamit Nobel Acquisition.

 

•                  *Foreign exchange (loss)/gain*.  The Company recorded foreign exchange(losses) and gains related to its long-term debt.  These amounts reflect the non-cashtranslation impact on euro-denominated debt resulting from the strengthening orweakening of the euro against the U.S. dollar during the applicable periods.Foreign exchange (loss) / gain also includes losses on foreign currencyderivative agreements that the Company entered into in connection with theDynamit Nobel Acquisition.

 

On a segmentbasis, the Company defines Adjusted EBITDA as operating income excludingdepreciation and amortization, certain non-cash gains and charges, certainnon-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 income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the senior secured credit agreement.  Senior management uses Adjusted EBITDA on asegment basis as the primary measure to evaluate the ongoing performance of theCompany’s business segments and reporting units.

 

The Companyuses Adjusted EBITDA on a consolidated basis to assess its operatingperformance.  In addition, managementuses Adjusted EBITDA on a consolidated basis as the most significant criterionin the calculation of performance-based cash bonuses.

 

13

----

 

Rockwoodbelieves this financial measure on a consolidated basis is helpful inhighlighting trends in its overall business because Adjusted EBITDA excludesthose items that have little or no bearing on day-to-day operating performance.

 

Because theCompany views Adjusted EBITDA on both a segment basis and consolidated basis asan operating performance measure, the Company uses net income (loss) as themost comparable GAAP measure.  Thefollowing table, which sets forth the applicable component of Adjusted EBITDA,presents a reconciliation of net income (loss) to Adjusted EBITDA on a GAAPbasis:

 
| **(millions)**                                | ** ** | **Performance  Additives** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Specialty  Chemicals** | ** ** | **Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Custom  Synthesis** | ** ** | **Corporate  and  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------|------------|--------------------------|------------|--------------|------------|------------------------|------------|-----------------------|------------|----------------------------------|------------|------------------|------------|
| **Three  months ended September 30, 2004**    |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net income (loss)                             |       | $                          | 13.5       |                     | $          | 4.5             |       | $                        | 0.6        |         | $          | (1.8                   | )          | $                     | 6.0        |                             | $          | (4.6             | )          | $ | (3.7 | ) | $ | (64.5 | ) | $ | (50.0 | ) |
| Income tax  provision (benefit)               |       | 6.4                        |       | 1.5                      |       | (0.4            | )          | (0.1                     | )          | (0.8         | )          | (1.1                   | )          | (0.9                  | )          | (18.0                            | )          | (13.4            | )          |
| Interest, net                                 |       | 6.8                        |       | (0.1                     | )          | 1.3             |       | 2.7                      |       | 1.1          |       | 0.8                    |       | 2.0                   |       | 30.5                             |       | 45.1             |       |
| Depreciation and  amortization                |       | 7.6                        |       | 1.4                      |       | 5.2             |       | 6.3                      |       | 3.5          |       | 3.8                    |       | 4.2                   |       | 0.2                              |       | 32.2             |       |
| Restructuring and  related charges            |       | 0.2                        |       | —                   |       | —          |       | (0.1                     | )          | —       |       | —                 |       | —                |       | —                           |       | 0.1              |       |
| Systems/organization  establishment expenses  |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.5                              |       | 1.5              |       |
| Inventory  write-up reversal                  |       | 0.5                        |       | —                   |       | —          |       | 12.7                     |       | 4.3          |       | 14.4                   |       | 2.8                   |       | —                           |       | 34.7             |       |
| Write-off of  deferred debt issuance costs    |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.8                              |       | 1.8              |       |
| Loss from  disposed businesses                |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | 0.8                   |       | —                           |       | 0.8              |       |
| Foreign exchange  loss                        |       | 0.5                        |       | —                   |       | 0.9             |       | —                   |       | —       |       | —                 |       | —                |       | 39.5                             |       | 40.9             |       |
| Other                                         |       | —                     |       | —                   |       | —          |       | 1.4                      |       | —       |       | —                 |       | —                |       | —                           |       | 1.4              |       |
| Total Adjusted  EBITDA                        |       | $                          | 35.5       |                     | $          | 7.3             |       | $                        | 7.6        |         | $          | 21.1                   |       | $                     | 14.1       |                             | $          | 13.3             |       | $ | 5.2 |   | $ | (9.0 | ) | $ | 95.1 |   |
|                                          |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Three  months ended September 30, 2003**    |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net income (loss)                             |       | $                          | 0.5        |                     | $          | 3.5             |       | $                        | (0.5       | )            | $          | —                 |       | $                     | —     |                             | $          | —           |       | $ | — |   | $ | (26.5 | ) | $ | (23.0 | ) |
| Income tax provision  (benefit)               |       | 4.0                        |       | 1.3                      |       | (0.2            | )          | —                   |       | —       |       | —                 |       | —                |       | (14.5                            | )          | (9.4             | )          |
| Interest, net                                 |       | 7.5                        |       | (0.1                     | )          | 1.6             |       | —                   |       | —       |       | —                 |       | —                |       | 10.7                             |       | 19.7             |       |
| Depreciation and  amortization                |       | 6.6                        |       | 1.4                      |       | 4.4             |       | —                   |       | —       |       | —                 |       | —                |       | 0.5                              |       | 12.9             |       |
| Restructuring and  related charges            |       | 0.1                        |       | 0.1                      |       | 0.0             |       | —                   |       | —       |       | —                 |       | —                |       | —                           |       | 0.2              |       |
| Systems/organization  establishment expenses  |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 0.4                              |       | 0.4              |       |
| Cancelled  acquisition and disposal costs     |       | —                     |       | —                   |       | 1.1             |       | —                   |       | —       |       | —                 |       | —                |       | —                           |       | 1.1              |       |
| Write-off of  deferred debt issuance costs    |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 36.9                             |       | 36.9             |       |
| Foreign exchange gain                         |       | (0.2                       | )          | —                   |       | (0.4            | )          | —                   |       | —       |       | —                 |       | —                |       | (0.5                             | )          | (1.1             | )          |
| Intercompany  dividend                        |       | 10.4                       |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | (10.4                            | )          | —           |       |
| Total Adjusted  EBITDA                        |       | $                          | 28.9       |                     | $          | 6.2             |       | $                        | 6.0        |         | $          | —                 |       | $                     | —     |                             | $          | —           |       | $ | — |   | $ | (3.4 | ) | $ | 37.7 |   |
|                                          |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Nine  months ended September 30, 2004**     |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net income (loss)                             |       | $                          | 45.3       |                     | $          | 12.9            |       | $                        | 2.2        |         | $          | (1.8                   | )          | $                     | 6.0        |                             | $          | (4.6             | )          | $ | (3.7 | ) | $ | (80.5 | ) | $ | (24.2 | ) |
| Income tax  provision (benefit)               |       | 25.8                       |       | 5.6                      |       | 0.8             |       | (0.1                     | )          | (0.8         | )          | (1.1                   | )          | (0.9                  | )          | (23.0                            | )          | 6.3              |       |
| Interest, net                                 |       | 21.4                       |       | (0.3                     | )          | 4.1             |       | 2.7                      |       | 1.1          |       | 0.8                    |       | 2.0                   |       | 42.4                             |       | 74.2             |       |
| Depreciation and  amortization                |       | 21.8                       |       | 4.1                      |       | 15.5            |       | 6.3                      |       | 3.5          |       | 3.8                    |       | 4.2                   |       | 1.2                              |       | 60.4             |       |
| Restructuring and  related charges            |       | 0.2                        |       | —                   |       | —          |       | (0.1                     | )          | —       |       | —                 |       | —                |       | —                           |       | 0.1              |       |
| Systems/organization  establishment expenses  |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 2.5                              |       | 2.5              |       |
| Cancelled  acquisition and disposal costs     |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 0.1                              |       | 0.1              |       |
| Write-off of  deferred debt issuance costs    |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.8                              |       | 1.8              |       |
| Stamp duty tax                                |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 4.0                              |       | 4.0              |       |
| Inventory  write-up reversal                  |       | 0.5                        |       | —                   |       | —          |       | 12.7                     |       | 4.3          |       | 14.4                   |       | 2.8                   |       | —                           |       | 34.7             |       |
| Loss from  disposed businesses                |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | 0.8                   |       | —                           |       | 0.8              |       |
| Foreign exchange  (gain) loss                 |       | (0.8                       | )          | —                   |       | (1.0            | )          | —                   |       | —       |       | —                 |       | —                |       | 34.0                             |       | 32.2             |       |
| Other                                         |       | —                     |       | —                   |       | —          |       | 1.4                      |       | —       |       | —                 |       | —                |       | —                           |       | 1.4              |       |
| Total Adjusted  EBITDA                        |       | $                          | 114.2      |                     | $          | 22.3            |       | $                        | 21.6       |         | $          | 21.1                   |       | $                     | 14.1       |                             | $          | 13.3             |       | $ | 5.2 |   | $ | (17.5 | ) | $ | 194.3 |   |
|                                          |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Nine  months ended September 30, 2003**     |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net income (loss)                             |       | $                          | 17.3       |                     | $          | 10.2            |       | $                        | 2.1        |         | $          | —                 |       | $                     | —     |                             | $          | —           |       | $ | — |   | $ | (63.6 | ) | $ | (34.0 | ) |
| Income tax  provision (benefit)               |       | 11.8                       |       | 4.4                      |       | 0.9             |       | —                   |       | —       |       | —                 |       | —                |       | (31.3                            | )          | (14.2            | )          |
| Interest, net                                 |       | 22.7                       |       | (0.2                     | )          | 4.9             |       | —                   |       | —       |       | —                 |       | —                |       | 35.5                             |       | 62.9             |       |
| Depreciation and  amortization                |       | 19.4                       |       | 3.8                      |       | 12.8            |       | —                   |       | —       |       | —                 |       | —                |       | 1.6                              |       | 37.6             |       |
| Restructuring and  related charges            |       | 0.4                        |       | 0.5                      |       | 0.4             |       | —                   |       | —       |       | —                 |       | —                |       | —                           |       | 1.3              |       |
| Systems/organization  establishment expenses  |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.1                              |       | 1.1              |       |
| Cancelled  acquisition and disposal costs     |       | —                     |       | —                   |       | 1.5             |       | —                   |       | —       |       | —                 |       | —                |       | 0.2                              |       | 1.7              |       |
| Write-off of  deferred debt issuance costs    |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 36.9                             |       | 36.9             |       |
| Business  interruption and insurance recovery |       | —                     |       | —                   |       | (4.5            | )          | —                   |       | —       |       | —                 |       | —                |       | —                           |       | (4.5             | )          |
| Inventory  write-up reversal                  |       | 0.1                        |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | —                           |       | 0.1              |       |
| Foreign exchange  (gain) loss                 |       | (0.2                       | )          | —                   |       | (0.2            | )          | —                   |       | —       |       | —                 |       | —                |       | 19.5                             |       | 19.1             |       |
| Intercompany  dividend                        |       | 10.4                       |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | (10.4                            | )          | —           |       |
| Total Adjusted  EBITDA                        |       | $                          | 81.9       |                     | $          | 18.7            |       | $                        | 17.9       |         | $          | —                 |       | $                     | —     |                             | $          | —           |       | $ | — |   | $ | (10.5 | ) | $ | 108.0 |   |

 

 

14

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**4.     INVENTORIES:**

 

Inventories are comprised of the following:

 
| **(millions)**       | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------|------------|-------------------------|------------|------------------------|------------|
| ** **           | ** ** | ** **              | ** ** | ** **             | ** ** |
| Raw materials        |       | $                       | 107.4      |                   | $          | 26.8 |   |
| Work-in-process      |       | 67.8                    |       | 3.2                    |       |
| Finished goods       |       | 213.9                   |       | 50.0                   |       |
| Packaging  materials |       | 21.6                    |       | 7.8                    |       |
|                 |       | $                       | 410.7      |                   | $          | 87.8 |   |

 

The portion of this balance represented by assets of Dynamit Nobel issubject to change upon the finalization of purchase accounting.  See Note 2-Acquisitions.

 

**5.     PROPERTY, PLANT AND EQUIPMENT:**

 

Property, plant and equipment, net is comprised of the following:

 
| **(millions)**                                           | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Land                                                     |       | $                       | 173.8      |                   | $          | 2.8 |   |
| Buildings and  improvements, including land improvements |       | 399.5                   |       | 126.7                  |       |
| Machinery and  equipment                                 |       | 820.4                   |       | 374.4                  |       |
| Furniture and  fixtures                                  |       | 36.7                    |       | 21.1                   |       |
| Mining rights                                            |       | 89.8                    |       | —                 |       |
| Construction-in-progress                                 |       | 80.2                    |       | 11.2                   |       |
| Property, plant  and equipment, at cost                  |       | 1,600.4                 |       | 536.2                  |       |
| Less accumulated  depreciation and amortization          |       | (186.7                  | )          | (117.6                 | )          |
| Property, plant  and equipment, net                      |       | $                       | 1,413.7    |                   | $          | 418.6 |   |

 

Depreciation expense was $24.0 million and $48.9 million for the threeand nine months ended September 30, 2004, respectively.

 

In addition, property, plant and equipment includes items recordedunder capital leases by businesses included in the Dynamit Nobel Acquisition.As of December 31, 2003, the net book value of such property was $45.8 million,primarily representing buildings and improvements (including landimprovements).

 

The portion of this balance represented by assets of Dynamit Nobel issubject to change upon the finalization of purchase accounting.  See Note 2-Acquisitions.

 

**6.     GOODWILL:**

 

Below are goodwill balances and activity by segment:

 
| **(millions)**               | ** ** | **Performance  Additives** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Specialty  Chemicals** | ** ** | **Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Custom  Synthesis** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------|------------|--------------------------|------------|--------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Balance, December  31, 2003  |       | $                          | 450.9      |                     | $          | 110.3           |       | $                        | 122.7      |         | $          | —                 |       | $                     | —     |      | $          | — |   | $ | — |   | $ | 683.9 |   |
|                         |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |      |       |
| Acquisitions                 |       | 2.9                        |       | —                   |       | 0.1             |       | 505.3                    |       | 149.3        |       | 222.5                  |       | 35.4                  |       | 915.5     |       |
|                         |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |      |       |
| Foreign exchange             |       | (0.1                       | )          | 0.6                      |       | 0.4             |       | 16.0                     |       | 4.7          |       | 7.0                    |       | 1.1                   |       | 29.7      |       |
| Balance,  September 30, 2004 |       | $                          | 453.7      |                     | $          | 110.9           |       | $                        | 123.2      |         | $          | 521.3                  |       | $                     | 154.0      |      | $          | 229.5 |   | $ | 36.5 |   | $ | 1,629.1 |   |

 

The portion of this balance represented by assets of Dynamit Nobel issubject to change upon the finalization of purchase accounting.  See Note 2-Acquisitions.

 

15

----

 

**7.     OTHER INTANGIBLE ASSETS:**

 

Other intangible assets, net consist of:

 
| ** **                     | ** ** | **As of September 30, 2004** | ** ** | **As of December 31, 2003**   | ** ** |
|--------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| **(millions)**                 | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|                           |       |                         |       |                          |       |   |   |   |   |   |   |   |   |
| Patents                        |       | $                            | 313.8      |                          | $          | (25.0 | ) | $ | 288.8 |   | $ | 41.4 |   | $ | (17.6 | ) | $ | 23.8 |   |
|                           |       |                         |       |                          |       |   |   |   |   |   |   |   |   |
| Trade Names and  Trademarks    |       | 93.1                         |       | (0.6                          | )          | 92.5 |   | — |   | — |   | — |   |
|                           |       |                         |       |                          |       |   |   |   |   |   |   |   |   |
| Customer  Relationships        |       | 192.4                        |       | (2.6                          | )          | 189.8 |   | — |   | — |   | — |   |
|                           |       |                         |       |                          |       |   |   |   |   |   |   |   |   |
| Internally  Developed Software |       | 2.1                          |       | (1.3                          | )          | 0.8 |   | 2.1 |   | (0.9 | ) | 1.2 |   |
|                           |       |                         |       |                          |       |   |   |   |   |   |   |   |   |
| Other                          |       | 1.4                          |       | (0.6                          | )          | 0.8 |   | 0.9 |   | (0.2 | ) | 0.7 |   |
| Total                          |       | $                            | 602.8      |                          | $          | (30.1 | ) | $ | 572.7 |   | $ | 44.4 |   | $ | (18.7 | ) | $ | 25.7 |   |

 

Amortization of other intangible assets was $8.2 million and $1.6million for the three months ended September 30, 2004 and 2003,respectively, and $11.5 million and $4.5 million for the nine months endedSeptember 30, 2004 and 2003, respectively. Estimated amortization expense for each of the five succeeding fiscalyears is as follows:

 
| **(millions)  Year ended** | ** ** | **Amortization  Expense** | ** ** |
|----------------------------|------------|---------------------------|------------|
|                       |       |                      |       |
| 2004                       |       | $                         | 22.9       |   |
| 2005                       |       | 46.9                      |       |
| 2006                       |       | 46.9                      |       |
| 2007                       |       | 46.9                      |       |
| 2008                       |       | 45.5                      |       |
| 2009                       |       | 42.1                      |       |
|                            |            |                           |            |  |

 

The portion of this balance represented by assets of Dynamit Nobel issubject to change upon the finalization of purchase accounting.  See Note 2-Acquisitions.

 

**8.     LONG-TERM DEBT:**

 

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

 
| **(millions)**                                                                                                   | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
|                                                                                                             |       |                   |       |                  |       |
| Senior secured  credit facilities:                                                                               |       |                   |       |                  |       |
| Tranche A-1 term  loans (€39.1 as of September 30, 2004)                                                    |       | $                      | 48.6       |                  | $          | — |   |
| Tranche A-2 term  loans (€170.4 as of September 30, 2004)                                                   |       | 211.6                  |       | —                |       |
| Tranche B term  loans                                                                                            |       | 985.0                  |       | —                |       |
| Tranche C term  loans (€222.1 as of September 30, 2004)                                                     |       | 275.9                  |       | —                |       |
| 2003 Senior  secured credit facilities (€133.2 and $290.2 as of December 31, 2003) (repaid  July 31, 2004): |       | —                 |       | 458.0                 |       |
| Senior  subordinated loan facility (€419.1 and $350.0 as of September 30, 2004)                             |       | 870.5                  |       | —                |       |
| 2011 Notes                                                                                                       |       | 375.0                  |       | 375.0                 |       |
| Other term loan  facilities (€82.2 as of September 30, 2004)                                                |       | 102.0                  |       | —                |       |
| Capitalized  leases (€33.4 as of September 30, 2004)                                                        |       | 41.5                   |       | —                |       |
| Preferred stock  of subsidiary (£12.0 as of September 30, 2004)                                             |       | 21.7                   |       | —                |       |
| Other (€12.0 as  of September 30, 2004)                                                                     |       | 14.9                   |       | —                |       |
|                                                                                                             |       | 2,946.7                |       | 833.0                 |       |
|                                                                                                             |       |                   |       |                  |       |
| Less current  maturities                                                                                         |       | (59.5                  | )          | (9.1                  | )          |
|                                                                                                             |       | $                      | 2,887.2    |                  | $          | 823.9 |   |
| Maturities of  long-term debt are as follows for the below periods:                                              |       |                   |       |                  |       |
|                                                                                                             |       |                   |       |                  |       |
| Three months  ended December 31, 2004                                                                            |       | $                      | 36.4       |                  |       |   |
| 12 Months ended  December 31:                                                                                    |       |                   |       |                  |       |
| 2005                                                                                                             |       | 25.5                   |       |                  |       |
| 2006                                                                                                             |       | 43.8                   |       |                  |       |
| 2007                                                                                                             |       | 53.3                   |       |                  |       |
| 2008                                                                                                             |       | 54.5                   |       |                  |       |
| 2009                                                                                                             |       | 53.8                   |       |                  |       |
| Thereafter                                                                                                       |       | 2,679.4                |       |                  |       |
|                                                                                                             |       | $                      | 2,946.7    |                  |       |   |

 

16

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***Senior SecuredCredit Facilities***

 

***a)Structure***

 

In connectionwith the Acquisition Financing, the Company, as U.S. Borrower, RockwoodSpecialties International, Inc., (the Company’s immediate parent) as Guarantor,and Rockwood Specialties Limited, (a United Kingdom subsidiary) as U.K. Borrower,entered into a new senior secured credit agreement on July 30, 2004. On October8, 2004, the Company amended its new senior secured credit facilities to borrowan additional $160.0 million of tranche B term loans and, €52.7 million (or$65.5 million) of tranche C term loans (or $225.5 million in the aggregate) andused the proceeds to repay a portion (€105.9 million and $89.9 million or$221.4 million in the aggregate) of the borrowings under the new seniorsubordinated loan facility and to pay related fees of $2.3 million. The Companywrote off $3.8 million of deferred financing costs in connection with therepayment under this amendment.

 

The fullamount of the tranche A-1 term loans, €128.5 million of the tranche A-2 termloans, $985.0 million of the tranche B term loans and €222.1 million of thetranche C term loans were drawn in a single drawing on the closing of theDynamit Nobel Acquisition.  The remaining€41.9 million of the tranche A-2 term loans were drawn in a single drawing onSeptember 30, 2004 in connection with the acquisition of the Pigments andDispersions business of Johnson Matthey Plc.

 

*b) Availability*

 

The seniorsecured credit facilities consist of the term loan tranches listed above aswell as a senior secured revolving credit facility in an aggregate principalamount of $250.0 million made available in U.S. dollars, euros and/or poundssterling.  A portion of the revolvingcredit facility is available in the form of letters of credit and swinglineloans.  Under the terms of the amendment,the Company may, under certain circumstances and subject to receipt ofadditional commitments from existing lenders or other eligible institutions,request that the tranche B term loans and/or the revolving credit commitmentsbe increased by an aggregate amount of up to $250 million. At September 30,2004 the Company had no borrowings and $16.3 million of standby letters ofcredit outstanding under the revolving credit facility.  See Note 14 — Subsequent Events.

 

Amountsborrowed under the term loan facilities that are repaid or prepaid may not bereborrowed.

 

***c) Interest and Fees***

** **

The interestrates per year under the revolving credit facility and the tranche A-1, A-2 andB term loan facilities are, at the Company’s option, Adjusted LIBOR plus 2.50%or, in the case of loans denominated in U.S. dollars, ABR plus 1.25%. ABR isthe alternate base rate, which is the higher of Credit Suisse First Boston’sprime rate and the federal funds effective rate plus 0.5%. The interest rateper year under the tranche C term loan facility is Adjusted LIBOR plus3.00%.  Adjusted LIBOR is the Londoninter-bank offered rate, adjusted for statutory reserves. In each case, theinterest rates per year (other than under the tranche C term loan facility) aresubject to step-downs determined by reference to a performance test.

 

The Companymay elect interest periods of one, two, three or six months (or in the case ofrevolving credit loans, nine or twelve months, to the extent available from alllenders under the revolving credit facility) for Adjusted LIBORborrowings.  Interest is payablequarterly in the case of ABR loans and at the end of each interest period and,in any event, at least every three months, in the case of Adjusted LIBORborrowings.

 

The seniorsecured credit facilities require payment of customary commitment, letter ofcredit and other fees.

 

***d) Guarantees;Security***

** **

Obligationsunder the senior secured credit facilities are guaranteed by RockwoodSpecialties International, Inc., the Company and each of its existing andsubsequently acquired or organized direct or indirect domestic subsidiaries,subject to certain exceptions, and are secured by first-priority securityinterest in: substantially all the tangible and intangible assets of theCompany and its direct or indirect domestic subsidiaries, subject toexceptions; all the capital stock of or other equity interest in the Companyand each of its direct or indirect domestic subsidiaries; a maximum of 65% ofthe capital stock of or other equity interests in each direct foreignsubsidiary of either Rockwood Specialties Group, Inc. or of any domesticsubsidiary of the Company.

 

***e) Maturity,Amortization and Prepayments***

** **

The trancheA-1 and A-2 term loans will mature on July 31, 2011 and will amortize at escalatingpercentages on a semi-annual basis commencing on January 1, 2006.  The tranche B term loans and tranche C termloans will mature on July 31, 2012 and will amortize

 

17

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on asemi-annual basis commencing on January 1, 2006, with each repayment amountprior to maturity to be equal to 0.5% of the principal amount of tranche B termloans and tranche C term loans, respectively. The revolving credit facility will mature on July 31, 2010.

 

In addition,the Company is required to make the following mandatory prepayments of the termloans under the senior secured credit facilities, in each case subject tocertain exceptions, with:

 

•                  100% of the netcash proceeds of all sales or other dispositions by the Company or any of itsrestricted subsidiaries under the senior secured credit facilities of assetsother than net cash proceeds (a) from the sale or other disposition of assetsin the ordinary course of business, (b) of certain disposals permitted underthe senior secured credit agreement (including the proceeds of sales ortransfers of accounts receivable (including pursuant to a securitization) inthe amount of up to $200.0 million at any time) or (c) that are reinvested inthe Company and its restricted subsidiaries within twelve months of the sale orother disposition (subject to extension in certain circumstances).

 

•                  100% of the netcash proceeds of issuances of certain debt obligations.

 

•                  50% of excesscash flows, as defined, in respect of any fiscal year at the end of which theconsolidated total debt to consolidated EBITDA ratio is equal to or greaterthan 3.50 to 1.0, reduced by any amounts reinvested during the first six monthsof the year and voluntary prepayments.

 

***f) FinancialCovenants***

** **

The new seniorsecured credit facilities contain the following financial covenants:

 

•                  a consolidatedtotal net debt to consolidated Adjusted EBITDA test;

 

•                  a consolidatedAdjusted EBITDA to consolidated cash interest expense test; and

 

•                  limitations oncapital expenditures.

 

For purposesof calculating compliance with the financial covenants as of any date, foreigncurrency denominated indebtedness will be converted to U.S. dollars based onaverage exchange rates for the twelve-month period ending on such date.

 

***Senior subordinatedloan facility*** – The senior subordinated loan facility hadan initial interest rate equal to the greater of 9.0% and EURIBOR + 7% (in thecase of euro borrowings) or LIBOR + 8% (in the case of dollar borrowings)annually with a 75 basis point increase every six months for the first 18months. If the senior subordinated loan facility is not refinanced within 18months, the interest rate would be 14.5%. During the fourth quarter of 2004,the senior subordinated loan facility was fully repaid. See Note 14 –Subsequent Events.

 

***2011 Notes –***In connection with the July 2003 Refinancing, the Company issued $375.0 millionprincipal amount of 10 5/8% senior subordinated notes due 2011 (“2011 Notes”).Certain of the Company’s domestic subsidiaries guarantee the 2011 Notes on asenior subordinated basis. The 2011 Notes mature on May 15, 2011 with interestpayable semi-annually on May 15 and November 15. Interest accrues at the rateof 10 5/8% per year. The 2011 Notes have covenants and other terms and conditionsthat are comparable or generally less restrictive than the senior securedcredit facilities.

 

***Other term loanfacilities***- Certain subsidiaries in the Dynamit NobelAcquisition are borrowers under term loan facilities denominated in variouscurrencies including euro, Swiss Francs, Taiwanese Dollars and Japanese Yen.Interest rates range from 1.38% to 6.05% and mature between 2005 and 2011.Certain of these term loan facilities are collateralized by mortgages on landand buildings and trade receivables.

 

***Preferred stock*****-**Chemetall Plc., a Rockwood subsidiary, had previously issued12.0 million shares of preferred stock which must be redeemed at their parvalue (£1) on July 3, 2008 and may be called at an earlier date. Theshares have a liquidation preference at their par value and pay an annualdividend of 9.0% payable on January 3 and July 3 of each year. If, inthe opinion of management, the level of profit reported does not allow thepayment of a dividend, the dividend arrearage must be paid in subsequent years.The preferred stock does not confer any voting rights unless the payment of thedividend or redemption price is more than six months in arrears or a vote isbeing held on the company’s liquidation or a capital reduction. The terms andconditions governing the issuance of the preferred stock contain covenantsobliging the issuer to maintain a certain debt/equity ratio.

 

18

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***Covenants-*****The Company was in compliance withits applicable debt covenants at September 30, 2004 and December 31, 2003.

 

***Fair Value-***The Company estimates that debt under the senior secured credit facilities,based on current interest rates and terms, approximates fair value. Based onquoted market values, the Company estimates that the fair value of its 2011Notes approximated $412.5 million at September 30, 2004.

 

***DerivativeContracts-*** During 2001, the Company entered into interestrate swaps to manage its exposure to changes in interest rates related to eurodenominated debt. These contracts were terminated in August 2004 when theCompany entered into new interest rate swaps to manage its exposure to changesin interest rates.  As of September 30,2004, these contracts cover notional amounts of $652.6 million (at a rate of6.14%) and €486.0 million (at rates ranging from 4.62% to 7.03%).  These contracts effectively convert a largeportion of the Company’s floating rate debt instruments to fixed rateobligations for the contract periods. The US dollar swap matures in July 2007 and the Euro swap in July 2008.

 

During 2003 the Company entered into cross-currency interest rateswaps with notional amounts aggregating $78.2 million that effectivelyconverted $78.2 million US dollar borrowings into Euro based obligations ateffective interest rate of 4% over Euro LIBOR. In connection with the July 2003 Refinancing, the Company reduced thenotional amounts of this cross currency hedge to $20.1 million and €17.7million. These contracts have final maturity dates of July 2010. See Note14 — Subsequent Events.

 

As of September 30, 2004, $1,056.6 million ofthe debt outstanding was denominated in euros, including the borrowings underthe new senior subordinated loan facility, which have subsequently been repaid.See Note 14 - Subsequent events.

 

In order to mitigate the effect of anyexchange rate changes which may have taken place prior to the closing of theDynamit Nobel Acquisition, the Company entered into call options, permitting itto purchase up to €750.0 million at a price of $1.225 = €1.00. TheCompany recorded a mark-to-market loss of $2.9 million during the secondquarter of 2004 on the call options. The options expired unexercised and theCompany recorded an additional loss of $8.1 million in the third quarterof 2004. Rockwood also entered into a forward contract in July 2004 topurchase €1,057 million of euros at a fixed U.S. dollar rate of$1.208 = €1.00 which was utilized to pay for a portion of the purchaseprice at the closing of the Dynamit Nobel Acquisition. The Company recorded acharge of $4.2 million in the third quarter of 2004.

 

The Company elected not to apply hedge accounting in the historicalperiods presented and marked these derivative transactions to market; reflectedas a component of interest expense. These transactions increased interestexpense by $4.2 million and $1.2 million in the three and nine months endedSeptember 30, 2004, respectively, of which $1.8 million loss and $6.8 milliongain represents mark-to-market adjustments, respectively. The related liabilityon the contracts’ marked-to-market adjustments is reflected in “Otherliabilities” in the balance sheet. The Company believes that the counterpartiesto these agreements are financially sound institutions and the credit risk fornon-performance of these contracts is not significant.

 

***Debt IssuanceCosts-*** In connection with the Dynamit Nobel Acquisition,the Company wrote-off $1.8 million of deferred debt issuance costs during thethree months ended September 30, 2004. Also, the Company capitalized fees of$69.7 million during the same period related to the financing of the DynamitNobel Acquisition which are being amortized using the effective interest ratemethod over the term of the debt outstanding. At September 30, 2004, $11.0million of these financing fees were unpaid.

 

In connection with the July 2003 Refinancing, the Company wrote off theunamortized balance of all deferred debt issuance costs previously incurred($36.9 million).

 

**9.     TAXES:**

 

A reconciliation of income tax expense at the U.S.federal statutory income tax rate to actual income tax expenses is as follows:

 
| ** **                            | ** ** | **Nine months ended  September 30, 2004** | ** ** | **Three months ended  September 30, 2004** | ** ** | **Year ended  December 31, 2003** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
|                                  |       |                                      |       |                                       |       |                              |       |
| Federal Statutory  rate               |       | (35.0                                     | )%         | (35.0                                      | )%         | (35.0                             | )%         |
|                                  |       |                                      |       |                                       |       |                              |       |
| State taxes, net  of federal benefit  |       | 13.4                                      |       | 1.1                                        |       | 1.3                               |       |
|                                  |       |                                      |       |                                       |       |                              |       |
| Non-deductible  goodwill amortization |       | —                                    |       | —                                     |       | —                            |       |
|                                  |       |                                      |       |                                       |       |                              |       |
| Foreign/U S rate  differential        |       | 5.8                                       |       | (0.3                                       | )          | 2.5                               |       |
|                                  |       |                                      |       |                                       |       |                              |       |
| Goodwill  impairment                  |       | —                                    |       | —                                     |       | 8.5                               |       |
|                                  |       |                                      |       |                                       |       |                              |       |
| Increase in  valuation allowance      |       | 21.0                                      |       | 4.7                                        |       | 7.8                               |       |
|                                  |       |                                      |       |                                       |       |                              |       |
| Loss on  derivative instruments       |       | 29.7                                      |       | 8.4                                        |       | —                            |       |
|                                  |       |                                      |       |                                       |       |                              |       |
| Other                                 |       | —                                    |       | —                                     |       | 3.2                               |       |
|                                  |       |                                      |       |                                       |       |                              |       |
| Effective tax  rate                   |       | 34.9                                      | %          | (21.1                                      | )%         | (11.7                             | )%         |

 

19

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**10.  OPERATING LEASE OBLIGATIONS:**

 

As of September 30, 2004, the portionof the Company’s obligations under terms of noncancelable operating leasesarising from the businesses acquired in the Dynamit Nobel Acquisition were asfollows:

 
| **(millions)**                        | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| Three months  ended December 31, 2004 |       | $          | 6.1        |   |
| Years ended  December 31:             |       |       |       |
| 2005                                  |       | 12.2       |       |
| 2006                                  |       | 5.9        |       |
| 2007                                  |       | 3.3        |       |
| 2008                                  |       | 2.3        |       |
| 2009                                  |       | 1.9        |       |
| Thereafter                            |       | 10.8       |       |
|                                  |       |       |       |
| Total                                 |       | $          | 42.5       |   |

 

Rent expense under all operating leases was $4.0 million and $4.3million for the three and nine months ended September 30, 2004, respectively.

 

**11.  EMPLOYEE BENEFIT PLANS:**

 

The following represents the net periodic pension benefit costs andrelated components in accordance with SFAS 132:

 
| ** **                                   | ** ** | **2004**           | ** ** | **2003**            | ** ** |
|----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| **(millions)**                               | ** ** | **United  States** | ** ** | **United  Kingdom** | ** ** | **Germany** | ** ** | **All  Other** | ** ** | **Total** | ** ** | **United  States** | ** ** | **United  Kingdom** | ** ** | **Germany** | ** ** | **All  Other** | ** ** | **Total** | ** ** |
|                                         |       |               |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Three  months ended September 30**         |       |               |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                 |       | $                  | 0.3        |                | $          | 0.3 |   | $ | 0.4 |   | $ | 0.6 |   | $ | 1.6 |   | $ | — |   | $ | 0.2 |   | $ | — |   | $ | 0.1 |   | $ | 0.3 |   |
| Interest cost                                |       | 0.3                |       | 0.9                 |       | 1.7 |   | 0.6 |   | 3.5 |   | 0.1 |   | 0.3 |   | — |   | 0.1 |   | 0.5 |   |
| Expected return  on plan assets              |       | (0.2               | )          | (0.7                | )          | (0.1 | ) | 0.4 |   | (0.6 | ) | — |   | (0.3 | ) | — |   | (0.1 | ) | (0.4 | ) |
| Net amortization  of prior experience losses |       | 0.1                |       | 0.2                 |       | 0.5 |   | 0.1 |   | 0.9 |   | — |   | 0.1 |   | — |   | — |   | 0.1 |   |
|                                         |       |               |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net periodic  benefit cost                   |       | $                  | 0.5        |                | $          | 0.7 |   | $ | 2.5 |   | $ | 1.7 |   | $ | 5.4 |   | $ | 0.1 |   | $ | 0.3 |   | $ | — |   | $ | 0.1 |   | $ | 0.5 |   |
|                                         |       |               |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Nine  months ended September 30**          |       |               |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                 |       | $                  | 0.5        |                | $          | 0.7 |   | $ | 0.5 |   | $ | 0.6 |   | $ | 2.3 |   | $ | 0.1 |   | $ | 0.6 |   | $ | 0.1 |   | $ | 0.1 |   | $ | 0.9 |   |
| Interest cost                                |       | 0.5                |       | 1.7                 |       | 1.8 |   | 0.8 |   | 4.8 |   | 0.2 |   | 0.9 |   | 0.1 |   | 0.2 |   | 1.4 |   |
| Expected return  on plan assets              |       | (0.4               | )          | (1.3                | )          | (0.2 | ) | 0.3 |   | (1.6 | ) | (0.1 | ) | (0.7 | ) | (0.1 | ) | (0.2 | ) | (1.1 | ) |
| Net amortization  of prior experience losses |       | 0.1                |       | 0.4                 |       | 0.5 |   | 0.2 |   | 1.2 |   | 0.1 |   | 0.1 |   | — |   | — |   | 0.2 |   |
|                                         |       |               |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net periodic  benefit cost                   |       | $                  | 0.7        |                | $          | 1.5 |   | $ | 2.6 |   | $ | 1.9 |   | $ | 6.7 |   | $ | 0.3 |   | $ | 0.9 |   | $ | 0.1 |   | $ | 0.1 |   | $ | 1.4 |   |

 

The Company maintains various defined benefit pension plans, whichcover certain employees in the US, UK, Germany, Italy and Taiwan. In addition,the Company provides certain retired employees in Germany with postretirementbenefits for private health insurance premiums. Also, two subsidiaries providevarious retirees with postretirement benefits, principally health carebenefits.

 

In May 2004, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position (“FSP”) 106-2 *Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003*. This guidance supersedes FSP 106-1 issuedin January 2004 and clarifies the accounting and disclosure requirements foremployers with postretirement benefit plans that have been or will be affectedby the passage of the Medicare Prescription Drug Improvement and ModernizationAct of 2003 (the “Act”). The Act introduces two new features to Medicare thatan employer needs to consider in measuring its obligation and net periodicpostretirement benefit costs. The effective date for the new requirements isthe first interim or annual period beginning after June 15, 2004. The adoptionof FSP 106-2 did not have a material impact on the Company.

 

***Plans withaccumulated benefit obligations in excess of plan assets***—TheCompany’s defined benefit plans all had accumulated benefit obligations inexcess of plan assets.

 

***Contributions***—Duringthe nine months ended September 30 2004, the Company made contributions ofapproximately $3.1 million to its defined benefit pension plans to coverbenefits due. The Company expects to make additional contributions ofapproximately $3.6

 

20

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million during the final quarter of 2004.

 

**12.  STOCK-BASED COMPENSATION:**

 

In September 2004, Holdings amendedthe Amended and Restated 2003 Stock Purchase and Option Plan (as amended, the “Plan”)to increase the number of shares authorized under the Plan. Under the Plan,Holdings may grant stock options and restricted stock to the Company’smanagement personnel and directors and allow management personnel and directorsto purchase shares of Holdings’ common stock. There are 165,000 authorizedshares available for grant under the Plan.

 

***Restricted Stock***—Restrictedstock of Holdings can be granted with or without payment of consideration withrestrictions on the recipient’s right to transfer or sell the stock. $0.3million or 500 shares vested during the nine months ended September 30, 2004,which included 167 shares during the three months ended September 30, 2004.

 

***Stock Purchase***—Eligiblemanagement personnel and directors can purchase shares of Holdings’ commonstock at prices as determined by Holdings’ Board of Directors. Under the Plan,Holdings sold 3,000 shares during the three and nine months ended September 30,2004 at the fair market value of the stock as determined by the Board ofDirectors at the date of purchase for gross proceeds of $1.5 million.

 

***Stock Options***—Stockoptions granted under this Plan shall have an exercise price at least equal tothe fair market value of Holdings’ common stock on the date of grant. There aretwo types of options available for grant under the Plan. Time options have alife of ten years from the date of grant and vest in installments of 20% of thetotal time options granted on each of the first five anniversaries of the grantdate. Performance options have a life of ten years and become exercisable withrespect to 20% of the total performance options granted upon the achievement ofcertain performance targets. Performance options become exercisable on theeighth anniversary of the grant date to the extent that the options have notbecome otherwise exercisable or have not been terminated. To date, none of theperformance targets that would trigger vesting have been achieved.

 

A summary of the status of the Company’s options granted by Holdings atSeptember 30, 2004, and changes during the nine months ended on that dateis presented below:

 

| ** **                            | ** ** | **Nine months ended September 30,  2004** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **Shares**                                | ** ** | **Weighted Average  Exercise Price** | ** ** |
| Outstanding at  beginning of period   |       | 52,880                                    |       | $ | 500 |   |
| Granted                               |       | 15,250                                    |       | 500 |   |
| Outstanding at  end of period         |       | 68,130                                    |       | $ | 500 |   |
|                                  |       |                                      |       |   |   |
| Options exercisable  at end of period |       | 11,248                                    |       | $ | 500 |   |

 

**13.  CONTINGENCIES:**

 

***Legal Proceedings***—TheCompany is involved in various legal proceedings, including intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters, in accordance with SFAS 5,*Accounting for Contingencies*, if it is probable that aliability has been incurred and an amount can be reasonably estimated. It isthe Company’s policy to disclose such matters when there is at least areasonable possibility that a material loss may have been incurred.

 

***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 UK Holdings Ltd., as successor to the Laporte Plc, isobligated to indemnify the Company for certain legal, tax and environmentalliabilities and obligations that relate to the period prior to the closing ofthe KKR Acquisition.

 

Under the terms of the Sale and Purchase Agreement with mg technologiesag and its subsidiary MG NAH (“mg technologies”), mg technologies is obligatedto indemnify the Company for certain legal, tax and environmental liabilitiesand obligations that relate to the period prior to the closing, subject tocertain limits and exclusions. In the opinion of management, and based uponinformation currently available, the ultimate resolution of any indemnificationclaims will not have a material effect on the Company’s financial condition orresults of operations.

 

21

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***EnvironmentalMatters***—In the ordinary course of business, like mostother industrial companies, the Company’s operations are subject to extensiveand evolving federal, state, local and foreign environmental laws andregulations. Governmental authorities may resort to a variety of civil andcriminal enforcement measures, including monetary penalties and remediationrequirements, for violation of such laws. The Company is currently involved inthe assessment and remediation of some sites, which include Company-owned sitesand sites owned by third parties.  TheCompany has evaluated its total environmental exposure based on currentlyavailable data and believes that its environmental matters will not have amaterial adverse impact on the Company’s financial position or results ofoperations. If matters previously identified by management are resolved in amanner different from original estimates, there is the potential for a materialadverse effect on operating results or cash flows in any one accounting period.

 

**14.  SUBSEQUENT EVENTS:**

 

On October 29, 2004, the Company entered into a definitive agreement tomerge the three business lines of its Custom Synthesis segment (Dynamit NobelSpecial Chemistry, Finorga S.A. and Rohner AG) with Groupe Novasep SAS, orGroupe Novasep, to form a new standalone company within Rockwood.  The Company expects to complete the merger inthe fourth quarter of 2004, subject to regulatory approvals and other customaryconditions. Groupe Novasep specializes in innovative production of activepharmaceutical ingredients, or API, from biotechnological or chemical processesand focuses on finding purification solutions by the research and developmentof new purification processes.  As aresult of the proposed merger, the Company will acquire approximately twothirds of the stock of Groupe Novasep, which is currently held by outsideinvestors, for approximately €50.0 million in cash (or $63.6 million based onthe October 31, 2004 exchange rate of €1.00=$1.272), and the Groupe Novasepmanagement will contribute the remaining one third of the stock of GroupeNovasep to the Company in exchange for shares in the new company. The Companywill also assume approximately €20.0 million (or $25.4 million) of net debt. TheCompany expects to use a combination of borrowings under its revolving creditfacility and cash on hand to finance this transaction.

 

On November 10*,*2004, the Company repaid the seniorsubordinated loan facility by completing the sale of €375.0 million aggregateprincipal amount of 7.625% senior subordinated notes and $200.0 millionaggregate principal amount of 7.500% senior subordinated notes, both due in2014. The notes are *pari passu* toexisting and future senior subordinated indebtedness, including the 2011 Notesand junior to all of the Company’s existing and future senior indebtedness. Thenotes are guaranteed on a senior subordinated unsecured basis by certain of theCompany’s domestic subsidiaries. Proceeds aggregating $665.8 million from thesale of the notes were used to repay $260.1 million and €313.2 million,representing the remaining outstanding borrowings under the Company’s seniorsubordinated loan facility, plus accrued interest thereon, pay related fees andexpenses of approximately $11.1 million and for general corporate purposes.

 

Also, in connection with thistransaction, the Company entered into cross currency interest rate swaps with afive year term and a notional amount of €155.6 million that effectively convertthe U.S. dollar fixed rate debt in respect of the dollar notes sold into eurofixed rate debt. The Company has designated this contract as a hedge of theforeign currency exposure of its net investment in its euro denominatedoperations.

 

DuringOctober 2004, certain members of the Company’s management purchased 2,350shares of Holding’s common stock for proceeds of $1.2 million, which wascontributed to the Company. In connection with the purchase of these shares,pursuant to the Plan, such members of the Company’s management were grantedstock options to purchase 11,470 shares of common stock.

 

22

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**15.  CONSOLIDATING FINANCIAL INFORMATION:**

 

As described in Note 8 - Long-term Debt, the Company issued the 2011Notes in July 2003.  The following unaudited consolidating financialstatements present the results of operations, financial condition and cashflows, in separate columns, of the parent company (Rockwood SpecialtiesGroup, Inc.), which is the issuer of the 2011 Notes, guarantorsubsidiaries, non-guarantor subsidiaries, elimination adjustments, andconsolidated totals.

 

**ROCKWOODSPECIALTIES GROUP INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED SEPTEMBER 30, 2004**

**(inmillions)**

 
| ** **                                    | ** ** | **Parent Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| NET SALES                                     |       | $                  | —     |                        | $          | 212.6                           |       | $                | 321.0      |   | $ | 533.6 |   |
| COST OF PRODUCTS  SOLD                        |       | —             |       | 157.7                       |       | 245.3                           |       | 403.0            |       |
| GROSS PROFIT                                  |       | —             |       | 54.9                        |       | 75.7                            |       | 130.6            |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | 0.2                |       | 36.1                        |       | 69.8                            |       | 106.1            |       |
| RESTRUCTURING  CHARGE, net                    |       | —             |       | 0.1                         |       | —                          |       | 0.1              |       |
| OPERATING (LOSS)  INCOME                      |       | (0.2               | )          | 18.7                        |       | 5.9                             |       | 24.4             |       |
| OTHER INCOME  (EXPENSES):                     |       |               |       |                        |       |                            |       |             |       |
| Intergroup  interest, net                     |       | 13.6               |       | (15.3                       | )          | 1.7                             |       | —           |       |
| Interest, net                                 |       | (35.0              | )          | (1.3                        | )          | (8.8                            | )          | (45.1            | )          |
| Write-off of  deferred debt issuance costs    |       | (1.8               | )          | —                      |       | —                          |       | (1.8             | )          |
| Intergroup  other, net                        |       | —             |       | 0.9                         |       | (0.9                            | )          | —           |       |
| Foreign exchange  loss, net                   |       | (35.9              | )          | —                      |       | (5.0                            | )          | (40.9            | )          |
| Net                                           |       | (59.1              | )          | (15.7                       | )          | (13.0                           | )          | (87.8            | )          |
| (LOSS) INCOME  BEFORE TAXES                   |       | (59.3              | )          | 3.0                         |       | (7.1                            | )          | (63.4            | )          |
| INCOME TAX  (BENEFIT) PROVISION               |       | (11.0              | )          | 5.3                         |       | (7.7                            | )          | (13.4            | )          |
| NET LOSS                                      |       | $                  | (48.3      | )                           | $          | (2.3                            | )          | $                | 0.6        |   | $ | (50.0 | ) |

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED SEPTEMBER 30, 2003**

**(inmillions)**

 
| ** **                                    | ** ** | **Parent Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| NET SALES                                     |       | $                  | —     |                        | $          | 133.1                           |       | $                | 66.7       |   | $ | 199.8 |   |
| COST OF PRODUCTS  SOLD                        |       | —             |       | 93.0                        |       | 51.9                            |       | 144.9            |       |
| GROSS PROFIT                                  |       | —             |       | 40.1                        |       | 14.8                            |       | 54.9             |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | 0.2                |       | 22.0                        |       | 9.4                             |       | 31.6             |       |
| RESTRUCTURING  CHARGE, net                    |       | —             |       | —                      |       | 0.2                             |       | 0.2              |       |
| OPERATING (LOSS)  INCOME                      |       | (0.2               | )          | 18.1                        |       | 5.2                             |       | 23.1             |       |
| OTHER INCOME  (EXPENSES):                     |       |               |       |                        |       |                            |       |             |       |
| Intergroup  interest, net                     |       | 14.6               |       | (13.8                       | )          | (0.8                            | )          | —           |       |
| Interest, net                                 |       | (15.8              | )          | 0.1                         |       | (4.0                            | )          | (19.7            | )          |
| Write-off of  deferred debt issuance costs    |       | (31.8              | )          | —                      |       | (5.1                            | )          | (36.9            | )          |
| Intergroup  other, net                        |       | —             |       | (0.7                        | )          | 0.7                             |       | —           |       |
| Foreign exchange  gain (loss), net            |       | 1.3                |       | (0.1                        | )          | (0.1                            | )          | 1.1              |       |
| Net                                           |       | (31.7              | )          | (14.5                       | )          | (9.3                            | )          | (55.5            | )          |
| (LOSS) INCOME  BEFORE TAXES                   |       | (31.9              | )          | 3.6                         |       | (4.1                            | )          | (32.4            | )          |
| INCOME TAX  (BENEFIT) PROVISION               |       | (11.5              | )          | 2.2                         |       | (0.1                            | )          | (9.4             | )          |
| NET (LOSS)  INCOME                            |       | $                  | (20.4      | )                           | $          | 1.4                             |       | $                | (4.0       | ) | $ | (23.0 | ) |

 

23

----

 

**ROCKWOODSPECIALTIES GROUP INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**NINEMONTHS ENDED SEPTEMBER 30, 2004**

**(inmillions)**

 
| ** **                                    | ** ** | **Parent Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| NET SALES                                     |       | $                  | —     |                        | $          | 544.0                           |       | $                | 483.9      |   | $ | 1,027.9 |   |
| COST OF PRODUCTS  SOLD                        |       | —             |       | 385.3                       |       | 371.0                           |       | 756.3            |       |
| GROSS PROFIT                                  |       | —             |       | 158.7                       |       | 112.9                           |       | 271.6            |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | 0.2                |       | 84.2                        |       | 92.8                            |       | 177.2            |       |
| RESTRUCTURING  CHARGE, net                    |       | —             |       | 0.1                         |       | —                          |       | 0.1              |       |
| OPERATING (LOSS)  INCOME                      |       | (0.2               | )          | 74.4                        |       | 20.1                            |       | 94.3             |       |
| OTHER INCOME  (EXPENSES):                     |       |               |       |                        |       |                            |       |             |       |
| Intergroup  interest, net                     |       | 41.3               |       | (41.3                       | )          | —                          |       | —           |       |
| Interest, net                                 |       | (58.3              | )          | (2.0                        | )          | (13.9                           | )          | (74.2            | )          |
| Write-off of  deferred debt issuance costs    |       | (1.8               | )          | —                      |       | —                          |       | (1.8             | )          |
| Foreign exchange  (loss) gain, net            |       | (38.9              | )          | —                      |       | 6.7                             |       | (32.2            | )          |
| Other, net                                    |       | —             |       | —                      |       | (4.0                            | )          | (4.0             | )          |
| Net                                           |       | (57.7              | )          | (43.3                       | )          | (11.2                           | )          | (112.2           | )          |
| (LOSS) INCOME  BEFORE TAXES                   |       | (57.9              | )          | 31.1                        |       | 8.9                             |       | (17.9            | )          |
| INCOME TAX  (BENEFIT) PROVISION               |       | (10.4              | )          | 17.0                        |       | (0.3                            | )          | 6.3              |       |
| NET (LOSS) INCOME                             |       | $                  | (47.5      | )                           | $          | 14.1                            |       | $                | 9.2        |   | $ | (24.2 | ) |

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**NINEMONTHS ENDED SEPTEMBER 30, 2003**

**(inmillions)**

 
| ** **                                    | ** ** | **Parent Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| NET SALES                                     |       | $                  | —     |                        | $          | 388.5                           |       | $                | 204.2      |   | $ | 592.7 |   |
| COST OF PRODUCTS  SOLD                        |       | —             |       | 274.9                       |       | 156.8                           |       | 431.7            |       |
| GROSS PROFIT                                  |       | —             |       | 113.6                       |       | 47.4                            |       | 161.0            |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | 0.3                |       | 64.0                        |       | 24.7                            |       | 89.0             |       |
| RESTRUCTURING  CHARGE, net                    |       | —             |       | 1.1                         |       | 0.2                             |       | 1.3              |       |
| OPERATING (LOSS)  INCOME                      |       | (0.3               | )          | 48.5                        |       | 22.5                            |       | 70.7             |       |
| OTHER INCOME  (EXPENSES):                     |       |               |       |                        |       |                            |       |             |       |
| Intergroup  interest, net                     |       | 43.1               |       | (40.7                       | )          | (2.4                            | )          | —           |       |
| Interest, net                                 |       | (50.5              | )          | 0.1                         |       | (12.5                           | )          | (62.9            | )          |
| Write-off of deferred  debt issuance costs    |       | (31.8              | )          | —                      |       | (5.1                            | )          | (36.9            | )          |
| Intergroup  other, net                        |       | —             |       | (1.8                        | )          | 1.8                             |       | —           |       |
| Foreign exchange  loss, net                   |       | (7.8               | )          | (0.1                        | )          | (11.2                           | )          | (19.1            | )          |
| Net                                           |       | (47.0              | )          | (42.5                       | )          | (29.4                           | )          | (118.9           | )          |
| (LOSS) INCOME  BEFORE TAXES                   |       | (47.3              | )          | 6.0                         |       | (6.9                            | )          | (48.2            | )          |
| INCOME TAX  (BENEFIT) PROVISION               |       | (16.1              | )          | 2.9                         |       | (1.0                            | )          | (14.2            | )          |
| NET (LOSS)  INCOME                            |       | $                  | (31.2      | )                           | $          | 3.1                             |       | $                | (5.9       | ) | $ | (34.0 | ) |

 

24

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**SEPTEMBER30, 2004**

**(inmillions)**

 
| ** **                                      | ** ** | **Parent  Company** | ** ** | **Guarantor**

**Subsidiaries** | ** ** | **Non-Guarantor**

**Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                      |       |                |       |                            |       |                                |       |             |       |             |       |
| CURRENT ASSETS:                                 |       |                |       |                            |       |                                |       |             |       |             |       |
| Cash and cash equivalents                       |       | $                   | 40.2       |                            | $          | 60.7                                |       | $                | 81.0       |             | $          | — |   | $ | 181.9 |   |
| Accounts receivable, net                        |       | —              |       | 124.3                           |       | 306.8                               |       | —           |       | 431.1            |       |
| Inventories                                     |       | —              |       | 107.3                           |       | 303.4                               |       | —           |       | 410.7            |       |
| Deferred income taxes                           |       | 10.1                |       | 1.8                             |       | 8.0                                 |       | —           |       | 19.9             |       |
| Prepaid expenses and other current assets       |       | —              |       | 6.1                             |       | 41.9                                |       | —           |       | 48.0             |       |
| Total current assets                            |       | 50.3                |       | 300.2                           |       | 741.1                               |       | —           |       | 1,091.6          |       |
| PROPERTY, PLANT AND EQUIPMENT, net              |       | —              |       | 318.1                           |       | 1,095.6                             |       |             |       | 1,413.7          |       |
| INVESTMENT IN SUBSIDIARIES                      |       | 2,744.6             |       | —                          |       | —                              |       | (2,744.6         | )          | —           |       |
| GOODWILL                                        |       | —              |       | 564.3                           |       | 1,064.8                             |       | —           |       | 1,629.1          |       |
| INTERGROUP RECEIVABLE                           |       | 703.1               |       | 594.2                           |       | 94.8                                |       | (1,392.1         | )          | —           |       |
| OTHER INTANGIBLE ASSETS, net                    |       | —              |       | 27.0                            |       | 545.7                               |       | —           |       | 572.7            |       |
| DEFERRED DEBT ISSUANCE COSTS, net               |       | 8.0                 |       | 68.1                            |       | 2.7                                 |       | —           |       | 78.8             |       |
| OTHER ASSETS                                    |       | —              |       | 8.3                             |       | 64.7                                |       | —           |       | 73.0             |       |
| TOTAL ASSETS                                    |       | $                   | 3,506.0    |                            | $          | 1,880.2                             |       | $                | 3,609.4    |             | $          | (4,136.7 | ) | $ | 4,858.9 |   |
|                                            |       |                |       |                            |       |                                |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |                |       |                            |       |                                |       |             |       |             |       |
| CURRENT LIABILITIES:                            |       |                |       |                            |       |                                |       |             |       |             |       |
| Accounts payable                                |       | $                   | —     |                            | $          | 66.9                                |       | $                | 144.0      |             | $          | — |   | $ | 210.9 |   |
| Income taxes payable                            |       | (0.6                | )          | 2.5                             |       | 21.8                                |       | —           |       | 23.7             |       |
| Accrued expenses and other liabilities          |       | 26.8                |       | 72.8                            |       | 284.3                               |       | —           |       | 383.9            |       |
| Long-term debt, current portion                 |       | 6.2                 |       | —                          |       | 53.3                                |       | —           |       | 59.5             |       |
| Total current liabilities                       |       | 32.4                |       | 142.2                           |       | 503.4                               |       | —           |       | 678.0            |       |
| LONG-TERM DEBT                                  |       | 2,548.7             |       | —                          |       | 338.5                               |       | —           |       | 2,887.2          |       |
| PENSION AND RELATED LIABILITIES                 |       | —              |       | 13.0                            |       | 309.6                               |       | —           |       | 322.6            |       |
| INTERGROUP PAYABLE                              |       | 18.6                |       | 1,277.4                         |       | 95.6                                |       | (1,391.6         | )          | —           |       |
| DEFERRED INCOME TAXES                           |       | (29.5               | )          | 34.7                            |       | 28.7                                |       | —           |       | 33.9             |       |
| OTHER LIABILITIES                               |       | 13.6                |       | 22.4                            |       | 86.4                                |       | —           |       | 122.4            |       |
| Total liabilities                               |       | 2,583.8             |       | 1,489.7                         |       | 1,362.2                             |       | (1,391.6         | )          | 4,044.1          |       |
| STOCKHOLDERS’ EQUITY:                      |       |                |       |                            |       |                                |       |             |       |             |       |
| Common stock                                    |       | —              |       | 190.6                           |       | 70.0                                |       | (260.6           | )          | —           |       |
| Paid-in capital                                 |       | 882.3               |       | 374.3                           |       | 2,099.7                             |       | (2,484.5         | )          | 871.8            |       |
| Accumulated other comprehensive income (loss)   |       | 17.7                |       | (3.9                            | )          | 154.5                               |       | —           |       | 168.3            |       |
| Accumulated deficit                             |       | 22.2                |       | (170.5                          | )          | (77.0                               | )          | —           |       | (225.3           | )          |
| Total stockholders’ equity                 |       | 922.2               |       | 390.5                           |       | 2,247.2                             |       | (2,745.1         | )          | 814.8            |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |       | $                   | 3,506.0    |                            | $          | 1,880.2                             |       | $                | 3,609.4    |             | $          | (4,136.7 | ) | $ | 4,858.9 |   |

 

25

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**DECEMBER31, 2003**

**(inmillions)**

 
| ** **                                       | ** ** | **Parent Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                       |       |               |       |                        |       |                            |       |             |       |             |       |
| CURRENT ASSETS:                                  |       |               |       |                        |       |                            |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $                  | (43.1      | )                           | $          | 79.2                            |       | $                | 6.6        |             | $          | — |   | $ | 42.7 |   |
| Accounts  receivable, net                        |       | —             |       | 78.9                        |       | 59.4                            |       | —           |       | 138.3            |       |
| Inventories                                      |       | —             |       | 47.6                        |       | 40.2                            |       | —           |       | 87.8             |       |
| Deferred income  taxes                           |       | (0.4               | )          | 2.0                         |       | 1.2                             |       | —           |       | 2.8              |       |
| Prepaid expenses  and other current assets       |       | —             |       | 8.1                         |       | 4.4                             |       | —           |       | 12.5             |       |
| Total current  assets                            |       | (43.5              | )          | 215.8                       |       | 111.8                           |       | —           |       | 284.1            |       |
| PROPERTY, PLANT  AND EQUIPMENT, net              |       | —             |       | 190.1                       |       | 228.5                           |       |             |       | 418.6            |       |
| INVESTMENT IN  SUBSIDIARIES                      |       | 660.4              |       | —                      |       | —                          |       | (660.4           | )          | —           |       |
| GOODWILL                                         |       | —             |       | 362.4                       |       | 321.5                           |       | —           |       | 683.9            |       |
| INTERGROUP  RECEIVABLE                           |       | 609.1              |       | 602.2                       |       | 90.9                            |       | (1,302.2         | )          | —           |       |
| OTHER INTANGIBLE  ASSETS, net                    |       | —             |       | 5.7                         |       | 20.0                            |       | —           |       | 25.7             |       |
| DEFERRED DEBT  ISSUANCE COSTS, net               |       | 2.2                |       | 9.6                         |       | 2.2                             |       | —           |       | 14.0             |       |
| OTHER ASSETS                                     |       | —             |       | 6.4                         |       | 0.3                             |       | —           |       | 6.7              |       |
| TOTAL ASSETS                                     |       | $                  | 1,228.2    |                        | $          | 1,392.2                         |       | $                | 775.2      |             | $          | (1,962.6 | ) | $ | 1,433.0 |   |
|                                             |       |               |       |                        |       |                            |       |             |       |             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   |       |               |       |                        |       |                            |       |             |       |             |       |
| CURRENT  LIABILITIES:                            |       |               |       |                        |       |                            |       |             |       |             |       |
| Accounts payable                                 |       | $                  | —     |                        | $          | 52.6                            |       | $                | 46.0       |             | $          | — |   | $ | 98.6 |   |
| Income taxes  payable                            |       | (0.6               | )          | 0.1                         |       | 12.5                            |       | —           |       | 12.0             |       |
| Accrued expenses  and other liabilities          |       | 7.8                |       | 25.3                        |       | 18.1                            |       | —           |       | 51.2             |       |
| Long-term debt,  current portion                 |       | 2.7                |       | —                      |       | 6.4                             |       | —           |       | 9.1              |       |
| Total current  liabilities                       |       | 9.9                |       | 78.0                        |       | 83.0                            |       | —           |       | 170.9            |       |
| LONG-TERM DEBT                                   |       | 642.0              |       | —                      |       | 181.9                           |       | —           |       | 823.9            |       |
| PENSION AND  RELATED LIABILITIES                 |       | —             |       | 14.9                        |       | 11.2                            |       | —           |       | 26.1             |       |
| INTERGROUP  PAYABLE                              |       | 14.7               |       | 1,129.9                     |       | 157.6                           |       | (1,302.2         | )          | —           |       |
| DEFERRED INCOME  TAXES                           |       | (29.6              | )          | 19.0                        |       | 17.9                            |       | —           |       | 7.3              |       |
| OTHER  LIABILITIES                               |       | 24.7               |       | 13.2                        |       | 13.2                            |       | 0.1              |       | 51.2             |       |
| Total  liabilities                               |       | 661.7              |       | 1,255.0                     |       | 464.8                           |       | (1,302.1         | )          | 1,079.4          |       |
| STOCKHOLDERS’  EQUITY:                      |       |               |       |                        |       |                            |       |             |       |             |       |
| Common stock                                     |       | —             |       | 190.6                       |       | 70.1                            |       | (260.7           | )          | —           |       |
| Paid-in capital                                  |       | 478.3              |       | 134.4                       |       | 255.4                           |       | (399.8           | )          | 468.3            |       |
| Accumulated  other comprehensive income (loss)   |       | 18.6               |       | (3.2                        | )          | 71.0                            |       | —           |       | 86.4             |       |
| Accumulated  deficit                             |       | 69.6               |       | (184.6                      | )          | (86.1                           | )          | —           |       | (201.1           | )          |
| Total  stockholders’ equity                 |       | 566.5              |       | 137.2                       |       | 310.4                           |       | (660.5           | )          | 353.6            |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY |       | $                  | 1,228.2    |                        | $          | 1,392.2                         |       | $                | 775.2      |             | $          | (1,962.6 | ) | $ | 1,433.0 |   |

 

26

----

** **

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**NINEMONTHS ENDED SEPTEMBER 30, 2004**

**(inmillions)**

 
| ** **                                                                                              | ** ** | **Parent  Company** | ** ** | **Guarantor**

**Subsidiaries** | ** ** | **Non-Guarantor**

**Subsidiaries** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                   |       |                |       |                            |       |                                |       |             |       |
| Net (loss) income                                                                                       |       | $                   | (47.5      | )                               | $          | 14.1                                |       | $                | 9.2        |   | $ | (24.2 | ) |
| Adjustments to reconcile net (loss) income to net  cash (used in) provided by operating activities:     |       |                |       |                            |       |                                |       |             |       |
| Depreciation and amortization                                                                           |       | —              |       | 17.5                            |       | 42.9                                |       | 60.4             |       |
| Deferred financing costs amortization                                                                   |       | 0.2                 |       | 2.9                             |       | 0.1                                 |       | 3.2              |       |
| Write-off of deferred debt issuance costs                                                               |       | —              |       | 1.8                             |       | —                              |       | 1.8              |       |
| Foreign exchange loss                                                                                   |       | 25.8                |       | —                          |       | (5.4                                | )          | 20.4             |       |
| Fair value adjustments of derivatives                                                                   |       | (5.8                | )          | —                          |       | (1.0                                | )          | (6.8             |  )    |
| Bad debt provision                                                                                      |       | —              |       | 0.8                             |       | 0.4                                 |       | 1.2              |       |
| Deferred income taxes                                                                                   |       | (10.4)              |       | 16.4                            |       | (10.7                               | )          | (4.7             | )          |
| Changes in assets and liabilities, net of the effect  of foreign currency translation and acquisitions: |       |                |       |                            |       |                                |       |             |       |
| Accounts receivable                                                                                     |       | —              |       | (9.3                            | )          | (3.4                                | )          | (12.7            | )          |
| Inventories, including fair value write-up charge                                                       |       | —              |       | (6.7                            | )          | 38.8                                |       | 32.1             |       |
| Prepaid expenses and other assets                                                                       |       | —              |       | 2.9                             |       | 2.4                                 |       | 5.3              |       |
| Accounts payable                                                                                        |       | —              |       | 4.7                             |       | (18.4                               | )          | (13.7            | )     |
| Income taxes payable                                                                                    |       | —              |       | (0.6                            | )          | (0.9                                | )          | (1.5             | )          |
| Accrued expenses and other liabilities                                                                  |       | 14.2                |       | (69.5                           | )          | 81.4                                |       | 26.1             |       |
| Other operating activities, net                                                                         |       | (107.3              | )          | 67.0                            |       | 39.8                                |       | (0.5             | )          |
| Net cash (used in) provided by operating activities                                                     |       | (130.8              | )          | 42.0                            |       | 175.2                               |       | 86.4             |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                   |       |                |       |                            |       |                                |       |             |       |
| Acquisitions, including transaction fees paid, net  of cash acquired                                    |       | (2,068.1            | )          | 1.9                             |       | 7.7                                 |       | (2,058.5         | )          |
| Capital expenditures                                                                                    |       | —              |       | (10.2                           | )          | (28.6                               | )          | (38.8            | )          |
| Proceeds on sale of property, plant and equipment                                                       |       | —              |       | 0.1                             |       | 0.7                                 |       | 0.8              |       |
| Net cash used in investing activities                                                                   |       | (2,068.1            | )          | (8.2                            | )          | (20.2                               | )          | (2,096.5         | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                   |       |                |       |                            |       |                                |       |             |       |
| Equity contributions                                                                                    |       | 404.0               |       | —                          |       | —                              |       | 404.0            |       |
| Payments on long-term debt                                                                              |       | (274.7              | )          | —                          |       | (288.6                              | )          | (563.3           | )          |
| Proceeds from long-term debt, net of issuance cost  paid                                                |       | 2,152.9             |       | (52.3                           | )          | 206.5                               |       | 2,307.1          |       |
| Net cash provided by (used in)financing activities                                                      |       | 2,282.2             |       | (52.3                           | )          | (82.1                               | )          | 2,147.8          |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                 |       | —              |       | —                          |       | 1.5                                 |       | 1.5              |       |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | 83.3                |       | (18.5                           | )          | 74.4                                |       | 139.2            |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | (43.1               | )          | 79.2                            |       | 6.6                                 |       | 42.7             |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                |       | $                   | 40.2       |                            | $          | 60.7                                |       | $                | 81.0       |   | $ | 181.9 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**NINEMONTHS ENDED SEPTEMBER 30, 2003**

**(inmillions)**

 
| ** **                                                                                               | ** ** | **Parent Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                                   |       |               |       |                        |       |                            |       |             |       |
| Net  (loss) income                                                                                       |       | $                  | (31.2      | )                           | $          | 3.1                             |       | $                | (5.9       | ) | $ | (34.0 | ) |
| Adjustments  to reconcile net (loss) income to net cash (used in) provided by operating  activities:     |       |               |       |                        |       |                            |       |             |       |
| Depreciation  and amortization                                                                           |       | —             |       | 17.2                        |       | 20.4                            |       | 37.6             |       |
| Deferred  financing costs amortization                                                                   |       | 3.2                |       | —                      |       | 0.7                             |       | 3.9              |       |
| Write-off  of deferred debt issuance costs                                                               |       | 31.8               |       | —                      |       | 5.1                             |       | 36.9             |       |
| Foreign  exchange loss                                                                                   |       | 7.8                |       | 0.1                         |       | 11.2                            |       | 19.1             |       |
| Fair  value adjustments of derivatives                                                                   |       | 0.9                |       | —                      |       | 1.8                             |       | 2.7              |       |
| Bad  debt provision                                                                                      |       | —             |       | 0.1                         |       | 0.1                             |       | 0.2              |       |
| Deferred  income taxes                                                                                   |       | (16.1              | )          | 2.8                         |       | (6.4                            | )          | (19.7            | )          |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |               |       |                        |       |                            |       |             |       |
| Accounts  receivable                                                                                     |       | —             |       | 0.6                         |       | (3.2                            | )          | (2.6             | )          |
| Inventories                                                                                              |       | —             |       | (2.9                        | )          | 0.9                             |       | (2.0             | )          |
| Prepaid  expenses and other assets                                                                       |       | —             |       | (2.5                        | )          | 1.4                             |       | (1.1             | )          |
| Accounts  payable                                                                                        |       | —             |       | 7.1                         |       | (4.1                            | )          | 3.0              |       |
| Income  taxes payable                                                                                    |       | —             |       | (0.7                        | )          | (2.6                            | )          | (3.3             | )          |
| Accrued  expenses and other liabilities                                                                  |       | 1.2                |       | (7.8                        | )          | 4.6                             |       | (2.0             | )          |
| Other  operating activities, net                                                                         |       | (78.2              | )          | 79.4                        |       | 3.2                             |       | 4.4              |       |
| Net  cash (used in) provided by operating activities                                                     |       | (80.6              | )          | 96.5                        |       | 27.2                            |       | 43.1             |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                                   |       |               |       |                        |       |                            |       |             |       |
| Acquisitions,  net of cash acquired                                                                      |       | —             |       | (12.4                       | )          | (1.7                            | )          | (14.1            | )          |
| Capital  expenditures                                                                                    |       | —             |       | (12.3                       | )          | (14.5                           | )          | (26.8            | )          |
| Proceeds  on sale of property, plant and equipment                                                       |       | —             |       | 0.2                         |       | —                          |       | 0.2              |       |
| Net  insurance proceeds from fire damage                                                                 |       | —             |       | —                      |       | 3.3                             |       | 3.3              |       |
| Net  cash used in investing activities                                                                   |       | —             |       | (24.5                       | )          | (12.9                           | )          | (37.4            | )          |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                   |       |               |       |                        |       |                            |       |             |       |
| Equity  contributions                                                                                    |       | 95.0               |       | —                      |       | —                          |       | 95.0             |       |
| Payments  on long-term debt                                                                              |       | (720.3             | )          | —                      |       | (177.3                          | )          | (897.6           | )          |
| Proceeds  from long-term debt                                                                            |       | 630.1              |       | —                      |       | 170.9                           |       | 801.0            |       |
| Net  cash provided by (used in) financing activities                                                     |       | 4.8                |       | —                      |       | (6.4                            | )          | (1.6             | )          |
| EFFECT  OF EXCHANGE RATE CHANGES ON CASH                                                                 |       | —             |       | —                      |       | 4.5                             |       | 4.5              |       |
| NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | (75.8              | )          | 72.0                        |       | 12.4                            |       | 8.6              |       |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 42.4               |       | (1.7                        | )          | 2.2                             |       | 42.9             |       |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                                |       | $                  | (33.4      | )                           | $          | 70.3                            |       | $                | 14.6       |   | $ | 51.5 |   |

 

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**Item 2****.****           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

*Thefollowing should be read in conjunction with the Condensed ConsolidatedFinancial Statements and the related notes that appear elsewhere in thisreport. In this section, unless we indicate otherwise or the context otherwiserequires, any references to “we,”“our,” and “us” refer to Rockwood SpecialtiesGroup, Inc. and its consolidated subsidiaries. Amounts may not recalculate due to rounding differences.*

* *

*In connection with the Dynamit Nobel Acquisition, we haveentered into new financing arrangements and have significantly altered ourcapital structure. The following discussion contains forward-looking statementsthat involve numerous risks and uncertainties. Our actual results could differmaterially from those discussed in the forward-looking statements as a resultof these risks and uncertainties, including those set forth under “InformationConcerning Forward-Looking Statements”.*

 

On July 31, 2004,the Company completed the acquisition of four businesses of Dynamit Nobel frommg technologies ag. The businesses acquired are focused on highly specializedmarkets and consist of: white pigments; surface treatment and lithiumchemicals; ceramics; and pharmaceutical intermediates (the “Dynamit NobelAcquisition”). The resultsof operations of Dynamit Nobel for the two month period ended September 30,2004 since the date of the Dynamit Nobel Acquisition are included in ourcondensed consolidated financial statements for the three and nine-monthperiods ended September 30, 2004, along with Dynamit Nobel’s financialposition as of September 30, 2004. Given the significance of the DynamitNobel Acquisition we have included a limited discussion of the results of ouroperations on a pro forma basis as if the Dynamit Nobel Acquisition had takenplace at the beginning of the periods presented.  See “—Results of Operations Pro Forma NetSales and Adjusted EBITDA” below.

 

##### **General**

 

We are a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials in our specific markets. We serve customers across awide variety of industries and geographic areas. As of September 30, 2004,we operated through seven business segments: (i) Performance Additives;(ii) Specialty Compounds; (iii) Electronics; (iv) SpecialtyChemicals; (v) Pigments; (vi) Advanced Ceramics; and (vii) Custom Synthesis.

 

Asa result of the Dynamit Nobel Acquisition we acquired four of our sevensegments: (1) Specialty Chemicals; (2) Pigments; (3) AdvancedCeramics and (4) Custom Synthesis. In connection with the Dynamit Nobel Acquisition, we entered into newsenior secured credit facilities which provide for approximately$1,470.7 million (€389.7 million and $985.0 million) of terms loans and arevolving credit facility of $250.0 million. We also entered into a new$870.5 million (€419.8 and $350.0 million) senior subordinated loanfacility and received an equity contribution of $404.0 from the proceeds of anequity contribution of $425 million to our ultimate parent, Rockwood Holdings(“Holdings”), from affiliates of KohlbergKravis Roberts & Co. L.P. (“KKR”) and DLJ Merchant Banking Partners III, L.P. and its affiliatedfunds (“DLJMB”), less a $20.0 millionrepayment of a portion of the additional payment-in-kind (“PIK”) notes issued in connection with interestpayments on the $70.0 million initial aggregate principal amount of PIK Notesissued in connection with the KKR Acquisition, and related fees of $1.0million. See also “- Liquidity and Capital Resources” below for discussion ofother acquisitions and refinancings.

 

**FactorsWhich Affect our Results of Operations**

 

**Economicand Market Conditions**

 

Economic and marketconditions in our business segments and regions in which we operate vary fromperiod to period. The principal factors that impacted our results of operationsin these periods included the following:

 

***Performance Additives***

 

•                                          Growthin the North American construction market contributed to an increase in salesof our products in the periods presented into this end-use market, specificallyour Iron Oxide Pigments and Timber Treatment Chemicals businesses. TimberTreatment Chemicals also benefited from high levels of activity in homeimprovement areas such as new and replacement decks.

•                                          Theincreasing market for environmentally advanced wood treatment chemical productsand the phase out of chromated copper arsenate (“CCA”) wood treatment productsfor residential use has had a positive impact on our Timber Treatment Chemicalsbusiness, which is a leading supplier of such products. This trend has helpedour Timber Treatment Chemicals business increase its portion of sales of highermargin alkaline copper quaternary (“ACQ”) products, and we expect this trend tocontinue as ACQ products continue to be transitioned into the North Americanresidential market.

•                                          Acontinuing trend towards the increased use of colored concrete products in theNorth American construction market, particularly paving stones, has had apositive effect on our Iron Oxide Pigments business line.

 

***Specialty Compounds***

 

•                                          Ourlargest product line in the Specialty Compounds segment is wire and cablerelated products. Sales within this product line are dependent upon thetelecommunications market and related sectors, specifically demand for high-endvoice and data

 

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communication wire andcable, for which our Specialty Compounds segment is a significant provider ofsheathing materials. Sales of these products have been relatively stable in2003 and 2004 after experiencing declines in prior years.

•                                          Mostof the other end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product. Sales of these products havebeen relatively flat in 2003 and 2004 after experiencing significant declinesin prior years. We continue to focus more of our efforts towards increasinghigh margin specialty applications.

•                                          Wehave significantly rationalized our cost structure in this segment throughplant consolidation, headcount reductions and other cost cutting measures.

 

***Electronics***

 

•                                          Demandfor our Electronic Chemicals products generally follows the activity levels ofsemiconductor and printed circuit board manufacturers, while the price of ourproducts is insulated to some degree from the effect of changes in the price ofsemiconductors and printed circuit boards due to the fact that the cost ofthese products is generally a small component of the cost of the end product.The global semiconductor and printed circuit board markets are cyclical innature. Market conditions have generally improved during 2004 as compared to2003.

•                                          Demandfor the services performed by our Wafer Reclaim business have risen in thecurrent year due to the improved market conditions. However, pricing pressurestill exists due to competitive factors.

•                                          Demandin our Photomasks business is affected by the number of new electronic productsrather than production levels of existing products, and thus is not affected asmuch by the demand levels for semiconductors, but rather follows the rate ofnew products being developed. The consolidation in our competitive basecontinues to cause downward pricing pressure in this business.

 

***Specialty Chemicals***

 

•                                          Demandfor Surface Treatment products within our Specialty Chemicals segment generallyfollows the activities levels of metal processing manufacturers including theautomotive supply, steelworks and aircraft industries.  The market for Surface Treatment products isprimarily in North America, Europe and Asia.

•                                          Marketconditions for surface treatment products in the industries served have beenrelatively stable in 2003 and 2004. 

•                                          Demandfor our lithium products is generally driven in part by demand of lithiumcarbonate in industrial applications, the aluminum business, battery productsand higher general demand in China. Sales of lithium products specifically used in life science applicationsdepend on the trends in drug development and growth in pharmaceuticalsmarkets.  The market for lithium-basedproducts is predominately concentrated in North America, Europe and Asia.

•                                          Marketconditions for lithium products in the industries served have been relativelystable in 2003 and 2004.

 

***Pigments***

 

•                                          Demandin the industry has historically followed the economic growth of industrializedcountries.

•                                          Demandfor our titanium dioxide pigments in anatase form is mainly driven by demand inthe synthetic fiber industry, while demand for our functional additives andtitanium dioxide products in rutile form is driven by demand in the coatings,paper and plastics industries.  Themarket for our products is predominately in Europe and North America.

•                                          Duringthe periods presented, relatively stable price levels were experienced in ouranatase pigment markets on a global scale. Volumes for anatase pigments increased in 2003. During the first half of2004, strong growth in Asia led to higher volumes, while we experienced pricingpressure in Europe from global suppliers and in Asia from domestic Chinesesuppliers.

•                                          In2003, prices for titanium dioxide pigments gradually increased although demandfor rutile form pigments and functional additives suffered due to continuedweak global economic conditions.  Weexperienced certain pricing pressures for titanium dioxide rutile form pigmentssince then.

 

***AdvancedCeramics***

 

•                                          Beginningin 2003 the markets for our electronic products stabilized although weexperienced less demand as a result of the shift in the market focus to Asia.

•                                          Demand for our ceramic medicaldevices is mainly tied to the aging population in Europe and the U.S.  As a result, sales of our products used in medicaldevice applications have experienced double-digit growth each year since 2001.We expect demand for ceramic components in artificial hip joints to continue toincrease steadily.

•                                          Salesof ceramic products for use in mechanical applications and cutting toolsproducts have been negatively impacted by strong pricing pressure from Asiancompetitors in 2003 and 2004. We also experienced lower market growth as theseapplications are for more mature industries.

•                                          AdvancedCeramics for other applications generally follows overall economic and marketconditions because of the variety of end-use markets into which we sell ourproducts.  The market for these productsis predominately in Asia, North American and Europe.

 

***Custom Synthesis***

 

•                                          Demand for our custom synthesischemistries depends to a large extent on the pipeline and lifecycles ofpharmaceutical products.  The decrease ofannual FDA approvals in recent years reflects the slowdown of the developmentof new molecules in the

 

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life-sciencesindustry.  In addition, the averagedevelopment time of a new drug has increased in recent years, despitepharmaceutical manufacturers’ attempts to decrease this development period.

•                                          Further, merger and acquisition activityin the pharmaceutical industry and overcapacity in the custom synthesisindustry has affected the demand for and prices of our chemistries.  For example, we experienced a decrease indemand for our products as a result of the acquisition of Roche Vitamins byDSM, which resulted in the combined company producing formerly outsourcedchemistries in-house resulting in capacity utilization issues at Rohner.  We also expect demand to be affected by themigration of certain manufacturing processes to China.

•                                          Demandfor pharmaceuticals has risen in recent years driven by a growing populationworldwide and an aging population in the U.S.

 

##### **Currency Fluctuations**

 

We operate ageographically diverse business. We estimate that we sold to customers in morethan 60 countries during the first nine months of 2004. Currently, we serve ourdiverse and extensive customer base with 93 manufacturing facilities in 24countries. Although we sell and manufacture our products in many countries, oursales and production costs are mainly denominated in U.S. dollars, euros andpounds sterling. Our results of operations and financial condition aretherefore impacted by the fluctuation of the euro and the pound sterlingagainst our reporting currency, the U.S. dollar. No other currency issignificant to our results of operations. Unless otherwise noted, allreferences below to currency exchange rate changes primarily relate to thestrengthening of the euro and the pound against the U.S. dollar in the periodscompared.

 

Our financial results aresubject to the impact of gains and losses on currency translations, which occurwhen balance sheet accounts of foreign operations are translated into U.S.dollars at period-end exchange rates and income and expense accounts aretranslated at average exchange rates over the course of that period. Gains andlosses on currency translations are recorded in our financial statements as acomponent of “other comprehensive income (loss)” and do not impact ouroperating margins. The increase in the value of the euro has had a positiveimpact on our net sales, gross profit and operating income reported in ourconsolidated statements of operations for the three and nine months ended September 30,2004.

 

Our balance sheet issubject to the effect of currency fluctuations on the translation of ourforeign currency denominated debt and cash. Gains and losses on theremeasurement of debt and cash denominated in a currency other than thefunctional currency of the borrower are included as a component of “other income(expenses).”

 

In addition, ourfinancial results are subject to the impact of gains and losses on currencytransactions, which occur when operating transactions are denominated in acurrency different from the local operating currency. Gains and losses oncurrency transactions are included in operating income and impact our operatingmargins. We have entered into certain contracts in 2004 in connection with asmall portion of our currency transaction risk. Although our operating marginshistorically have not been significantly impacted by currency transaction risk,currency fluctuations could have a material impact on our future operatingincome and operating margins, particularly with the Dynamit Nobel Acquisition.

 

**RawMaterials**

 

Wepurchase raw materials and chemical intermediates from a large number of thirdparties and have a broad raw material base. The table below lists the mostsignificant raw materials purchased in 2003 from outside sources and theprincipal products for which the materials were used.

 
| **Raw  Material**      | ** ** | **Segment**           | ** ** | **Products**                 | ** ** |
|------------------------|------------|-----------------------|------------|------------------------------|------------|
|                   |       |                  |       |                         |       |
| Titanium-bearing  slag |       | Pigments              |       | Titanium dioxide             |       |
| Iron  oxide            |       | Performance Additives |       | Iron oxide pigments          |       |
| Chromic  acid          |       | Performance Additives |       | Wood preservation  chemicals |       |
| Quaternary  amines     |       | Performance Additives |       | Organoclays                  |       |
| PVC  resin             |       | Specialty Compounds   |       | Compounds                    |       |
| Plasticizers           |       | Specialty Compounds   |       | Compounds                    |       |
| Lithium                |       | Specialty Chemicals   |       | Lithium compounds            |       |

 

Titanium-bearingslag, our largest raw material (in terms of dollars), is the most important rawmaterial used in the production of specialty grade titanium dioxide in ourPigments segment. We purchase titanium-bearing slag annually from twosuppliers. Our supply agreement with one of them is for a fixed term until December 31,2007, subject to automatic annual renewal until December 31, 2011, unlessearlier terminated, and contains a fixed price with an annual escalationclause. Our supply agreement with the other supplier is for a fixed term until December 31,2006 and provides for a fixed price until December 31, 2004. Prices forthe years 2005 and 2006 will be negotiated for each of these years.

 

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Historically,we have received iron oxide, our second largest raw material (in terms ofdollars), from multiple sources and have not experienced any significant supplyshortages or price fluctuations. Iron oxide is primarily sourced from ourplants in the United States, Italy and China, as well as from a third party inIndia and China. Chromic acid is a commodity chemical used in the formulationof CCA and we have not experienced any significant supply shortages or pricefluctuations in the past. We source our chromic acid from Kazakhstan, China,Turkey and the United States through both fixed price and annually adjustedcontracts which vary in term from one to three years. As a result of theconversion from CCA to ACQ, our principal raw material for our timber businesshas shifted from chromic acid to quaternary amines, which we exclusivelysource, solvents and copper. Accordingly, chromic acid is no longer one of ourmost significant raw materials. In our Clay-based Additives business line ofour Performance Additives segment, quaternary amine is sourced under along-term contract, which expires in late 2008 and is subject to quarterlyadjustment for the price of tallow, the base component of quaternary amine. PVCresin is a commodity product and its pricing is directly related to the priceof ethylene and chlorine, as well as PVC industry operating rates and energyprices. Some of the plasticizers we use are generic and considered a commodityproduct, while others are specific and considered a specialty product. Oursupply contracts for plasticizers do not specify a fixed price, and most ofthem contain market price and discount adjustments.

 

Lithiumis a primary raw material source for all lithium chemicals and is found in onlya small number of locations, including most importantly, the Atacama Desert inChile. We have a long-term contract with the Chilean government to mine lithiumbrine in the Atacama Desert in Chile, which we believe provides a securelong-term access to lithium.

 

Majorrequirements for our key raw materials and energy are typically satisfiedpursuant to contractual agreements and medium- or long-term relationships withsuppliers. We are not generally dependent on any one supplier for a major partof our raw materials requirements, but certain important raw materials areobtained from a few major suppliers. In general, where we have limited sourcesof raw materials, we have developed contingency plans to minimize the effect ofany interruption or reduction in supply.

 

Temporaryshortages of raw materials may occasionally occur and cause temporary priceincreases. In recent years, these shortages have not resulted in unavailabilityof raw materials. However, the continuing availability and price of rawmaterials are affected by unscheduled plant interruptions occurring duringperiods of high demand, domestic and world market and political conditions, aswell as the direct or indirect effect of governmental regulations. Duringperiods of high demand, our raw materials are subject to significant pricefluctuations, and, in the past, such fluctuations have had an adverse impact onthe results of operations of our business. The impact of any future rawmaterial shortages on our business as a whole or in specific geographic regionscannot be accurately predicted.

 

**Acquisitionsand Dispositions**

 

See “—Liquidity andCapital Resources” below for discussion of the Dynamit Nobel Acquisitionconsummated in the third quarter of 2004.

 

OnSeptember 2, 2004 the Company completed the acquisition of the Pigmentsand Dispersions business of Johnson Matthey PLC for approximately $50.0 million.The acquisition expands the Company’s global iron oxide pigments’business specifically within transparent iron oxide pigments and dispersions,color concentrates and complex inorganic color pigments for the surface andwood coatings, plastics, building materials and printing inks markets. Theacquisition includes manufacturing facilities in Kidsgrove, U.K., Sudbury,U.K., and Braeside, Victoria, Australia. The Company utilized the remainingundrawn funds from the term loan portion of its senior credit facilities tofinance this transaction.

 

On October 29, 2004, theCompany entered into a definitive agreement to merge the three business linesof our Custom Synthesis segment with Groupe Novasep SAS to form a newstandalone company within Rockwood.  TheCompany expects to complete the merger in the fourth quarter of 2004.

 

**Componentsof Adjusted EBITDA**

 

The process ofrefocusing and restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe Dynamit Nobel Acquisition, resulted in a number of charges that haveaffected Rockwood’s historical results. These charges, along with certain otheritems, are added to or subtracted from net loss to derive Adjusted EBITDA, asdefined below.  The more significant ofthese items include the following:

 

•                  *Restructuring and Related Charges*.  We have recorded certain restructuringcharges during the three and nine months ended September 30, 2004 formiscellaneous restructuring activities.

 

•                  *Systems/Organization Establishment Expenses*.  These expenses include costs that arose inconnection with the KKR Acquisition and our resulting organization as astand-alone company and primarily relate to the amortization of sign-oncompensation arrangements for key executives. For the three and nine months ended September 30, 2004, these

 

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expenses also include certain costs relatedto the integration of the businesses acquired in the Dynamit Nobel Acquisition,as well as professional fees incurred regarding systems and internal controldocumentation in connection with the Sarbanes-Oxley Act of 2002.  These expenses are reflected in the “corporateand eliminations” column when our results are presented on a segment basis.

 

•                  *Cancelled Acquisition and Disposal Costs*.  Such costs were incurred in connection withnon-consummated acquisitions and dispositions.

 

•                  *Write-off of deferred debt issuance costs*.  In July 2003, we wrote off $36.9 millionof deferred debt issuance costs related to our previous long-term debt that wasrepaid as part of the July 2003 Refinancing.  In December 2003, we incurred $1.4million of expenses in connection with a further modification of our thensenior credit agreement resulting in a 75 basis point interest rate reductionon $290 million of our senior debt. In July 2004 the Company wrote off$1.8 million of deferred debt issuance costs related to previous long-term debtthat was repaid as part of the Dynamit Nobel Acquisition.

 

•                  *Stamp duty tax*.  During the nine months ended September 30,2004, we paid a stamp duty tax on certain assets transferred in the UnitedKingdom in connection with the KKR Acquisition.

 

•                  *Business Interruption Costs and Insurance Recovery*.  We recorded gains in the three and ninemonths ended September 30, 2003 for fire insurance settlements.

 

•                  *Inventory Write-Up Reversal.* Under Statement of Financial AccountingStandard No. 141, *Business Combinations*, allinventories acquired in an acquisition must be revalued to “fair value.”  In connection with the Dynamit NobelAcquisition, the Company allocated approximately $49.7 million of the totalpurchase price to inventory to reflect manufacturing profit in inventory at thedate of the acquisition.  This resulted ina consequential reduction in gross profit of $34.2 million in the three andnine-month periods ended September 30, 2004, as the inventory was sold inthe normal course of business. Also included for the periods presented hereinis the impact of inventory step-ups from certain acquisitions in thePerformance Additives segment.

 

•                  *Foreign exchange (loss)/gain*.  We have recorded foreign exchange (losses)and gains related to our long-term debt. These amounts reflect the non-cash translation impact on our euro-denominateddebt resulting from the strengthening or weakening of the euro against the U.S.dollar during the applicable periods. Foreign exchange (loss) / gain alsoincludes losses on foreign currency derivative agreements that the Companyentered into in connection with the Dynamit Nobel Acquisition.

 

On a segmentbasis, we define Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain non-recurring gainsand charges and certain items deemed by our senior management to have little orno bearing on the day-to-day operating performance of our business segments andreporting units.  The adjustments made toour operating income directly correlate with the adjustments to net income incalculating Adjusted EBITDA on a consolidated basis pursuant to the seniorsecured credit agreement.  Our seniormanagement uses Adjusted EBITDA on a segment basis as the primary measure toevaluate the ongoing performance of our business segments and reporting units.

 

We useAdjusted EBITDA on a consolidated basis to assess our operatingperformance.  In addition, managementuses Adjusted EBITDA on a consolidated basis as the most significant criterionin the calculation of performance-based cash bonuses.  We believe this financial measure on aconsolidated basis is helpful in highlighting trends in our overall businessbecause Adjusted EBITDA excludes those items that have little or no bearing onour day-to-day operating performance.

 

Because weview Adjusted EBITDA on both a segment basis and consolidated basis as anoperating performance measure, we use net (loss) income as the most comparablegenerally accepted accounting principles (“GAAP”) measure.  The following table, which sets forth theapplication component of Adjusted EBITDA, presents a reconciliation of net lossto Adjusted EBITDA on a GAAP basis:

 

33

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| ** **                                          | ** ** | **Three months ended September 30** | ** ** | **Nine months ended September 30** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(millions)**                                      | ** ** | **2004**                                 | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                     |       |                                    |       |   |   |   |   |
| Net loss                                            |       | $                                        | (50.0      | )                                       | $          | (23.0 | ) | $ | (24.2 | ) | $ | (34.0 | ) |
| Income  tax provision (benefit)                     |       | (13.4                                    | )          | (9.4                                    | )          | 6.3 |   | (14.2 | ) |
| Interest,  net                                      |       | 45.1                                     |       | 19.7                                    |       | 74.2 |   | 62.9 |   |
| Depreciation  and amortization                      |       | 32.2                                     |       | 12.9                                    |       | 60.4 |   | 37.6 |   |
| Restructuring  and related charges                  |       | 0.1                                      |       | 0.2                                     |       | 0.1 |   | 1.3 |   |
| Systems/organization  establishment expenses        |       | 1.5                                      |       | 0.4                                     |       | 2.5 |   | 1.1 |   |
| Cancelled  acquisition and disposal costs           |       | —                                   |       | 1.1                                     |       | 0.1 |   | 1.7 |   |
| Write-off  of deferred debt issuance costs          |       | 1.8                                      |       | 36.9                                    |       | 1.8 |   | 36.9 |   |
| Stamp  duty tax                                     |       | —                                   |       | —                                  |       | 4.0 |   | — |   |
| Business  interruption costs and insurance recovery |       | —                                   |       | —                                  |       | — |   | (4.5 | ) |
| Inventory  write-up reversal                        |       | 34.7                                     |       | —                                  |       | 34.7 |   | 0.1 |   |
| Loss  from disposed businesses                      |       | 0.8                                      |       | —                                  |       | 0.8 |   | — |   |
| Foreign  exchange loss (gain)                       |       | 40.9                                     |       | (1.1                                    | )          | 32.2 |   | 19.1 |   |
| Other                                               |       | 1.4                                      |       | —                                  |       | 1.4 |   | — |   |
|                                                |       |                                     |       |                                    |       |   |   |   |   |
| Total  Adjusted EBITDA                              |       | $                                        | 95.1       |                                    | $          | 37.7 |   | $ | 194.3 |   | $ | 108.0 |   |

 

AdjustedEBITDA is not an alternative to net (loss) income, operating income or cashflows from operating activities as calculated and presented in accordance withGAAP. You should not rely on Adjusted EBITDA as a substitute for any GAAPfinancial measure. We strongly urge you to review the reconciliations ofAdjusted EBITDA contained in this section, including the related explanations,the limitations of these exclusions described below and the other financialinformation contained in this report. We also strongly urge you not to rely onany single financial measure to evaluate our business.

 

Managementcompensates for the limitations of using non-GAAP financial measures by usingthem only to supplement our GAAP results to provide a more completeunderstanding of the factors and trends affecting our business. When viewedwith our GAAP results and the reconciliations of Adjusted EBITDA discussedabove and contained in the notes to Rockwood’s financial statements, we believeAdjusted EBITDA provides a more complete understanding of factors and trendsaffecting our business than GAAP results alone.

 

Thereare material limitations associated with excluding the reconciling items listedin the previous tables from our earnings to calculate Adjusted EBITDA and usingthis non-GAAP financial measure as compared to the use of the most directlycomparable GAAP financial measures. For example, the cash portion of income tax(benefit) provision, interest expense—net, and restructuring as well asnon-recurring charges related to securities issuance, acquisition activities,and systems/organization establishment, generally represent charges (gains)which may significantly affect funds available to use in our operating,financing and investing activities. Non-operating foreign exchange gains(losses), although not immediately affecting cash used in investing activities,may affect the amount of funds needed to service our debt if those currencyimpacts remain in place as we meet our future principal repayment obligations.Depreciation, amortization, non-cash (gains) charges and impairment charges,though not directly affecting our current cash position, represent the wear andtear and/or reduction in value of the plant, equipment, and intangible assetswhich permit 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 valuechanges. A reader may find any one or all of these items important inevaluating our performance, results of operations, financial position andliquidity.

 

**Off-BalanceSheet Arrangements**

 

None.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and the related disclosure of contingent assets and liabilities. Weevaluate our estimates on an ongoing basis, based on historical experience andvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

We believe the followingto be the most critical accounting policies and estimates affecting preparationof our consolidated financial statements.

 

*RevenueRecognition.*  We recognize revenue when the earningsprocess is complete. This generally occurs when products are shipped to thecustomer in accordance with the terms of the contract of sale, title and riskof loss have been transferred, collectibility is reasonably assured, andpricing is fixed or determinable. Accruals are made for sales returns and otherallowances based on our experience. Revenue under service agreements isrealized when the service is performed.

 

*ImpairmentAccounting.*  The recoverability of goodwill is reviewedon an annual basis during the fourth quarter. Additionally, the recoverabilityof goodwill, long-lived tangible, and certain intangible assets is reviewedwhen events or changes in

circumstances occurindicating that the carrying value of the assets may not be recoverable. Themeasurement of possible impairment for assets other than goodwill is based uponthe ability to recover the carrying value of the asset through the expectedfuture undiscounted cash flows from the use of the asset and its eventualdisposition. An impairment loss, equal to the difference between the asset’sfair value and its carrying value, is recognized when the estimated futureundiscounted cash flows are less than its carrying amount.

 

*LegalMatters.*  We are involved in various legal proceedings,including product liability, intellectual property and environmental matters,of a nature considered normal to our business. It is our policy to accrue foramounts related to these matters in accordance with SFAS No. 5, *Accounting for Contingencies*, if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is our policy to disclose such matters when there is at least areasonable possibility that a loss may have been incurred.

 

*EnvironmentalMatters.*  We accrue costs of a non-capital naturerelated to environmental clean-up when those costs are believed to be probableand can be reasonably estimated. Expenditures that extend the life of therelated property or mitigate or prevent future environmental contamination arecapitalized, and expenditures related to existing conditions resulting frompast or present operations and from which no current or future benefit isdiscernible are immediately expensed. The quantification of environmentalexposures requires an assessment of many factors, including changing laws andregulations, advancements in environmental technologies, the quality ofinformation available related to specific sites, the assessment stage of eachsite investigation and the length of time involved

 

34

----

 

in remediation orsettlement. We do not include anticipated recoveries from insurance carriers orother third parties in our accruals for environmental liabilities.

 

We have evaluated ourtotal environmental exposure based on currently available data and believe thatsuch environmental matters will not have a material adverse impact on ourfinancial position or results of operations. If matters previously identifiedby management are resolved in a manner different from original estimates, thereis the potential for a material adverse effect on operating results or cashflows in any one accounting period.

 

*Restructuring.* We record restructuring charges from time to time that represent expensesincurred in connection with consolidations and cessations of certain of ouroperations as well as headcount reduction programs. These charges consistprimarily of write-offs of surplus assets and severance costs. These chargesare based on various factors including the employee’s length of service,contract provisions, salary levels and local governmental legislation. At thetime a related charge is recorded, we calculate our best estimate based upondetailed analysis. Although significant changes are not expected, actual costsmay differ from these estimates.

 

*DeferredTaxes.*  We have in the past recorded valuationallowances to reduce our deferred tax assets to the amount that is more likelythan not to be realized. While we have considered future taxable income andongoing prudent and feasible tax planning strategies in assessing the need forvaluation allowances, if we were to determine that we would be able to realizedeferred tax assets in the future in excess of our net recorded amount, anadjustment to the deferred tax asset would increase income in the period suchdetermination was made. Likewise, should we determine that we would not be ableto realize all or part of our recorded net deferred tax assets in the future,an adjustment to the deferred tax asset would decrease income in the periodsuch determination was made.

 

**Resultsof Operations**

 

Net sales consist ofproduct sales in our seven segments, net of sales discounts, product returnsand allowances. Sales are primarily made on a purchase order basis. Revenuesare recognized when the earnings process is complete which is generally whenproducts are shipped, title and risk of loss has been transferred to thecustomer, collectibility is reasonably assured, and pricing is fixed anddeterminable.

 

Cost of products soldconsists of raw material costs, manufacturing variable and fixed costs,including headcount-related costs, manufacturing overhead, includingdepreciation, energy costs and periodic maintenance costs.

 

Operatingexpenses include research and development costs, sales and marketing,divisional management expenses and corporate services including cashmanagement, legal, benefit plans administration and other administrative andprofessional services.

 

##### **Pro Forma Net sales and Adjusted EBITDA**

 

The followingtable presents net sales and Adjusted EBITDA by segment on a pro forma basis asif the Dynamit Nobel Acquisition had occurred at the beginning of each periodpresented.  Our company has changedsignificantly since the Dynamit Nobel Acquisition.  However, our historical results of operationson an actual basis, presented immediately following this pro forma information,only includes the results of operations for the segments acquired as part ofthe Dynamit Nobel Acquisition since the consummation date of July 31, 2004as required by purchase accounting rules. As such, we believe the followingsupplemental pro forma information is helpful in highlighting trends by segmentand on a consolidated basis.** The following supplemental pro formainformation is provided for informational purposes only and does not purport tobe indicative of the results which would have actually been attained had theDynamit Acquisition occurred as of the beginning of the period presented orthat may be attained in the future.  Thesupplemental pro forma information has been prepared based upon currentlyavailable information and assumptions that we believe are reasonable.  Such currently available information andassumptions may prove to be inaccurate over time.

 

35

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| **Pro Forma  Net Sales by Segment** | ** ** | ** **                                 | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | ** **                                 | ** ** |
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** |
| **(millions)**                      | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
|                                |       |                                       |       |   |   |
| Performance  Additives              |       | $                                          | 158.3      |   | $ | 119.8 |   |
| Specialty  Compounds                |       | 52.0                                       |       | 45.3 |   |
| Electronics                         |       | 43.2                                       |       | 34.7 |   |
| Specialty  Chemicals                |       | 178.4                                      |       | 158.4 |   |
| Pigments                            |       | 102.3                                      |       | 96.3 |   |
| Advanced  Ceramics                  |       | 86.6                                       |       | 71.7 |   |
| Custom  Synthesis                   |       | 57.5                                       |       | 62.1 |   |
|                                |       |                                       |       |   |   |
| **Total**                           | ** ** | **$**                                      | **678.3**  | ** ** | **$** | **588.3** | ** ** |

 

| ** **             | ** ** | **Nine Months Ended  September 30,** | ** **  |
|------------------------|------------|-------------------------------------------|-------------|
| ** **             | ** ** | **2004**                                  | ** **  | **2003** | ** ** |
|                   |       |                                      |        |   |   |
| Performance  Additives |       | $                                         | 470.5       |   | $ | 352.0 |   |
| Specialty  Compounds   |       | 152.5                                     |        | 135.4 |   |
| Electronics            |       | 124.8                                     |        | 105.3 |   |
| Specialty  Chemicals   |       | 555.1                                     |        | 487.3 |   |
| Pigments               |       | 315.1                                     |        | 284.4 |   |
| Advanced  Ceramics     |       | 259.8                                     |        | 214.8 |   |
| Custom  Synthesis      |       | 180.3                                     |        | 202.0 |   |
|                   |       |                                      |        |   |   |
| **Total**              | ** ** | **$**                                     | **2,058.1** | ** ** | **$** | **1,781.2** | ** ** |

 

| **Pro Forma Adjusted  EBITDA by Segment** | ** ** | ** **                                 | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | ** **                                 | ** ** |
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** |
| **(millions)**                            | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
|                                      |       |                                       |       |   |   |
| Performance  Additives                    |       | $                                          | 35.5       |   | $ | 28.9 |   |
| Specialty  Compounds                      |       | 7.3                                        |       | 6.2 |   |
| Electronics                               |       | 7.6                                        |       | 6.0 |   |
| Specialty  Chemicals                      |       | 33.1                                       |       | 27.1 |   |
| Pigments                                  |       | 21.0                                       |       | 18.8 |   |
| Advanced  Ceramics                        |       | 20.4                                       |       | 18.6 |   |
| Custom  Synthesis                         |       | 7.2                                        |       | 7.8 |   |
| Corporate                                 |       | (9.1                                       | )          | (8.4 | ) |
|                                      |       |                                       |       |   |   |
| **Total**                                 | ** ** | **$**                                      | **123.0**  | ** ** | **$** | **105.0** | ** ** |

 

| ** **             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------|------------|-------------------------------------------|------------|
| ** **             | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
|                   |       |                                      |       |   |   |
| Performance  Additives |       | $                                         | 114.2      |   | $ | 81.9 |   |
| Specialty  Compounds   |       | 22.3                                      |       | 18.7 |   |
| Electronics            |       | 21.6                                      |       | 17.9 |   |
| Specialty  Chemicals   |       | 104.4                                     |       | 94.6 |   |
| Pigments               |       | 61.3                                      |       | 55.3 |   |
| Advanced  Ceramics     |       | 59.0                                      |       | 50.0 |   |
| Custom  Synthesis      |       | 24.1                                      |       | 36.2 |   |
| Corporate              |       | (26.4                                     | )          | (25.0 | ) |
|                   |       |                                      |       |   |   |
| **Total**              | ** ** | **$**                                     | **380.5**  | ** ** | **$** | **329.6** | ** ** |

 

The following tablepresents the changes in net sales and Adjusted EBITDA on a pro forma basis indollars and percentages.

 

| **Pro Forma Net Sales by Segment** | ** ** | ** **                                                           | ** ** | ** **    | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------|------------|---------------|------------|
| ** **                         | ** ** | ** **                                                           | ** ** | ** **    | ** ** |
| ** **                         | ** ** | **Change : Three Months Ended  September 30, 2004 versus 2003** | ** ** | **Operating** | ** ** |
| **(millions)**                     | ** ** | **Total**                                                            | ** ** | **% Change**  | ** ** | **FX(1)** | ** ** | **Growth** | ** ** |
| ** **                         | ** ** | ** **                                                           | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Performance  Additives             |       | $                                                                    | 38.5       |          | 32.1       | % | $ | 3.4 |   | $ | 35.1 |   |
| Specialty  Compounds               |       | 6.7                                                                  |       | 14.8          | %          | 1.5 |   | 5.2 |   |
| Electronics                        |       | 8.5                                                                  |       | 24.5          | %          | 1.5 |   | 7.0 |   |
| Specialty  Chemicals               |       | 20.0                                                                 |       | 12.6          | %          | 10.0 |   | 10.0 |   |
| Pigments                           |       | 6.0                                                                  |       | 6.2           | %          | 8.2 |   | (2.2 | ) |
| Advanced  Ceramics                 |       | 14.9                                                                 |       | 20.8          | %          | 6.1 |   | 8.8 |   |
| Custom  Synthesis                  |       | (4.6                                                                 | )          | -7.4          | %          | 4.6 |   | (9.2 | ) |
| **Total**                          | ** ** | **$**                                                                | **90.0**   | ** **    | **15.3**   | **%** | **$** | **35.3** | ** ** | **$** | **54.7** | ** ** |

 

| ** **             | ** ** | **Change : Nine Months Ended  September 30, 2004 versus 2003** | ** ** | **Operating** | ** ** |
|------------------------|------------|---------------------------------------------------------------------|------------|---------------|------------|
| ** **             | ** ** | **Total**                                                           | ** ** | **% Change**  | ** ** | **FX(1)** | ** ** | **Growth** | ** ** |
|                   |       |                                                                |       |          |       |   |   |   |   |
| Performance  Additives |       | $                                                                   | 118.5      |          | 33.7       | % | $ | 11.0 |   | $ | 107.5 |   |
| Specialty  Compounds   |       | 17.1                                                                |       | 12.6          | %          | 4.9 |   | 12.2 |   |
| Electronics            |       | 19.5                                                                |       | 18.5          | %          | 5.3 |   | 14.2 |   |
| Specialty  Chemicals   |       | 67.8                                                                |       | 13.9          | %          | 36.7 |   | 31.1 |   |
| Pigments               |       | 30.7                                                                |       | 10.8          | %          | 29.6 |   | 1.1 |   |
| Advanced  Ceramics     |       | 45.0                                                                |       | 20.9          | %          | 21.4 |   | 23.6 |   |
| Custom  Synthesis      |       | (21.7                                                               | )          | -10.7         | %          | 16.9 |   | (38.6 | ) |
| **Total**              | ** ** | **$**                                                               | **276.9**  | ** **    | **15.5**   | **%** | **$** | **125.8** | ** ** | **$** | **151.1** | ** ** |

 

36

----

 

| **Pro Forma Adjusted EBITDA by Segment** | ** ** | ** **                                                           | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                                           | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Change : Three Months Ended  September 30, 2004 versus 2003** | ** ** | **Operating** | ** ** |
| **(millions)**                           | ** ** | **Total**                                                            | ** ** | **% Change** | ** ** | **FX(1)** | ** ** | **Growth** | ** ** |
| ** **                               | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Performance  Additives                   |       | $                                                                    | 6.6        |   | 22.8 | % | $ | 0.7 |   | $ | 5.9 |   |
| Specialty  Compounds                     |       | 1.1                                                                  |       | 17.7 | % | 0.1 |   | 1.0 |   |
| Electronics                              |       | 1.6                                                                  |       | 26.7 | % | (0.1 | ) | 1.7 |   |
| Specialty  Chemicals                     |       | 6.0                                                                  |       | 22.1 | % | 2.0 |   | 4.0 |   |
| Pigments                                 |       | 2.2                                                                  |       | 11.7 | % | 1.7 |   | 0.5 |   |
| Advanced  Ceramics                       |       | 1.8                                                                  |       | 9.7 | % | 1.6 |   | 0.2 |   |
| Custom  Synthesis                        |       | (0.6                                                                 | )          | -7.7 | % | 0.5 |   | (1.1 | ) |
| Corporate                                |       | (0.7                                                                 | )          | 8.3 | % | (0.2 | ) | (0.5 | ) |
| **Total**                                | ** ** | **$**                                                                | **18.0**   | ** ** | **17.1** | **%** | **$** | **6.3** | ** ** | **$** | **11.7** | ** ** |

 

| ** **             | ** ** | **Change : Nine Months Ended  September 30, 2004 versus 2003** | ** ** | **Operating** | ** ** |
|------------------------|------------|---------------------------------------------------------------------|------------|---------------|------------|
| ** **             | ** ** | **Total**                                                           | ** ** | **% Change**  | ** ** | **FX(1)** | ** ** | **Growth** | ** ** |
|                   |       |                                                                |       |          |       |   |   |   |   |
| Performance  Additives |       | $                                                                   | 32.3       |          | 39.4       | % | $ | 2.2 |   | $ | 30.1 |   |
| Specialty  Compounds   |       | 3.6                                                                 |       | 19.3          | %          | 0.6 |   | 3.0 |   |
| Electronics            |       | 3.7                                                                 |       | 20.7          | %          | (0.2 | ) | 3.9 |   |
| Specialty  Chemicals   |       | 9.8                                                                 |       | 10.4          | %          | 7.1 |   | 2.7 |   |
| Pigments               |       | 6.0                                                                 |       | 10.8          | %          | 5.8 |   | 0.2 |   |
| Advanced  Ceramics     |       | 9.0                                                                 |       | 18.0          | %          | 5.3 |   | 3.7 |   |
| Custom  Synthesis      |       | (12.1                                                               | )          | -33.4         | %          | 2.2 |   | (14.3 | ) |
| Corporate              |       | (1.4                                                                | )          | 5.6           | %          | (1.2 | ) | (0.2 | ) |
| **Total**              | ** ** | **$**                                                               | **50.9**   | ** **    | **15.4**   | **%** | **$** | **21.8** | ** ** | **$** | **29.1** | ** ** |

 

----

(1)  The FX Effect was calculated based on thechange in the euro to U.S. dollar exchange rate for the applicable period.

 

***Proformathree months ended September 30, 2004 compared with pro forma three monthsended September 30, 2003***

 

##### **Pro Forma Net Sales**

 

Net sales on a pro formabasis were $678.3 million for the third quarter of 2004 as compared to $588.3million for the third quarter of 2003. The 15.3 % increase is partially due tofavorable currency exchange rate changes of $35.3 million. After adjusting forcurrency, net sales increased $54.7 million or 9.3% with increases inPerformance Additives of $35.1 million, Specialty Compounds of $5.2 million,Electronics of $7.0 million, Specialty Chemicals of $10.0 million and AdvancedCeramics of $8.8 million, offset by decreases in Pigments of $2.2 million andCustom Synthesis of $9.2 million.

 

*PerformanceAdditives.* Net sales for our Performance Additivessegment increased 32.1% over the prior period primarily due to higher sales ofour Timber Treatment Chemicals due to a greater mix of ACQ products versus CCAproducts as a result of the ACQ conversion. Also, our Iron Oxide Pigments businesshad stronger volume due to increased demand for construction relatedproducts.  Also included in net saleswere $3.4 million from favorable currency exchange rates changes and $6.8million from the impact of acquisitions.

 

*SpecialtyCompounds.*Net sales for our Specialty Compounds segmentincreased 14.8% over the prior period primarily due to increased sales volumesand more favorable pricing of certain products in our wire and cable compoundsbusiness. The remaining increase in net sales of $1.5 million is due tocurrency.

 

*Electronics.* Netsales for our Electronics segment increased 24.5% over the prior year periodprimarily due to higher sales volumes, offset in part by pricing pressure incertain businesses. Conditions in certain of our Electronic Chemicalsbusinesses were stronger in the current year due to the improved general marketenvironment in the industries served.

 

*SpecialtyChemicals.*Net sales for ourSpecialty Chemicals segment increased 12.6% or $20.0 million on a pro formabasis over the prior period, including $10.0 million related to favorablecurrency exchange rate changes. After adjusting for currency, net sales

* *

*37*

----

* *

*increased $10.0 million primarilydue to strong organic growth in Surface Treatment product lines and highersales prices in Metal Sulfide products due to the pass through of raw materialcost increases.*

 

*Pigments*.Net sales for our Pigments segment increased 6.2% on a pro forma basis over theprior year period, including $8.2 million of favorable currency exchange ratechanges. After adjusting for currency, net sales decreased $2.2 million due tolower sales of Titanium Dioxide (“TiO2”) due to limited stock availability ofrutile pigments and lower TiO2 prices in the coatings, paper and plasticsmarkets partially offset by higher sales of specialty products within theFunctional Additives product line and higher Water Chemistry sales in the watertreatment and paper industries.

* *

*AdvancedCeramics.*Net sales for ourAdvanced Ceramics segment increased 20.8% on a pro forma basis over the prioryear period, including $6.1 million related to favorable currency exchange ratechanges. After adjusting for currency, net sales increased $8.8 millionprimarily due to higher sales volumes in medical products and electronicapplications. Also, mechanical application and piezo product sales volumes werehigher.

* *

*CustomSynthesis.*Net sales for ourCustom Synthesis segment decreased 7.4% on a pro forma basis as compared to theprior year period despite $4.6 million related to favorable currency exchangerate changes. After adjusting for currency, net sales decreased $9.2 millionprimarily due to continued capacity utilization issues at the Rohner plant.

* *

**ProForma Adjusted EBITDA**

 

Adjusted EBITDA on a proforma basis for the combined company increased from $105.0 million to $123.0million or 17.1%. After excluding currency, Adjusted EBITDA increased $11.7million or 11.1%. Adjusted EBITDA as a percentage of net sales on a pro formabasis was 18.1% in the third quarter of 2004 versus 17.8% in the third quarterof 2003.

 

*PerformanceAdditives.*  Adjusted EBITDA for our PerformanceAdditives segment increased from $28.9 million to $35.5 million or 22.8%primarily due to the increase in net sales of Timber Treatment Chemicals due toa greater mix of ACQ products, partially offset by higher raw material costsfor copper and quaternary amines used in the production of ACQ. Adjusted EBITDAas a percentage of net sales was 22.4% in the third quarter of 2004 versus 24.1%in the third quarter of 2003 due primarily to the higher raw material costs.

 

*SpecialtyCompounds.*Adjusted EBITDA for our Specialty Compoundssegment increased from $6.2 million to $7.3 million or 17.7% primarily due tothe increase in net sales discussed above partially offset by higher PVC rawmaterial costs. Adjusted EBITDA as a percentage of net sales was 14.0% in thethird quarter of 2004 versus 13.7% in the third quarter of 2003.

 

*Electronics.* AdjustedEBITDA for our Electronics segment increased from $6.0 million to $7.6 millionor 26.7% primarily due to the increase in net sales discussed above. AdjustedEBITDA as a percentage of net sales was 17.6% in the third quarter of 2004versus 17.3% in the third quarter of 2003.

 

*SpecialtyChemicals.* Adjusted EBITDA for our Specialty Chemicalssegment increased from $27.1 million to $33.1 million or 22.1% on a pro formabasis. After excluding currency, Adjusted EBITDA increased $4.0 million or14.7% primarily due to the increase in net sales discussed above. AdjustedEBITDA as a percentage of net sales on a pro forma basis was 18.5% in the thirdquarter of 2004 versus 17.1% in the third quarter of 2003 primarily due to theimpact of Surface Treatment sales volume increases partially offset by lowermargins on Metal Sulfide products due to raw material cost increases andunfavorable lithium mix.

 

*Pigments.*Adjusted EBITDA for our Pigments segment increased from $18.8 million to $21.0million or 11.7% on a pro forma basis. After excluding currency, AdjustedEBITDA increased $0.5 million or 2.7% primarily due to cost managementinitiatives partially offset by the decrease in net sales discussed above.Adjusted EBITDA as a percentage of net sales on a pro forma basis was 20.5% inthe third quarter of 2004 versus 19.5% in the third quarter of 2003 primarilydue to the cost management initiatives.

 

*AdvancedCeramics.* Adjusted EBITDA for our Advanced Ceramics segmentincreased from $18.6 million to $20.4 million or 9.7% on a pro forma basis.After excluding currency, Adjusted EBITDA increased $0.2 million or 1.1%primarily due to the increase in net sales discussed above. Adjusted EBITDA asa percentage of net sales on a pro forma basis was 23.5% in the third quarterof 2004 versus 25.9% in the third quarter of 2003 primarily due to unfavorable salesmix.

* *

*CustomSynthesis*. Adjusted EBITDAfor our Custom Synthesis segment decreased from $7.8 million to $7.2 million or7.7% on a pro forma basis as compared to the prior year period despite $0.5million related to favorable currency exchange rate changes. After adjustingfor currency, Adjusted EBITDA decreased $1.1 million or 14.1% primarily due tolower sales at Rohner discussed above and currency effects at the Finorgaoperation from selling certain products in US dollars with euro basedproduction costs in a period where the US dollar weakened versus prior yearoffset slightly by cost savings from headcount reductions at Rohner. AdjustedEBITDA as a percentage of net sales on a pro forma basis was 12.5% in the thirdquarter of 2004 versus 12.6% in the third quarter of 2003.

 

38

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*Corporate*.  Adjusted EBITDA loss at Corporate increased from $8.4 million to $9.1million on a pro forma basis or 8.3% primarily due to higher central costs forthe two-month period since the Dynamit Nobel Acquisition and higher bonusaccruals.Adjusted EBITDA as apercentage of net sales on a pro forma basis was (1.3)% in the third quarter of2004 versus (1.4)% in the third quarter of 2003.

* *

The followingtable presents a pro forma reconciliation of net (loss) income to AdjustedEBITDA on a GAAP basis by segment and on a consolidated basis for the thirdquarter of 2004 and 2003:

 
| **(millions)**                                 | ** ** | **Performance  Additives** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Specialty  Chemicals** | ** ** | **Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Custom  Synthesis** | ** ** | **Corporate  and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------|------------|--------------------------|------------|--------------|------------|------------------------|------------|-----------------------|------------|----------------------------------|------------|------------------|------------|
| **Three months ended September 30, 2004** |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net  income (loss)                             |       | $                          | 13.5       |                     | $          | 4.5             |       | $                        | 0.5        |         | $          | 12.8                   |       | $                     | 8.5        |                             | $          | 1.2              |       | $ | (2.1 | ) | $ | (69.7 | ) | $ | (30.8 | ) |
| Income  tax provision (benefit)                |       | 6.4                        |       | 1.5                      |       | (0.3            | )          | (20.4                    | )          | 0.6          |       | (6.4                   | )          | (6.8                  | )          | (11.0                            | )          | (36.4            | )          |
| Interest,  net                                 |       | 6.8                        |       | (0.1                     | )          | 1.3             |       | 3.6                      |       | 1.6          |       | 1.2                    |       | 2.5                   |       | 29.7                             |       | 46.6             |       |
| Depreciation  and amortization                 |       | 7.6                        |       | 1.4                      |       | 5.2             |       | 10.2                     |       | 5.9          |       | 6.3                    |       | 8.1                   |       | 0.3                              |       | 45.0             |       |
| Restructuring  and related charges             |       | 0.2                        |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | —                           |       | 0.2              |       |
| Systems/organization  establishment expenses   |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.5                              |       | 1.5              |       |
| Cancelled  acquisition and disposal costs      |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 0.1                              |       | 0.1              |       |
| Inventory  write-up reversal                   |       | 0.5                        |       | —                   |       | —          |       | 19.2                     |       | 4.8          |       | 20.3                   |       | 4.2                   |       | —                           |       | 49.0             |       |
| Write-off  of deferred debt issuance costs     |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.8                              |       | 1.8              |       |
| Loss  from disposed businesses                 |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | 0.8                   |       | —                           |       | 0.8              |       |
| Foreign  exchange loss                         |       | 0.5                        |       | —                   |       | 0.9             |       | —                   |       | —       |       | —                 |       | —                |       | 39.5                             |       | 40.9             |       |
| Other                                          |       | —                     |       | —                   |       | —          |       | 7.7                      |       | (0.4         | )          | (2.2                   | )          | 0.5                   |       | (1.3                             | )          | 4.3              |       |
| Total  Adjusted EBITDA                         |       | $                          | 35.5       |                     | $          | 7.3             |       | $                        | 7.6        |         | $          | 33.1                   |       | $                     | 21.0       |                             | $          | 20.4             |       | $ | 7.2 |   | $ | (9.1 | ) | $ | 123.0 |   |
|                                           |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Three months ended September 30, 2003** |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net  income (loss)                             |       | $                          | 0.5        |                     | $          | 3.5             |       | $                        | (0.5       | )            | $          | 3.8                    |       | $                     | 14.2       |                             | $          | (3.3             | )          | $ | (5.1 | ) | $ | (52.4 | ) | $ | (39.3 | ) |
| Income  tax provision (benefit)                |       | 4.0                        |       | 1.3                      |       | (0.2            | )          | (7.5                     | )          | (6.3         | )          | (3.4                   | )          | 1.6                   |       | (15.3                            | )          | (25.8            | )          |
| Interest,  net                                 |       | 7.5                        |       | (0.1                     | )          | 1.6             |       | 3.2                      |       | 0.6          |       | 0.2                    |       | 1.3                   |       | 34.3                             |       | 48.6             |       |
| Depreciation  and amortization                 |       | 6.6                        |       | 1.4                      |       | 4.4             |       | 9.7                      |       | 5.1          |       | 5.6                    |       | 5.7                   |       | 0.6                              |       | 39.1             |       |
| Restructuring  and related charges             |       | 0.1                        |       | 0.1                      |       | —          |       | 0.1                      |       | —       |       | —                 |       | 0.3                   |       | —                           |       | 0.6              |       |
| Systems/organization  establishment expenses   |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 0.4                              |       | 0.4              |       |
| Cancelled  acquisition and disposal costs      |       | —                     |       | —                   |       | 1.1             |       | —                   |       | —       |       | —                 |       | —                |       | —                           |       | 1.1              |       |
| Inventory  write-up reversal                   |       | —                     |       | —                   |       | —          |       | 16.4                     |       | 5.2          |       | 17.1                   |       | 4.0                   |       | —                           |       | 42.7             |       |
| Write-off  of deferred debt issuance costs     |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 36.9                             |       | 36.9             |       |
| Foreign  exchange gain                         |       | (0.2                       | )          | —                   |       | (0.4            | )          | —                   |       | —       |       | —                 |       | —                |       | (0.5                             | )          | (1.1             | )          |
| Other                                          |       | —                     |       | —                   |       | —          |       | 1.4                      |       | —       |       | 2.4                    |       | —                |       | (2.0                             | )          | 1.8              |       |
| Intercompany  dividend                         |       | 10.4                       |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | (10.4                            | )          | —           |       |
| Total  Adjusted EBITDA                         |       | $                          | 28.9       |                     | $          | 6.2             |       | $                        | 6.0        |         | $          | 27.1                   |       | $                     | 18.8       |                             | $          | 18.6             |       | $ | 7.8 |   | $ | (8.4 | ) | $ | 105.0 |   |

 

***Pro Forma Nine months ended September 30, 2004 comparedwith pro forma Nine months ended September 30, 2003***

 

##### **Pro Forma Net Sales**

 

Net sales were $2,058.1million on a pro forma basis for the first nine months of 2004 as compared to$1,781.2 million for the first nine months of 2003. The 15.5% increase or $276.9million is partially due to favorable currency exchange rate changes of $125.8million. After adjusting for the effect of currency, net sales increased $151.1million or 8.5% with increases in Performance Additives of $107.5 million,Specialty Compounds of $12.2 million, Electronics of $14.9 million, SpecialtyChemicals of $31.1 million, Pigments of $1.1 million and Advanced Ceramics of$23.6 million, offset by a decrease in Custom Synthesis of $38.6 million.

 

*PerformanceAdditives.*  Net sales for our Performance Additivessegment increased 33.7% over the prior period primarily due to higher sales ofour Timber Treatment Chemicals due to a greater mix of ACQ products versus CCAproducts as a result of the ACQ conversion. Also, our Iron Oxide Pigmentsbusiness had stronger volume due to increased demand for construction products.  Included in net sales were $11.0 million fromfavorable currency exchange rates changes and $12.5 million from the impact ofacquisitions.

 

*SpecialtyCompounds.*Net sales for our Specialty Compounds segmentincreased 12.6% over the prior period due to an increase in sales volumes andmore favorable pricing of certain products in our wire and cable compoundsbusiness and favorable currency exchange rate changes of $4.9 million.

 

*Electronics.* Netsales for our Electronics segment increased 18.5% over the prior year periodprimarily due to an increase in sales volumes, offset in part by pricingpressure in certain businesses.

 

39

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*SpecialtyChemicals.*Net sales for ourSpecialty Chemicals segment increased 13.9% or $67.8 million on a pro formabasis over the prior period, including $36.7 million related to favorablecurrency exchange rate changes. After adjusting for currency, net salesincreased $31.1 million primarily due to organic growth in Surface Treatmentproduct lines, particularly in the third quarter, higher lithium sales andhigher sales prices in Metal Sulfide products due to the pass through of rawmaterial cost increases.

* *

*Pigments*.Net sales for our Pigments segment increased 10.8% on a pro forma basis overthe prior year period primarily due to $30.7 million of favorable currencyexchange rate changes. After adjusting for currency, net sales increased $1.1million due to higher sales of specialty products within the FunctionalAdditives product line and higher Water Chemistry sales in the water treatmentand paper industries. These increases were partially offset by lower sales ofTitanium Dioxide (“TiO2”) due to limited stock availability of rutile pigmentsand lower TiO2 prices in the coatings, paper and plastics markets.

 

*AdvancedCeramics.*Net sales for ourAdvanced Ceramics segment increased 20.9% on a pro forma basis over the prioryear period, including $21.4 million related to favorable currency exchangerate changes. After adjusting for currency, net sales increased $23.6 millionprimarily due to higher sales volumes in medical and electronic applicationproducts. Also, mechanical application and piezo product sales volumes werehigher.

* *

*CustomSynthesis.*Net sales for ourCustom Synthesis segment decreased 10.7% on a pro forma basis as compared tothe prior year period despite $16.9 million related to favorable currencyexchange rate changes. After adjusting for currency, net sales decreased $38.6million primarily due to the loss of sales of a major product at a largecustomer prior to the third quarter of 2003 and continued capacity utilizationissues at the Rohner plant.

 

**ProForma Adjusted EBITDA**

 

Adjusted EBITDA on a proforma basis for the combined company increased from $329.6 million to $380.5 millionor 15.4%. After excluding currency, Adjusted EBITDA increased $29.1 million or8.8%. Adjusted EBITDA as a percentage of net sales on a pro forma basis was18.5% in the first nine months of 2004 and 2003.

 

*PerformanceAdditives.*  Adjusted EBITDA for our PerformanceAdditives segment increased from $81.9 million to $114.2 million or 39.4%primarily due to the increase in net sales of Timber Treatment Chemicals due toa greater mix of ACQ products, partially offset by higher raw material costsspecifically in the third quarter of 2004. Adjusted EBITDA as a percentage ofnet sales was 24.3% in the first nine months of 2004 and 23.3% in the firstnine months of 2003.

 

*SpecialtyCompounds.*Adjusted EBITDA for our Specialty Compoundssegment increased from $18.7 million to $22.3 million or 19.3% primarily due tothe increase in net sales partially offset by higher PVC raw material costs asdiscussed above. Adjusted EBITDA as a percentage of net sales was 14.6% in thefirst nine months of 2004 and 13.8% in the first nine months of 2003.

 

*Electronics.* AdjustedEBITDA for our Electronics segment increased from $17.9 million to $21.6million or 20.7% primarily due to the increase in net sales with higher salesvolume offset by certain pricing pressures as discussed above. Adjusted EBITDAas a percentage of net sales was 17.3% in the first nine months of 2004 and 17.0%in the first nine months of 2003.

 

*SpecialtyChemicals.* Adjusted EBITDA for our Specialty Chemicalssegment increased from $94.6 million to $104.4 million or 10.4% on a pro formabasis. After excluding currency, Adjusted EBITDA increased $2.7 million or 2.9%primarily due to the increase in net sales discussed above. Adjusted EBITDA asa percentage of net sales on a pro forma basis was 18.8% in the first ninemonths of 2004 and 19.4% in the first nine months of 2003 with lower margins onMetal Sulfide products due to raw material cost increases, less favorablelithium mix and lower income from equity investments partially offset by theimpact of higher Surface Treatment sales volume.

 

*Pigments.*Adjusted EBITDA for our Pigments segment increased from $55.3 million to $61.3million or 10.8% on a pro forma basis. After excluding currency, AdjustedEBITDA increased $0.2 million primarily due to the increase in net salesdiscussed above as well as cost management initiatives. Adjusted EBITDA as apercentage of net sales on a pro forma basis was 19.5% in the first nine monthsof 2004 and 19.4% in the first nine months of 2003.

 

*AdvancedCeramics.* Adjusted EBITDA for our Advanced Ceramics segmentincreased from $50.0 million to $59.0 million or 18.0% on a pro forma basis.After excluding currency, Adjusted EBITDA increased $3.7 million or 7.4%primarily due to the increase in net sales discussed above. Adjusted EBITDA asa percentage of net sales on a pro forma basis was 22.7% in the first ninemonths of 2004 and 23.3% in the first nine months of 2003.

* *

*CustomSynthesis.*Adjusted EBITDA for our Custom Synthesis segmentdecreased from $36.2 million to $24.1 million or 33.4% on a pro forma basis ascompared to the prior year period despite $2.2 million related to favorablecurrency exchange rate changes. After

 

40

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adjusting for currency,Adjusted EBITDA decreased $14.3 million or 39.5 % primarily due to lower salesdiscussed above and currency effects at the Finorga operation from sellingcertain products in US dollars with euro based production costs in a periodwhere the US dollar weakened versus prior year. Adjusted EBITDA as a percentageof net sales on a pro forma basis was 9.3% in the first nine months of 2004 and16.8% in the first nine months of 2003 due to the above.

* *

*Corporate.*   Adjusted EBITDA loss at Corporate increasedfrom $25.0 million to $26.4 million primarily due to higher bonus accruals andhigher central costs to operate the significantly larger business due to theDynamit Nobel Acquisition. Adjusted EBITDA as a percentage of net sales on apro forma basis was (1.3)% in the first nine months of 2004 and (1.4)% in thefirst nine months of 2003.

 

The following tablepresents a pro forma reconciliation of net (loss) income to Adjusted EBITDA ona GAAP basis by segment and on a consolidated basis for the first nine monthsof 2004 and 2003:

 
| **(millions)**                                | ** ** | **Performance  Additives** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Specialty  Chemicals** | ** ** | **Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Custom  Synthesis** | ** ** | **Corporate  and  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------|------------|--------------------------|------------|--------------|------------|------------------------|------------|-----------------------|------------|----------------------------------|------------|------------------|------------|
| **Nine months ended September 30, 2004** |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net  income (loss)                            |       | $                          | 45.3       |                     | $          | 12.9            |       | $                        | 2.2        |         | $          | 33.1                   |       | $                     | 27.4       |                             | $          | 22.3             |       | $ | (3.7 | ) | $ | (131.8 | ) | $ | 7.7 |   |
| Income  tax provision (benefit)               |       | 25.8                       |       | 5.6                      |       | 0.8             |       | 1.7                      |       | 7.7          |       | (0.9                   | )          | (6.2                  | )          | (42.7                            | )          | (8.2             | )          |
| Interest,  net                                |       | 21.4                       |       | (0.3                     | )          | 4.1             |       | 11.9                     |       | 3.4          |       | 2.1                    |       | 5.4                   |       | 103.1                            |       | 151.1            |       |
| Depreciation  and amortization                |       | 21.8                       |       | 4.1                      |       | 15.5            |       | 30.3                     |       | 17.9         |       | 19.0                   |       | 21.7                  |       | 1.4                              |       | 131.7            |       |
| Restructuring  and related charges            |       | 0.2                        |       | —                   |       | —          |       | —                   |       | —       |       | 0.1                    |       | 0.3                   |       | —                           |       | 0.6              |       |
| Systems/organization  establishment expenses  |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 2.5                              |       | 2.5              |       |
| Cancelled  acquisition and disposal costs     |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 0.1                              |       | 0.1              |       |
| Write-off  of deferred debt issuance costs    |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.8                              |       | 1.8              |       |
| Stamp  duty tax                               |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 4.0                              |       | 4.0              |       |
| Inventory  write-up reversal                  |       | 0.5                        |       | —                   |       | —          |       | 20.8                     |       | 5.3          |       | 18.6                   |       | 5.3                   |       | —                           |       | 50.5             |       |
| Loss  from disposed businesses                |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | 0.8                   |       | —                           |       | 0.8              |       |
| Foreign  exchange (gain) loss                 |       | (0.8                       | )          | —                   |       | (1.0            | )          | —                   |       | —       |       | —                 |       | —                |       | 34.2                             |       | 32.4             |       |
| Other                                         |       | —                     |       | —                   |       | —          |       | 6.6                      |       | (0.4         | )          | (2.2                   | )          | 0.5                   |       | 1.0                              |       | 5.5              |       |
| Total  Adjusted EBITDA                        |       | $                          | 114.2      |                     | $          | 22.3            |       | $                        | 21.6       |         | $          | 104.4                  |       | $                     | 61.3       |                             | $          | 59.0             |       | $ | 24.1 |   | $ | (26.4 | ) | $ | 380.5 |   |
|                                          |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| **Nine months ended September 30, 2003** |       |                       |       |                     |       |            |       |                     |       |         |       |                   |       |                  |       |                             |       |             |       |
| Net  income (loss)                            |       | $                          | 17.3       |                     | $          | 10.2            |       | $                        | 2.1        |         | $          | 34.5                   |       | $                     | 32.8       |                             | $          | 11.8             |       | $ | (19.8 | ) | $ | (122.2 | ) | $ | (33.3 | ) |
| Income  tax provision (benefit)               |       | 11.8                       |       | 4.4                      |       | 0.9             |       | 4.8                      |       | 1.0          |       | 0.8                    |       | 28.7                  |       | (62.5                            | )          | (10.1            | )          |
| Interest,  net                                |       | 22.7                       |       | (0.2                     | )          | 4.9             |       | 11.3                     |       | 1.9          |       | 0.8                    |       | 3.9                   |       | 109.9                            |       | 155.2            |       |
| Depreciation  and amortization                |       | 19.4                       |       | 3.8                      |       | 12.8            |       | 29.2                     |       | 15.3         |       | 16.6                   |       | 16.9                  |       | 1.8                              |       | 115.8            |       |
| Restructuring  and related charges            |       | 0.4                        |       | 0.5                      |       | 0.3             |       | 0.1                      |       | —       |       | 1.8                    |       | 0.6                   |       | —                           |       | 3.7              |       |
| Systems/organization  establishment expenses  |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 1.1                              |       | 1.1              |       |
| Cancelled  acquisition and disposal costs     |       | —                     |       | —                   |       | 1.6             |       | —                   |       | —       |       | —                 |       | —                |       | 0.2                              |       | 1.8              |       |
| Write-off  of deferred debt issuance costs    |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | 36.9                             |       | 36.9             |       |
| Business  interruption and insurance recovery |       | —                     |       | —                   |       | (4.5            | )          | —                   |       | —       |       | —                 |       | —                |       | —                           |       | (4.5             | )          |
| Inventory  write-up reversal                  |       | 0.1                        |       | —                   |       | —          |       | 18.3                     |       | 4.3          |       | 12.7                   |       | 5.9                   |       | —                           |       | 41.3             |       |
| Foreign  exchange (gain) loss                 |       | (0.2                       | )          | —                   |       | (0.2            | )          | —                   |       | —       |       | —                 |       | —                |       | 19.5                             |       | 19.1             |       |
| Loss  from disposed businesses                |       | —                     |       | —                   |       | —          |       | —                   |       | —       |       | (0.8                   | )          | —                |       | —                           |       | (0.8             | )          |
| Earnings  from discontinued operations        |       | —                     |       | —                   |       | —          |       | (4.0                     | )          | —       |       | —                 |       | —                |       | 2.6                              |       | (1.4             | )          |
| Other                                         |       | —                     |       | —                   |       | —          |       | 0.4                      |       | —       |       | 6.3                    |       | —                |       | (1.9                             | )          | 4.8              |       |
| Intercompany  dividend                        |       | 10.4                       |       | —                   |       | —          |       | —                   |       | —       |       | —                 |       | —                |       | (10.4                            | )          | —           |       |
| Total  Adjusted EBITDA                        |       | $                          | 81.9       |                     | $          | 18.7            |       | $                        | 17.9       |         | $          | 94.6                   |       | $                     | 55.3       |                             | $          | 50.0             |       | $ | 36.2 |   | $ | (25.0 | ) | $ | 329.6 |   |

 

41

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**Actual Results of Operations**

 

The following tablepresents the major components of our operations on a historical basis,including as a percentage of net sales.

 
| ** **                         | ** ** | **Three months ended September  30,** | ** ** | **Nine months ended September  30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(dollars in millions)**             | ** ** |
| **Statement of operations data:**  |       |                                  |       |                                 |       |   |   |   |   |
| Net  sales:                        |       |                                  |       |                                 |       |   |   |   |   |
| Performance  Additives             |       | $                                     | 158.3      |                                 | $          | 119.8 |   | $ | 470.5 |   | $ | 352.0 |   |
| Specialty  Compounds               |       | 52.0                                  |       | 45.3                                 |       | 152.5 |   | 135.4 |   |
| Electronics                        |       | 43.2                                  |       | 34.7                                 |       | 124.8 |   | 105.3 |   |
| Specialty  Chemicals               |       | 116.6                                 |       | —                               |       | 116.6 |   | — |   |
| Pigments                           |       | 68.9                                  |       | —                               |       | 68.9 |   | — |   |
| Advanced  Ceramics                 |       | 56.6                                  |       | —                               |       | 56.6 |   | — |   |
| Custom  Synthesis                  |       | 38.0                                  |       | —                               |       | 38.0 |   | — |   |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Total  net sales                   |       | 533.6                                 |       | 199.8                                |       | 1,027.9 |   | 592.7 |   |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Gross  profit                      |       | 130.6                                 |       | 54.9                                 |       | 271.6 |   | 161.0 |   |
|                               |       | 24.5                                  | %          | 27.5                                 | %          | 26.4 | % | 27.2 | % |
| Operating  expenses                |       | 106.2                                 |       | 31.8                                 |       | 177.3 |   | 90.3 |   |
|                               |       | 19.9                                  | %          | 15.9                                 | %          | 17.2 | % | 15.2 | % |
| Operating  income (loss):          |       |                                  |       |                                 |       |   |   |   |   |
| Performance  Additives             |       | 27.2                                  |       | 22.3                                 |       | 91.2 |   | 62.0 |   |
|                               |       | 17.2                                  | %          | 18.6                                 | %          | 19.4 | % | 17.6 | % |
| Specialty  Compounds               |       | 5.9                                   |       | 4.7                                  |       | 18.2 |   | 14.3 |   |
|                               |       | 11.3                                  | %          | 10.4                                 | %          | 11.9 | % | 10.6 | % |
| Electronics                        |       | 2.4                                   |       | 0.5                                  |       | 6.1 |   | 7.6 |   |
|                               |       | 5.6                                   | %          | 1.4                                  | %          | 4.9 | % | 7.2 | % |
| Specialty  Chemicals               |       | 0.7                                   |       | —                               |       | 0.7 |   | — |   |
|                               |       | 0.6                                   | %          | —                               | %          | 0.6 | % | — | % |
| Pigments                           |       | 6.3                                   |       | —                               |       | 6.3 |   | — |   |
|                               |       | 9.1                                   | %          | —                               | %          | 9.1 | % | — | % |
| Advanced  Ceramics                 |       | (4.8                                  | )          | —                               |       | (4.8 | ) | — |   |
|                               |       | (8.5                                  | )%         | —                               | %          | (8.5 | )% | — | % |
| Custom  Synthesis                  |       | (2.6                                  | )          | —                               |       | (2.6 | ) | — |   |
|                               |       | (6.8                                  | )%         | —                               | %          | (6.8 | )% | — | % |
| Corporate  costs and eliminations  |       | (10.7                                 | )          | (4.4                                 | )          | (20.8 | ) | (13.2 | ) |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Total  operating income (loss)     |       | 24.4                                  |       | 23.1                                 |       | 94.3 |   | 70.7 |   |
|                               |       | 4.6                                   | %          | 11.6                                 | %          | 9.2 | % | 11.9 | % |
| Other  income (expenses):          |       |                                  |       |                                 |       |   |   |   |   |
| Interest  expense, net             |       | (45.1                                 | )          | (19.7                                | )          | (74.2 | ) | (62.9 | ) |
| Refinancing  expenses              |       | (1.8                                  | )          | (36.9                                | )          | (1.8 | ) | (36.9 | ) |
| Foreign  exchange (loss) gain, net |       | (40.9                                 | )          | 1.1                                  |       | (32.2 | ) | (19.1 | ) |
| Other,  net                        |       | —                                |       | —                               |       | (4.0 | ) | — |   |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Income  (loss) before taxes        |       | (63.4                                 | )          | (32.4                                | )          | (17.9 | ) | (48.2 | ) |
| Income  tax (benefit) provision    |       | (13.4                                 | )          | (9.4                                 | )          | 6.3 |   | (14.2 | ) |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Net  income (loss)                 |       | $                                     | (50.0      | )                                    | $          | (23.0 | ) | $ | (24.2 | ) | $ | (34.0 | ) |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Adjusted  EBITDA:                  |       |                                  |       |                                 |       |   |   |   |   |
| Performance  Additives             |       | $                                     | 35.5       |                                 | $          | 28.9 |   | $ | 114.2 |   | $ | 81.9 |   |
| Specialty  Compounds               |       | 7.3                                   |       | 6.2                                  |       | 22.3 |   | 18.7 |   |
| Electronics                        |       | 7.6                                   |       | 6.0                                  |       | 21.6 |   | 17.9 |   |
| Specialty  Chemicals               |       | 21.1                                  |       | —                               |       | 21.1 |   | — |   |
| Pigments                           |       | 14.1                                  |       | —                               |       | 14.1 |   | — |   |
| Advanced  Ceramics                 |       | 13.3                                  |       | —                               |       | 13.3 |   | — |   |
| Custom  Synthesis                  |       | 5.2                                   |       | —                               |       | 5.2 |   | — |   |
| Corporate  costs and eliminations  |       | (9.0                                  | )          | (3.4                                 | )          | (17.5 | ) | (10.5 | ) |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Total  Adjusted EBITDA             |       | $                                     | 95.1       |                                 | $          | 37.7 |   | $ | 194.3 |   | $ | 108.0 |   |
|                                    |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

42

----

 

The following tablepresents the changes in the major components of our operations on a historicalbasis in dollars and percentages.

 
| **(dollars in millions)**                        | ** ** | **Change:Three  Months ended September 30, 2004 versus 2003** | ** **    | **Change:Nine  Months ended September 30, 2004 versus 2003** | ** **        |
|--------------------------------------------------|------------|--------------------------------------------------------------------|---------------|-------------------------------------------------------------------|-------------------|
| ** **                                       | **Total**  | ** **                                                         | **%  Change** | ** **                                                        | **FX  Effect(1)** | ** ** | **Acquisitions  Divestitures  net** | ** ** | **Other** | ** ** | **Total** | ** ** | **%  Change** | ** ** | **FX  Effect(1)** | ** ** | **Acquisitions  Divestitures  net** | ** ** | **Other** | ** ** |
| **Statement of operations data:**                |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                   |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                           |       | 38.5                                                               |          | 32.1                                                              | %                 | 3.4 |   | 7.6 |   | 27.6 |   | 118.5 |   | 33.7 | % | 11.1 |   | 12.5 |   | 94.9 |   |
| Specialty  Compounds                             |       | 6.7                                                                |          | 14.8                                                              | %                 | 1.4 |   | 0.0 |   | 5.3 |   | 17.0 |   | 12.5 | % | 4.8 |   | 0.0 |   | 12.2 |   |
| Electronics                                      |       | 8.5                                                                |          | 24.5                                                              | %                 | 1.5 |   | 0.8 |   | 6.2 |   | 19.6 |   | 18.6 | % | 5.3 |   | 2.3 |   | 12.0 |   |
| Specialty  Chemicals                             |       | 116.6                                                              |          |                                                              |              | 0.0 |   | 116.6 |   | 0.0 |   | 116.6 |   |   |   | 0.0 |   | 116.6 |   | 0.0 |   |
| Pigments                                         |       | 68.9                                                               |          |                                                              |              | 0.0 |   | 68.9 |   | 0.0 |   | 68.9 |   |   |   | 0.0 |   | 68.9 |   | 0.0 |   |
| Advanced  Ceramics                               |       | 56.6                                                               |          |                                                              |              | 0.0 |   | 56.6 |   | 0.0 |   | 56.6 |   |   |   | 0.0 |   | 56.6 |   | 0.0 |   |
| Custom  Synthesis                                |       | 38.0                                                               |          |                                                              |              | 0.0 |   | 38.0 |   | 0.0 |   | 38.0 |   |   |   | 0.0 |   | 38.0 |   | 0.0 |   |
| Total  net sales                                 |       | 333.8                                                              |          | 167.1                                                             | %                 | 6.3 |   | 288.3 |   | 39.1 |   | 435.2 |   | 73.4 | % | 21.2 |   | 294.9 |   | 119.1 |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gross profit**                                 | ** ** | 75.7                                                               |          | 137.9                                                             | %                 | 0.7 |   | 66.2 |   | 8.8 |   | 110.6 |   | 68.7 | % | 3.2 |   | 66.7 |   | 40.7 |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Selling, general and administrative expenses** |       | 74.5                                                               |          | 235.8                                                             | %                 | 0.9 |   | 68.1 |   | 5.5 |   | 88.2 |   | 99.1 | % | 3.3 |   | 68.8 |   | 16.1 |   |
| **Restructuring charges**                        |       | (0.2                                                               | )             | -66.7                                                             | %                 | 0.0 |   | 0.0 |   | (0.2 | ) | (1.2 | ) | -92.3 | % | 0.0 |   |   |   | (1.2 | )  |
| **Total operating expenses**                     |       | 74.3                                                               |          | 232.9                                                             | %                 | 0.9 |   | 68.1 |   | 5.3 |   | 87.0 |   | 96.3 | % | 3.3 |   | 68.8 |   | 14.9 |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating income (loss) :**                    |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                           |       | 4.9                                                                |          | 22.0                                                              | %                 | 0.4 |   | 0.1 |   | 4.4 |   | 29.2 |   | 47.1 | % | 1.1 |   | 0.2 |   | 27.9 |   |
| Specialty  Compounds                             |       | 1.2                                                                |          | 25.5                                                              | %                 | 0.1 |   | 0.0 |   | 1.1 |   | 3.9 |   | 27.3 | % | 0.4 |   | 0.0 |   | 3.5 |   |
| Electronics                                      |       | 1.9                                                                |          | 380.0                                                             | %                 | (1.1 | ) | (0.4 | ) | 3.4 |   | (1.5 | ) | -19.7 | % | (1.4 | ) | (0.6 | ) | 0.5 |   |
| Specialty  Chemicals                             |       | 0.7                                                                |          |                                                              |              | 0.0 |   | 0.7 |   | 0.0 |   | 0.7 |   |   |   | 0.0 |   | 0.7 |   | 0.0 |   |
| Pigments                                         |       | 6.3                                                                |          |                                                              |              | 0.0 |   | 6.3 |   | 0.0 |   | 6.3 |   |   |   | 0.0 |   | 6.3 |   | 0.0 |   |
| Advanced  Ceramics                               |       | (4.8                                                               | )             |                                                              |              | 0.0 |   | (4.8 | ) | 0.0 |   | (4.8 | ) |   |   | 0.0 |   | (4.8 | ) | 0.0 |   |
| Custom  Synthesis                                |       | (2.6                                                               | )             |                                                              |              | 0.0 |   | (2.6 | ) | 0.0 |   | (2.6 | ) |   |   | 0.0 |   | (2.6 | ) | 0.0 |   |
| Corporate  costs and eliminations                |       | (6.3                                                               | )             | 143.2                                                             | %                 | 0.0 |   | (2.9 | ) | (3.4 | ) | (7.6 | ) | 57.6 | % | (0.1 | ) | (2.9 | ) | (4.6 | ) |
| Total                                            |       | 1.3                                                                |          | 5.6                                                               | %                 | (0.6 | ) | (3.6 | ) | 5.5 |   | 23.6 |   | 33.4 | % | 0.0 |   | (3.7 | ) | 27.3 |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other income (expenses):**                     |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  expense, net                           |       | (25.4                                                              | )             | 128.9                                                             | %                 | (0.6 | ) | (2.1 | ) | (22.7 | ) | (11.3 | ) | 18.0 | % | (1.4 | ) | (2.1 | ) | (7.8 | ) |
| Foreign  exchange(loss) gain, net                |       | (42.0                                                              | )             |                                                              |              |   |   |   |   |   |   | (13.1 | ) |   |   |   |   |   |   |   |   |
| Refinancing  expenses                            |       | 35.1                                                               |          |                                                              |              |   |   |   |   |   |   | 35.1 |   |   |   |   |   |   |   |   |   |
| Other                                            |       | 0.0                                                                |          |                                                              |              |   |   |   |   |   |   | (4.0 | ) |   |   |   |   |   |   |   |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **(Loss) income before taxes**                   |       | (31.0                                                              | )             |                                                              |              |   |   |   |   |   |   | 30.3 |   |   |   |   |   |   |   |   |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  tax (benefit) provision                  |       | (4.0                                                               | )             |                                                              |              |   |   |   |   |   |   | 20.5 |   |   |   |   |   |   |   |   |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net (loss) income:**                           |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                           |       | 13.0                                                               |          |                                                              |              |   |   |   |   |   |   | 28.0 |   |   |   |   |   |   |   |   |   |
| Specialty  Compounds                             |       | 1.0                                                                |          |                                                              |              |   |   |   |   |   |   | 2.7 |   |   |   |   |   |   |   |   |   |
| Electronics                                      |       | 1.1                                                                |          |                                                              |              |   |   |   |   |   |   | 0.2 |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                             |       | (1.8                                                               | )             |                                                              |              |   |   |   |   |   |   | (1.8 | ) |   |   |   |   |   |   |   |   |
| Pigments                                         |       | 6.0                                                                |          |                                                              |              |   |   |   |   |   |   | 6.0 |   |   |   |   |   |   |   |   |   |
| Advanced  Ceramics                               |       | (4.6                                                               | )             |                                                              |              |   |   |   |   |   |   | (4.6 | ) |   |   |   |   |   |   |   |   |
| Custom  Synthesis                                |       | (3.7                                                               | )             |                                                              |              |   |   |   |   |   |   | (3.7 | ) |   |   |   |   |   |   |   |   |
| Corporate  costs and eliminations                |       | (38.0                                                              | )             |                                                              |              |   |   |   |   |   |   | (17.0 | ) |   |   |   |   |   |   |   |   |
| Total                                            |       | (27.0                                                              | )             |                                                              |              |   |   |   |   |   |   | 9.8 |   |   |   |   |   |   |   |   |   |
|                                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Adjusted EBITDA:**                             |       |                                                               |          |                                                              |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                           |       | 6.6                                                                |          | 22.8                                                              | %                 | 0.7 |   | 0.5 |   | 5.4 |   | 32.3 |   | 39.4 | % | 2.2 |   | 0.8 |   | 29.3 |   |
| Specialty  Compounds                             |       | 1.1                                                                |          | 17.7                                                              | %                 | 0.2 |   | 0.0 |   | 0.9 |   | 3.6 |   | 19.3 | % | 0.6 |   | 0.0 |   | 3.0 |   |
| Electronics                                      |       | 1.6                                                                |          | 26.7                                                              | %                 | (0.2 | ) | (0.3 | ) | 2.1 |   | 3.7 |   | 20.7 | % | (0.3 | ) | (0.4 | ) | 4.4 |   |
| Specialty  Chemicals                             |       | 21.1                                                               |          |                                                              |              | 0.0 |   | 21.1 |   | 0.0 |   | 21.1 |   |   |   | 0.0 |   | 21.1 |   | 0.0 |   |
| Pigments                                         |       | 14.1                                                               |          |                                                              |              | 0.0 |   | 14.1 |   | 0.0 |   | 14.1 |   |   |   | 0.0 |   | 14.1 |   | 0.0 |   |
| Advanced  Ceramics                               |       | 13.3                                                               |          |                                                              |              | 0.0 |   | 13.3 |   | 0.0 |   | 13.3 |   |   |   | 0.0 |   | 13.3 |   | 0.0 |   |
| Custom  Synthesis                                |       | 5.2                                                                |          |                                                              |              | 0.0 |   | 5.2 |   | 0.0 |   | 5.2 |   |   |   | 0.0 |   | 5.2 |   | 0.0 |   |
| Corporate  costs and eliminations                |       | (5.6                                                               | )             | 164.7                                                             | %                 | 0.0 |   | (3.0 | ) | (2.6 | ) | (7.0 | ) | 66.7 | % | (0.1 | ) | (3.0 | ) | (3.9 | ) |
| Total                                            |       | 57.4                                                               |          | 152.3                                                             | %                 | 0.7 |   | 50.9 |   | 5.8 |   | 86.3 |   | 79.9 | % | 2.4 |   | 51.1 |   | 32.8 |   |

 

----

(1)  The FX Effect was calculated based on thechange in the euro to US dollar exchange rate for the applicable period.

 

***Actual three months ended September 30, 2004 comparedwith actual three months ended September 30, 2003***

 

##### **Net sales**

 

Net sales were $533.6million for the third quarter of 2004 as compared to $199.8 million for thethird quarter of 2003. The increase is principally due to the Dynamit NobelAcquisition consummated on July 31, 2004 as included in net sales is  $280.1 million from two months of operationsfor the segments acquired as part of the Dynamit Nobel Acquisition. Otheracquisitions accounted for $8.4 million of net sales for the third quarter of2004 as compared to the same period in 2003. Currency exchange rate changespositively impacted net sales in the third quarter of 2004 by approximately $6.3million. The remaining increase was $39.1 million or 19.5%.

 

*PerformanceAdditives.* Net sales for our Performance Additivessegment increased 32.1% over the prior period primarily due to higher sales ofour Timber Treatment Chemicals due to a greater mix of ACQ products versus CCAproducts as a result of the ACQ conversion. Also, our Iron Oxide Pigmentsbusiness had stronger volume due to increased demand for constructionproducts.  Also included in net saleswere $3.4 million from favorable currency exchange rates changes and $6.8million from the impact of acquisitions.

 

*SpecialtyCompounds.*Net sales for our Specialty Compounds segmentincreased 14.8% over the prior period due to increased sales volumes and morefavorable pricing of certain products in our wire and cable compounds business,with the remaining increase in net sales of $1.4 million primarily due tocurrency exchange rate changes.

 

43

----

 

*Electronics.* Netsales for our Electronics segment increased 24.5% over the prior year periodprimarily due to higher sales volumes, offset in part by pricing pressure incertain businesses. Conditions in certain of our Electronic Chemicalsbusinesses were stronger in the current year due to the improved general marketenvironment in the industries served.

 

**Grossprofit**

 

*Gross profit margin was 24.5% in thethird quarter of 2004 as compared to 27.5% in the third quarter of 2003. Grossprofit increased by $75.7 million primarily due to the Dynamit NobelAcquisition completed on July 31, 2004. Gross profit includes two monthsof operations for the segments acquired as part of the Dynamit NobelAcquisition.*

* *

*The decline in gross profit as apercentage of net sales was partially attributable to a  $34.7 million non-recurring charge, or 6.5%of net sales, to cost of goods sold in the third quarter of 2004 primarily relatedto the portion of the purchase price allocated to inventory to reflectmanufacturing profit in inventory at the date of the Dynamit Nobel Acquisition.This charge was the portion of that allocation for the inventory sold in thenormal course of business during the two months of operations for the segmentsacquired.*

* *

*After excluding the inventory chargediscussed above, gross margin as a percentage of net sales was 31.0% and 27.5%in the third quarter of 2004 and 2003, respectively, primarily due to morefavorable mix from ACQ product sales in our Timber Treatment Chemicals businesspartially offset by higher raw material costs in this business, higher PVC rawmaterial costs in our Specialty Compounds segment and pricing pressuresparticularly within our wafer reclaim business. Gross margin as a percentage ofnet sales is also generally higher in our new Specialty Chemicals segment, withcorresponding higher selling costs, as compared to the historical Rockwoodsegments.*

 

##### **Operating expenses**

 

*Operating expenses, or “SG&A”increased primarily due to two months of operating expenses for the segmentsacquired as part of the Dynamit Nobel Acquisition. Operating expenses as apercentage of net sales were 19.9% in the third quarter of 2004 as compared to15.9% in the third quarter of 2003.*

* *

*The increase in operating expensesas a percentage of net sales is partially attributable to $0.8 million oflosses related to disposed businesses in the Custom Synthesis segment and $1.6million of other non-recurring charges in 2004. Also, operating expenses,specifically selling costs, as a percentage of net sales is generally higher inour new Specialty Chemicals segment as compared to the historical Rockwoodsegments.*

* *

##### **Operating income**

 

Operating incomeincreased $1.3 million or 5.6%. After adjusting for currency exchange ratechanges and acquisitions, operating income increased $5.5 million or 23.8% dueto the reasons described above. After excluding the 2004 non-recurring chargesin gross profit and operating expenses, operating margins were relativelystable, 11.5% in 2004 versus 11.6% in 2003, despite higher depreciation andamortization expenses from fair value step-ups.

 

*PerformanceAdditives.*  Operating income increased $4.9 millionprimarily due to the increase in sales of Timber Treatment Chemicals due to agreater mix of ACQ products, partially offset by higher raw material costs asdiscussed above.

 

*SpecialtyCompounds.*Operating income increased $1.2 million primarilydue to the increase in sales partially offset by higher PVC raw material costsas discussed above.

 

*Electronics.* Operatingincome increased $1.9 million primarily due to the net increase in sales withhigher sales volume offset by certain pricing pressures as discussed above.

 

*Corporate.*   Operating loss at Corporate increased  $6.3 million primarily due to higher centralcosts to operate the significantly larger business due to the Dynamit NobelAcquisition and higher bonus accruals. Also, $1.5 million of nonrecurringcharges were incurred at Corporate including costs related to the integrationof the Dynamit Nobel Acquisition and costs related to Sarbanes-Oxleyimplementation.

 

**Other income (expenses)**

 

*Interestexpense, net.*  For the third quarter of 2004 and 2003,interest expense, net, included a loss of $1.8 million and a gain of $3.3 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 $0.8 million, respectively, of amortization expense related todeferred financing costs. This amortization increased in 2004 due to the effectof the Acquisition Financing (see “—Liquidity and Capital

 

44

----

 

Resources”), whichsubstantially reduced our deferred financing cost balance. Currency exchangerate changes increased interest expense, net, by $0.6 million. Theremaining increase of $26.6 million was primarily due to higher debt levelsfrom the Dynamit Nobel Acquisition.

 

*Foreignexchange loss.* In the third quarter of 2004, the foreignexchange losses reflected the non-cash currency impact on our euro-denominateddebt of the weakening of the pound against the euro and also included a $10.9million mark-to-market realized loss on certain foreign currency call options(see- “Liquidity and Capital Resources”). In the third quarter of 2003, theforeign exchange losses reflected the non-cash currency impact on oureuro-denominated debt of the strengthening of the euro against the U.S. dollar.

 

**Provisionfor income taxes**

 

The effective income taxrate for the three months ended September 30, 2004 was 21.1%. The currentyear effective tax rate was negatively impacted by 4.7% due to the expectedinability to realize tax benefits on losses incurred in the UK and by 1.1% dueto the expected inability to realize tax benefits on losses incurred in certainstates. Certain costs incurred in connection with the Dynamit Nobel Acquisitionare not deductible for tax purposes causing a negative impact on the effectivetax rate of 8.4% in the three months ended September 30, 2004. The effectof foreign tax rate differentials was (0.2)% in the three months ended September 30,2004.

 

The effective tax ratefor the three months ended September 30, 2003 was 29.0% primarily impactedby the expected inability to realize tax benefits on losses incurred in theU.K.

 

**Net loss**

 

Net loss for the thirdquarter of 2004 was $50.0 million as compared to $23.0 million for thethird quarter of 2003 due to the reasons discussed above.

 

**AdjustedEBITDA**

 

*PerformanceAdditives.*  Adjusted EBITDA for our PerformanceAdditives segment increased from $28.9 million to $35.5 million or 22.8%primarily due to the increase in net sales of Timber Treatment Chemicals due toa greater mix of ACQ products, partially offset by higher raw material costsfor copper and quaternary amines used in the production of ACQ. Adjusted EBITDAas a percentage of net sales was 22.4% in the third quarter of 2004 versus 24.1%in the third quarter of 2003 due primarily to the higher raw material costs.

 

*SpecialtyCompounds.*Adjusted EBITDA for our Specialty Compoundssegment increased from $6.2 million to $7.3 million or 17.7% primarily due tothe increase in net sales discussed above partially offset by higher PVC rawmaterial costs. Adjusted EBITDA as a percentage of net sales was 14.0% in thethird quarter of 2004 versus 13.7% in the third quarter of 2003.

 

*Electronics.* AdjustedEBITDA for our Electronics segment increased from $6.0 million to $7.6 millionor 26.7% primarily due to the increase in net sales discussed above. AdjustedEBITDA as a percentage of net sales was 17.6% in the third quarter of 2004versus 17.3% in the third quarter of 2003.

 

*Corporate.*   Adjusted EBITDA loss at Corporate increasedfrom $3.4 million to $9.0 million primarily due to higher central costs relatedto the Dynamit Nobel Acquisition.

 

***Actual nine months ended September 30, 2004 comparedwith actual nine months ended September 30, 2003***

 

**Netsales**

 

Net sales were $1,027.9million for the first nine months of 2004 as compared to $592.7 million for thefirst nine months of 2003. The 73.4% increase is partially due to the DynamitNobel Acquisition from the inclusion of $280.1 million of two months of operations for the segments acquired aspart of the Dynamit Nobel Acquisition. Other acquisitions accounted for $14.8million of net sales for the nine months of 2004 as compared to the same periodin 2003. Currency exchange rate changes positively impacted net sales in thethird quarter of 2004 by approximately $21.2 million. The remaining increasewas $119.1 million or 20.1%.

 

*PerformanceAdditives.*  Net sales for our Performance Additivessegment increased 33.7% over the prior period primarily due to higher sales ofour Timber Treatment Chemicals due to a greater mix of ACQ products versus CCAproducts as a result of the ACQ conversion. Also, our Iron Oxide Pigmentsbusiness had stronger volume due to increased demand for constructionproducts.  Also included in net saleswere $11.1 million from favorable currency exchange rates changes and $12.5million from the impact of acquisitions.

 

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*SpecialtyCompounds.*Net sales for our Specialty Compounds segmentincreased 12.5% over the prior period due to the increase in sales volumes andmore favorable pricing of certain products in our wire and cable compoundsbusiness and favorable currency exchange rate changes of $4.8 million.

 

*Electronics.* Netsales for our Electronics segment increased 18.5% over the prior year periodprimarily due to increase in sales volumes, offset in part by pricing pressurein certain businesses.

 

**Grossprofit**

 

*Gross profit margin was 26.4% in thefirst nine months of 2004 as compared to 27.2% in the first nine months of2003.*Gross profit increasedby $110.6 million, primarily due to the Dynamit Nobel Acquisition.

* *

*The decline in gross profit as apercentage of net sales was partially attributable to a $34.7 million charge,or 3.4% of net sales, to cost of goods sold in the third quarter of 2004 primarilyrelated to the portion of the purchase price allocated to inventory to reflectmanufacturing profit in inventory at the date of the Dynamit Nobel Acquisition.This charge was the portion of that allocation for the inventory sold in thenormal course of business during the two months of operations for the segmentsacquired.*

* *

*After excluding the inventory chargediscussed above, gross margin as a percentage of net sales was 29.8% in thefirst nine months of 2004 as compared to 27.2% in the first nine months of 2003primarily due to more favorable mix from ACQ product sales in our TimberTreatment Chemicals business partially offset by higher raw material costs inthis business, higher PVC raw material costs in our Specialty Compounds segmentand pricing pressures within our wafer reclaim and photomasks’ businesses.*

 

##### **Operating expenses**

 

*Operating expenses, or “SG&A”increased primarily due to the Dynamit Nobel Acquisition. Operating expenses asa percentage of net sales were 17.2% in the first nine months of 2004 ascompared to 15.2% in the first nine months of 2003.*

* *

*The increase in operating expensesas a percentage of net sales is partially attributable to income in 2003 fromfire insurance proceeds of $4.5 million. Also, operating expenses in 2004included $0.8 million of losses related to disposed businesses in the CustomSynthesis segment.*

 

**Operatingincome**

 

Operating incomeincreased $23.6 million or 33.4%. After adjusting for currency exchange ratechanges and acquisitions, operating income increased $27.3 million or 38.6% dueto the reasons described above. After excluding the 2004 and 2003 non-recurringcharges in gross profit and operating expenses, operating margins were 12.6% in2004 versus 11.2% in 2003, despite increased depreciation and amortizationexpenses from fair value step-ups.

 

*PerformanceAdditives.*  Operating income increased $29.2 millionprimarily due to the increase in sales of Timber Treatment Chemicals due to agreater mix of ACQ products, partially offset by higher raw material costs asdiscussed above.

 

*SpecialtyCompounds.*Operating income increased $3.9 million primarilydue to the increase in sales partially offset by higher PVC raw material costsas discussed above.

 

*Electronics.* Operatingincome decreased $1.5 million. After excluding the impact of currency changesand acquisitions, operating income increased $0.5 million primarily due to thenet increase in sales from higher sales volume offset by certain pricingpressures in 2004 and the $4.5 million of fire insurance proceeds in 2003 asdiscussed above.

 

*Corporate.*   Operating loss at Corporate increased  $7.6 million primarily due to higher bonusaccruals and higher central costs to operate the significantly larger businessdue to the Dynamit Nobel Acquisition. Also, $2.5 million of nonrecurringcharges were incurred at Corporate including costs related to the integrationof the Dynamit Nobel Acquisition and costs related to Sarbanes-Oxleyimplementation.

 

**Otherincome (expenses)**

 

*Interestexpense, net.*  For the first nine months of 2004 and2003, interest expense, net, included a gain of $6.8 million and a loss of$2.7 million, respectively, representing the movement in the mark to marketvaluation of our interest rate and cross currency hedging instruments as wellas $3.2 million and $3.9 million, respectively, of amortizationexpense related to deferred financing costs. This amortization decreased in2004 due to the effect of the 2003 Refinancing, and the Acquisition Financing(see “—Liquidity and Capital

 

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Resources”), whichsubstantially reduced our deferred financing cost balance. Currency exchangerate changes increased interest expense, net by $1.4 million. Theremaining increase of $11.8 million was primarily due to higher debt levelsfrom the Dynamit Nobel Acquisition.

 

*Foreignexchange gain (loss).*  In the first nine months of 2004,the foreign exchange gains reflected the non-cash currency impact on oureuro-denominated debt of the strengthening of the pound against the euro andalso included a $10.9 million mark-to-market realized loss on certain foreigncurrency call options (see- “Liquidity and Capital Resources”). In the firstnine months of 2003, the foreign exchange losses reflected the non-cashcurrency impact on our euro-denominated debt of the strengthening of the euroagainst the U.S. dollar.

 

*Other,net.*Represents stamp duty tax in 2004.

 

**Provisionfor income taxes**

 

The effective income taxrate for the nine months ended September 30, 2004 was (35.2)%. The currentyear effective tax rate was negatively impacted by 21.1% due to the expectedinability to realize tax benefits on losses incurred in the UK and by 13.5% dueto the expected inability to realize tax benefits on losses incurred in certainstates. Certain costs incurred in connection with the Dynamit Nobel Acquisitionare not deductible for tax purposes causing a negative impact on the effectivetax rate of 29.8% in the nine months ended September 30, 2004. The effectof foreign tax rate differentials was 5.8% in the nine months ended September 30,2004.

 

The effective tax ratefor the nine months ended September 30, 2003 was 29.5% primarily impactedby to the expected inability to realize tax benefits on losses incurred in theU.K.

 

**Netincome (loss)**

 

Net loss for the firstnine months of 2004 was $24.2 million as compared to a net loss of $34.0million for the first nine months of 2003 for the reasons discussed above.

 

**AdjustedEBITDA**

 

*PerformanceAdditives.*  Adjusted EBITDA for our PerformanceAdditives segment increased from $81.9 million to $114.2 million or 39.4%primarily due to the increase in net sales of Timber Treatment Chemicals due toa greater mix of ACQ products, partially offset by higher raw material costsspecifically in the third quarter of 2004. Adjusted EBITDA as a percentage ofnet sales was 24.3% in the first nine months of 2004 and 23.3% in the firstnine months of 2003.

 

*SpecialtyCompounds.*Adjusted EBITDA for our Specialty Compoundssegment increased from $18.7 million to $22.3 million or 19.3% primarily due tothe increase in net sales partially offset by higher PVC raw material costs asdiscussed above. Adjusted EBITDA as a percentage of net sales was 14.6% in thefirst nine months of 2004 and 13.8% in the first nine months of 2003.

 

*Electronics.* AdjustedEBITDA for our Electronics segment increased from $17.9 million to $21.6million or 20.7% primarily due to the increase in net sales with higher salesvolume offset by certain pricing pressures as discussed above. Adjusted EBITDAas a percentage of net sales was 17.3% in the first nine months of 2004 and16.9% in the first nine months of 2003.

 

*Corporate.*   Adjusted EBITDA loss at Corporate increasedfrom $10.5 million to $17.5 million primarily due to higher central costsrelated to the Dynamit Nobel Acquisition.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at September 30, 2004 exchange rates.*

 

Netcash provided by operating activities was $86.4 million and $43.1 millionin the nine months ended September 30, 2004 and 2003, respectively.  Net cash provided by operating activities inthe nine months ended September 30, 2004 includes $38.9 million from thebusinesses acquired in the Dynamit Nobel Acquisition for the two-month periodended September 30, 2004. The remaining increase in net cash provided byoperating activities of $4.4 million for the nine months ended September 30,2004 as compared to nine months ended September 30, 2003 was primarily dueto stronger operating results.

 

Net cash used for investing activities was$2,096.5 million in the nine months ended September 30, 2004, and$37.4 million in the nine months ended September 30, 2003.  Net cash used for investing activities forthe nine months ended September 30, 2004 includes

 

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$2,009.6 million related to the Dynamit Nobel Acquisition andapproximately $50 million related to the acquisition of the Pigments andDispersions business of Johnson Matthey PLC. The remaining change in net cashused for investing activities for the nine months ended September 30, 2004as compared to the nine months ended September 30, 2003 was primarily dueto the 2003 acquisition of Southern Color partially offset by higher capitalexpenditures related to the businesses acquired in the Dynamit NobelAcquisition for the two-month period ended September 30, 2004.

 

Net cash provided by financing activities was $2,147.8million in the nine months ended September 30, 2004 due to net financingproceeds for the acquisitions discussed above of $1,743.8 million, primarilythe Dynamit Nobel Acquisition, and equity contributions of $404.0 million forthe Dynamit Nobel Acquisition. Net cash used in financing activities was $1.6million in the nine months ended September 30, 2003 resulting from the July 2003Refinancing.

 

Inconnection with the Dynamit Nobel Acquisition, we entered into new seniorsecured credit facilities of approximately $1,470.6 million (€389.7million and $985.0 million) and a new senior subordinated loan facility ofapproximately $870.5 million (€419.8 million and $350.0 million) and receivedan equity contribution of $404.0 million from proceeds from equityinvestments in Holdings by affiliates of KKR and DLJMB (representing an equitycontribution in Holdings of $425.0 million less a $20.0 millionrepayment of a portion of the PIK notes issued in connection with interestpayments on the $70.0 million initial aggregate principal amount of thePIK notes issued and a related fee payment of $1.0 million).$50.4 million of the term loan and $250.0 million available under therevolving credit facility were undrawn at the closing of the Dynamit NobelAcquisition. The proceeds from these financings (the “Acquisition Financing”)were used to finance the purchase price of the businesses acquired in theDynamit Nobel Acquisition, repay all amounts outstanding under our old seniorcredit facilities (which totaled approximately $442.2 million), repayassumed debt of approximately $129.0 million, fund approximately$20.0 million of cash settlement of derivative transactions related to theDynamit Nobel Acquisition and pay related fees and expenses. In addition, weassumed long-term debt of approximately €135.1 million and £ 12.0 million (or $190.1 million).

 

Subsequentto the closing of the Dynamit Nobel Acquisition, we drew the remaining$50.4 million (€ 41.9 million) of the term loans in connection withthe acquisition of the Pigments and Dispersions business of Johnson MattheyPlc. In addition, on October 8, 2004, we amended the new senior securedcredit facilities to borrow an additional $160.0 million and€52.7 million (or $225.5 million in the aggregate) of term loans andused the additional borrowings to repay a portion of our senior subordinatedloan and to pay related fees.  Finally,on November 10, 2004, we repaid the remaining outstanding borrowingsunder the senior subordinated loan facility of $260.1 million and €313.2 million (or $665.8 million in theaggregate), plus accrued interest thereon with the proceeds from the issuance of €375.0 million ($465.8 million)principal amount of 7.625% senior subordinated notes due 2014 and $200.0million principal amount of 7.500% senior subordinated notes due 2014 (together,the “2014 Notes”), and we also used the net proceeds from the offering of the2014 Notes to pay related fees and expenses of approximately $11.1 million andfund general corporate purposes.  The October 8and November 10 refinancing of the senior subordinated loan facility arecollectively referred to as the “Refinancings.”

 

Inaddition, in connection with the issuance of the 2014 Notes, we entered intocross currency interest rate swaps with a five year term and a notional amountof €155.6 million that effectively convert the U.S. dollar fixed rate debt inrespect of the dollar notes sold into euro fixed rate debt. We have designated thiscontract as a hedge of the foreign currency exposure of our net investment inour euro denominated operations.

 

Asa result of the Acquisition Financing and Refinancings as of the date of thisfiling, at the September 30, 2004 exchange rate, we have aggregateindebtedness of $2,977.5 million, including $1,746.5 million of borrowingsunder the term loan portions of the new senior secured credit facilities,$665.8 million (€375.0 million and $200.0 million) of borrowings under the2014 Notes, $375.0 million of outstanding 2011 Notes and$190.1 million of Dynamit Nobel’s existing long-term debt which wasassumed by us in connection with the Dynamit Nobel Acquisition. In connectionwith the Dynamit Nobel Acquisition, we assumed certain standby letters of creditand comparable obligations. Many of these obligations will have to be renewedupon expiration and will then reduce availability under the revolving creditfacility.

 

Thesenior secured credit facilities (as amended) consist of tranche A-1 term loansin an aggregate principal amount of €39.1 million (or approximately$48.6 million) and tranche A-2 term loans in an aggregate principal amountof €170.4 million (or approximately $211.6 million), each maturing on July 31,2011, tranche B term loans in an aggregate principal amount of$1,145.0 million maturing on July 31, 2012 and tranche C termloans in an aggregate principal amount of €274.8 million (or approximately$341.3 million) maturing on July 31, 2012 and also provides arevolving credit facility in an aggregate principal amount of$250.0 million maturing on July 31, 2010.  The borrowings under the senior securedcredit facilities bear interest at a rate per year equal to the following:(1) in the case of tranche A-1, A-2 and B term loans and the revolvingcredit facility, at our option, either (i) Adjusted LIBOR plus 2.50% or(ii) in the case of loans denominated in U.S. dollars, ABR plus 1.25%; and(2) in the case of tranche C term loans, Adjusted LIBOR plus 3.00%.In each case, the interest rates per year (other than under the tranche Cterm loan facility) are subject to step-downs determined by reference to aperformance test. Adjusted LIBOR is the London inter-bank offered rate adjustedfor statutory reserves. ABR is the alternate base rate, which is the highest ofCredit Suisse First Boston’s prime rate and the federal funds effective rateplus 0.5%. Tranche A-1 and A-2 term loans are payable in January and July ofeach year at escalating percentages of the original principal amount.Tranche B and tranche C term loans are payable in January and July ofeach year at amounts equal to 0.5% of the original 

 

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principalbalance, with the remainder due at the final maturity date.

 

Our 2011Notes mature on May 15, 2011 and our 2014 Notes mature on November 15,2014.  Interest on both the 2011 Notesand 2014 Notes are payable semi-annually on May 15 and November 15.  Interest on the 2011 Notes accrues at therate of 10 5/8% per year, and interest on the 2014 Notes accrues at the rate of7.625% in the case of euro notes and 7.500% in the case of dollar notes.  Certain of our domestic subsidiariesguarantee the 2011 Notes and 2014 Notes on a senior subordinated unsecured basis.

 

Oursenior secured credit facilities contain various restrictive covenants, subjectto certain exceptions, which limit our, and our subsidiaries’ ability, to,among other things: incur indebtedness and other liabilities; create liens;merge or consolidate; dispose of assets; make investments; pay dividends andmake payments to shareholders; make payments on certain indebtedness; to amenddocuments related to certain indebtedness; and to enter into sale leasebacktransactions.

 

Our 2011 Notes and 2014Notes also contain similar restrictive covenants which, among other things,limit our ability, and the ability of our restricted subsidiaries, to: incuradditional indebtedness; pay dividends or make other distributions orrepurchase stock; make investments; create liens; transfer or sell assets;restrict dividends or other payments to us; guarantee indebtedness; engage intransactions with affiliates; and merge or consolidate with other companies orsell substantially all of our assets.

 

Inaddition, our senior secured credit facilities contain the following financialcovenants: a maximum total leverage ratio, a minimum interest coverage ratioand a maximum capital expenditures limitation. Specifically, the key financialratios in our new senior credit facilities are net debt to Adjusted EBITDA,which is required to be less than 6.95 to 1 for the twelve-month period ended December 31,2004, and Adjusted EBITDA to cash interest expense (interest expense, netexcluding deferred debt issuance cost amortization and the movements in themark-to-market value of our interest rate and cross-currency interest ratederivatives), which is required to be at least 1.60 to 1 for the twelve-monthperiod ended December 31, 2004. Because Adjusted EBITDA on a consolidatedbasis is used in the calculation of these ratios, Adjusted EBITDA is criticalto evaluating our liquidity position.

 

AdjustedEBITDA, which is referred to under the senior secured credit agreement as “ConsolidatedEBITDA,” is defined therein as consolidated earnings (which, as definedtherein, equals income (loss) before the deduction of income taxes of RockwoodSpecialties Group and the Restricted Subsidiaries (as such term is definedtherein), excluding extraordinary items) plus:

 

•                                          interest expense;

•                                          depreciation expense;

•                                          amortization expense, including amortizationof deferred financing fees;

•                                          extraordinary losses and non-recurringcharges;

•                                          non-cash charges;

•                                          losses on asset sales;

•                                          restructuring charges or reserves (includingseverance, relocation costs and one-time compensation charges and costsrelating to the closure of facilities);

•                                          expenses paid by Holdings or any of itssubsidiaries in connection with the Dynamit Nobel Acquisition, the new seniorsecured credit agreement, the granting of liens under the security documents(as such term is defined in the new senior secured credit agreement), theindenture governing the notes, this offering and any other relatedtransactions;

•                                          any expenses or charges incurred in connectionwith any issuance of debt or equity securities;

•                                          any fees and expenses related to permittedacquisitions;

•                                          any deduction for minority interest expense;and

•                                          costs arising in connection with certainlitigation matters;

 less:

•                                          extraordinary gains and non-recurring gains;

•                                          non-cash gains; and

•                                          gain on asset sales;

 

inall cases subject to certain exclusions and limitations.

 

Givenour use of Adjusted EBITDA as a liquidity measure, the following table presentsa reconciliation of net cash provided by (used in) operating activities toAdjusted EBITDA:

 

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| **(millions)**                                                                                                         | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                             | **2004**   | ** **                                | **2003**   | ** ** |
|                                                                                                                   |       |                                      |       |   |   |
| Net  cash provided by operating activities                                                                             |       | $                                         | 86.4       |   | $ | 43.1 |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions                |       | (0.9                                      | )          | 3.7 |   |
| Current  portion of income tax (benefit) provision                                                                     |       | 10.9                                      |       | 5.5 |   |
|                                                                                                                   |       |                                      |       |   |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 77.8                                      |       | 56.3 |   |
| Restructuring  and related charges                                                                                     |       | 0.1                                       |       | 1.3 |   |
| Systems/organization  establishment expenses                                                                           |       | 2.5                                       |       | 1.1 |   |
| Acquisition  and disposal costs                                                                                        |       | 0.1                                       |       | 1.7 |   |
| Stamp  duty tax                                                                                                        |       | 4.0                                       | ** ** | **—** | ** ** |
| Business  interruption costs and insurance recovery                                                                    | ** ** | **—**                                |       | (4.5 | ) |
| Foreign  exchange loss realized                                                                                        |       | 11.8                                      | ** ** | **—** | ** ** |
| Disposition  of business unit                                                                                          |       | 0.8                                       | ** ** | **—** | ** ** |
| Bad  debt provision                                                                                                    |       | (1.2                                      | )          | (0.2 | ) |
| Other                                                                                                                  |       | 2.0                                       |       | — |   |
| Total  Adjusted EBITDA                                                                                                 |       | $                                         | 194.3      |   | $ | 108.0 |   |

 

*(a)**                              *Business interruption costs and insurancerecovery are not included in the calculation of Adjusted EBITDA under theindentures governing the 2011 and 2014 Notes.

 

Ourborrowings and the borrowings of Rockwood Specialties Limited under the seniorsecured credit facilities are secured by a pledge by Rockwood SpecialtiesInternational, Inc. of 100% of our capital stock, a pledge of 100% of thecapital stock of certain of our direct and indirect domestic subsidiaries and apledge of 65% of the capital stock of our first-tier foreign subsidiaries. Inaddition, the borrowings of Rockwood Specialties Limited are also secured by apledge of the remaining 35% of the capital stock of our first-tier foreignsubsidiaries as well as 100% of the capital stock of certain other foreignsubsidiaries. Our borrowings and those of Rockwood Specialties Limited are alsosecured by substantially all of our assets and substantially all of the assetsof our direct and indirect domestic subsidiaries. In addition, the borrowingsby Rockwood Specialties Limited are secured by substantially all of the assetsof our foreign subsidiaries in certain countries. In addition, our borrowingsand the borrowings of Rockwood Specialties Limited are

 

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guaranteedby Rockwood Specialties International, Inc. and each of our direct andindirect domestic subsidiaries.

 

Asof September 30, 2004 $1,056.5 million of the debt outstanding is denominatedin euros, including the borrowings under the senior subordinated loan facilitywhich have subsequently been repaid. In order to mitigate the effect of anyexchange rate changes which may have taken place prior to the closing of theDynamit Nobel Acquisition, we entered into call options, permitting us topurchase up to €750.0 million at a price of $1.225 = €1.00. Werecorded a mark-to-market loss of $2.9 million during the second quarterof 2004 on the call options. The options expired unexercised and we recorded anadditional loss of $8.1 million in the third quarter of 2004. We alsoentered into a forward contract in July 2004 to purchase €1,057 millionof euros at a fixed U.S. dollar rate of $1.208 = €1.00 related to theFinancing, which was utilized to pay for a portion of the purchase price at theclosing of the Dynamit Nobel Acquisition. We recorded a charge of approximately$4.2 million in the third quarter of 2004. See Item 3 - Quantitative and Qualitative Disclosures About Market Risk.

 

During 2001, we enteredinto derivative contracts to manage our exposure to changes in interest ratesrelated to our then outstanding floating rate long-term debt. These contractswere terminated in August 2004 when we entered into derivative contracts(interest rate swaps) to manage our exposure to changes in interest ratesrelated to the senior credit facility in our Acquisition Financing.  As of September 30, 2004, thesecontracts cover notional amounts of $652.6 million (at a rate of 6.14%) and€486.0 million (at rates ranging from 4.62% to 7.03%).  These contracts effectively convert a largeportion of the Company’s floating rate debt instruments to fixed rateobligations for the contract periods. The US dollar swap matures in July 2007 and the Euro swap in July 2008.

 

Approximately$21.5 million and $9.0 million of the transaction fees, includingreimburseable expenses, were paid to KKR or its affiliates and to DLJMB,respectively. In addition, approximately $25.5 million of financing feeswere paid to CSFB or its affiliates.

 

During October 2004, certain members of our management purchased 2,350shares of Holding’s common stock for proceeds of $1.2 million which wascontributed to us. In connection with the purchase of such shares, pursuant tothe Amended and Restated 2003 Stock Purchase and Option Plan, as amended, suchmembers of our management were granted stock options to purchase 11,470 sharesof common stock.  During the thirdquarter of 2004, Holdings sold 3,000 shares of common stock to a member ofmanagement at fair market value as determined by the Board of Directors, forgross proceeds of $1.5 million.

 

Webelieve that the Dynamit Nobel Acquisition will ultimately enhance our accessto capital markets, and thereby enhance our liquidity and capital resources,due to the significantly increased size of the combined entity and increasedend market and geographic diversification. However, in the short term, our newcapital structure described above may result in less favorable financialratios, measures commonly used in debt covenants such as those governing ourexisting long-term debt.

 

##### **Capital Expenditures**

 

For the nine months endedSeptember 30, 2004 and 2003, our capital expenditures amounted to $12.0million and $26.8 million, respectively, excluding capital expenditures of thebusinesses of the Dynamit Nobel Acquisition. Capital expenditures for theperiod from the date of acquisition to September 30, 2004 related to thebusinesses of the Dynamit Nobel Acquisition amounted to $10.4 million. Weintend to apply our capital discipline and stringent controls such that weexpect the anticipated future capital expenditures as compared to historicallevels for the businesses of the Dynamit Nobel Acquisition will bereduced.  Our annual capital expenditures will increasein amount, but we do not believe they will change significantly from currentlevels in proportion to the size of the combined entity or as a percentage ofnet sales. Our capital expenditures have averaged $34.9 million peryear (excluding the effect of the Dynamit Nobel Acquisition) for the threeyears ended December 31, 2003, which consisted primarily of replacementsof worn, obsolete or damaged equipment as well as investments in new equipment,mostly for our Iron Oxide Pigments and Timber Treatment Chemicals businesslines. From 2001 through 2003, we made significant investments in newfacilities to expand capacity across our business lines including expendituresmade in connection with the expansion of our ACQ production capabilities in ourTimber Treatment Chemicals business line and expansion and refurbishment of twowafer reclaim facilities.

 

Ourability to pay principal and interest on our debt, fund working capital andmake anticipated capital expenditures depends on our future performance, whichis subject to general economic conditions and other factors, some of which arebeyond our control. We believe that based on current and anticipated levels ofoperations and conditions in our industry and markets, cash flows fromoperations and borrowings available under our revolving credit facility will beadequate for the foreseeable future to make required payments of principal andinterest on our debt, and fund our working capital and capital expenditurerequirements. There can be no assurance, however, that our business will generatesufficient cash flow from operations or that future borrowings will beavailable under our revolving credit facility in an amount sufficient to enableus to service our debt, or to fund our other liquidity needs. Furthermore, anyfuture acquisitions, business combinations or similar transactions will likelyrequire additional capital, and there can be no assurance that this capitalwill be available to us.

 

##### **Commitments and Contingencies**

 

We are involved in various legal proceedings, including productliability, intellectual property and environmental matters, of a natureconsidered normal to our business. It is our policy to accrue for amountsrelated to these matters in accordance with SFAS No. 5, 

 

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“Accounting for Contingencies,” if it is probable that aliability has been incurred and an amount can be reasonably estimated. It isour policy to disclose such matters when there is at least a reasonablepossibility that a material loss may have been incurred.

 

Under the terms of the Sale and Purchase Agreement enteredinto in connection with the Dynamit Nobel Acquisition, mg technologies ag andMG NAH, (“mg technologies”), are required to indemnify usfor certain legal, tax and environmental liabilities and obligations thatrelated to the period prior to the closing of the Dynamit Nobel Acquisition.

 

In addition, pursuant to the Sale and Purchase agreemententered into in connection with the Dynamit Nobel Acquisition, mg technologiesare required to indemnify us and our subsidiaries for 50% of the excess amountof losses over the amount of the related reserves (in the case of known claims)and 50% of claims (in the case of currently unknown claims) related to thecontamination of our or our subsidiaries’ properties, if notified within tenyears. If mg technologies’ responsibility for contamination matters cannot beproven, a sliding scale reduces the percentage further for each year during thefour-year period from year six to ten. mg technologies are also obligated toindemnify us for 85% of claims related to legacy site matters, such asenvironmental matters relating to properties or businesses owned or operated byDynamit Nobel prior to, but not on, the closing of the Dynamit NobelAcquisition, if notified within ten years. In addition, mg technologies areobligated to indemnify us for 50% of the excess amount of losses over theamount of the related reserves for operational compliance matters, if notifiedby December 31, 2006, and 50% of the excess amount of losses over theamount of the related reserves (in the case of known claims) and 50% of claims(in the case of currently unknown claims) related to certain environmentaldamage claims, if notified within ten years. All of these indemnity obligationsare subject to different minimum per-claim thresholds depending on whether thematter was disclosed or not, and on the subject matter, ranging between€100,000 and €750,000 (or $120,000 and $900,000 at an exchange rate of $1.20 to€1.00) depending on the type of claim. The indemnity obligations are furthersubject to certain deductibles, exclusions and limitations. Furthermore, mgtechnologies are obligated to indemnify us for certain environmental risksarising from certain “shared site” structures for a duration of ten years. Thisindemnity obligation is not subject to the percentages, de minimis andthresholds described above, and it is not subject to most of the generallimitations. In the event we seek indemnity under any of these obligations,there can be no assurance that mg technologies will adhere to theirobligations, and we may have to resort to legal action to enforce our rightsunder the indemnities.

 

**InformationConcerning Forward Looking Statements**

 

We have included in thisdocument forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, that state our intentions, beliefs,expectations or predictions for the future. These forward-looking statementsare subject to certain risks and uncertainties that could cause actual resultsto differ materially from historical results or those anticipated, depending ona variety of factors, including, but not limited to, the statements under “RiskFactors” detailed in our annual report on Form 10-K for the year ended December 31,2003 and other reports filed with the Securities and Exchange Commission, suchas:

 

•                                          changesin our business strategies;

•           changes in demand for our products;

•           fluctuations in interest rates, exchangerates and currency values;

•           availability and pricing of raw materials;

•           fluctuations in energy prices;

•           changes in the end-use markets in which ourproducts are sold;

•                                          changesin the general economic conditions in North America and Europe and in otherlocations in which we currently do   business;

•                                          technologicalchanges affecting production of our materials;

•           governmental and environmental regulationsand changes in those regulations;

•           hazards associated with chemicalsmanufacturing;

•                                          risksassociated with negotiating, consummating and integrating acquisitions,especially related to the integration of the Dynamit Nobel Acquisition;

•           risks associated with competition and theintroduction of new competing products, especially in the Asia-Pacific region;and

•           risks associated with international salesand operations.

 

Although we believe thatthe expectations reflected in forward-looking statements are reasonable, we cangive no assurance that those expectations will prove to have been correct. Allforward-looking statements contained in this document are qualified byreference to this cautionary statement. Except as required by law, we undertakeno obligation to publicly update any forward looking statements, whether as aresult of new information, future events or otherwise.

 

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**Item 3****.  Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

We areexposed to market risk from changes in interest rates, foreign currencyexchange rates and commodity prices. We manage our exposure to these marketrisks through regular operating and financing activities and through the use ofderivatives. When used, derivatives are employed as risk management tools andnot for trading purposes.

 

**Interest Rate Risk**

 

*As ofthe filing date using September 30, 2004 exchange rates.*

 

We had$1,178.7 million of variable rate debt outstanding as of September 30,2004 under our new senior secured credit facilities at the then exchange rate.Any borrowings under our revolving credit facility will also be at a variablerate. We are not required under the terms of any of our long-term debtfacilities to hedge, or otherwise protect against interest rate fluctuation inour variable rate debt. However, in August 2004, we entered into twoderivative contracts to hedge interest rate risk which currently cover notionalamounts of $652.6 million and €486.0 million. These derivative contractseffectively convert these debt instruments to fixed rate obligations, currentlyat weighted average interest rates of 6.14% and 6.36%, respectively. Thematurity date of the U.S. dollar hedge is July 2007, and the maturity dateof the euro hedge is July 2008.   A0.125% increase or decrease in the assumed weighted average interest rate wouldchange annual interest expense by $1.4 million.

 

##### **Foreign Currency Risk**

 

We conduct operations inmany countries around the world. Our results of operations are subject to bothcurrency transaction risk and currency translation risk. We operate ageographically diverse business, with approximately 53% of our 2003 pro formanet sales generated from customers in Europe, 34% in North America and 13% fromthe rest of the world.  We now serve our diverse and extensive customerbase with 93 manufacturing facilities in 24 countries. Although we sell andmanufacture our products in many countries, our sales and production costs aremainly denominated in U.S. dollars, euros and pounds sterling. Our results ofoperations and financial condition are therefore impacted by the fluctuation ofthe euro and the pound sterling against our reporting currency, the U.S.dollar. Due to the consummation of the Dynamit Nobel Acquisition, asignificantly larger share of sales and production costs is now denominated ineuros. This increases the impact of the fluctuation of the euro against theU.S. dollar.

 

We incur currencytransaction risk whenever we enter into either a purchase or sale transactionusing a currency other than the local currency of the transacting entity. Withrespect to currency translation risk, our financial condition and results ofoperations are measured and recorded in the relevant domestic currency and thentranslated into U.S. dollars for inclusion in our consolidated financialstatements. Exchange rates between these currencies and the U.S. dollar inrecent years have fluctuated significantly and may do so in the future.

 

Our financial results aresubject to the effect of currency fluctuations on the remeasurement of oureuro-denominated debt. Our senior credit facilities currently include €431.6million (or $536.0 million) of euro denominated debt, and we assumedapproximately €135.1 million (or $167.7 million) of euro denominated debt inconnection with the Dynamit Nobel Acquisition, in each case, based on theexchange rate on September 30, 2004. Gains and losses on the translationof debt denominated in a currency other than the functional currency of theborrower are included as a separate component of “Other income (expenses).” We had previously entered into cross-currency interest rate swaps, with a June 30,2004 notional amount of $75.0 million, that effectively converted US dollarLIBOR-based debt into euro LIBOR-based debt.  We settled $53.4 million ofthese swaps simultaneously with the closing of the Acquisition Financing.

 

Also, inconnection with the offering of the 2014 Notes, we entered into cross currencyinterest rate swaps with a five year term and a notional amount of €155.6million that effectively convert the U.S. dollar fixed rate debt in respect ofthe dollar notes sold into euro fixed rate debt. We designated this contract asa hedge of the foreign currency exposure of our net investment in its eurodenominated operations.

 

##### **Commodity Price Risk**

 

We are subject to commodity price risk for certain of our rawmaterials. We have not materially hedged this commodity price exposure to date.

 

**Item 4****.  Controls and Procedures**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our chief executive officer and chieffinancial officer, as appropriate, to allow timely decisions regarding requireddisclosures. Any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives. Our management, under the supervision and with theparticipation of our chief executive officer and chief financial officer, hasevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Rule 15d-14 of the

 

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Securities Exchange Actof 1934 as of September 30, 2004.  The disclosure controls and procedures of therecent acquisitions of Dynamit Nobel and the Johnson Matthey Pigments andDispersions Business differ in certain respects from those of the Company andare being aligned as part of the post-acquisition integration process. Basedupon our evaluation and subject to the foregoing, our chief executive officerand chief financial officer concluded that the design and operation of ourdisclosure controls and procedures are effective to accomplish theirobjectives.

 

Inaddition, other than as described above, there was no change in our internalcontrol over financial reporting or in other factors that occurred during thequarter ended September 30, 2004 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting. 

 

As part of our ongoing integration activities, we are continuing toincorporate our controls and procedures into the Dynamit Nobel and JohnsonMatthey Pigments and Dispersions Business entities acquired.

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**PART II– OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

We are involved invarious legal proceedings, including product liability, intellectual propertyand environmental matters, of a nature considered normal to our business.However, we do not believe that there is any individual litigation that is likelyto have a material adverse effect on our business or financial condition.

 

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

**Item4.  Submission of Matters to a Vote of SecurityHolders.**

 

None.

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits.**

 
| **Exhibit  No.** | ** ** | **Description  of Exhibit**                                                                                                                           |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                  |
| 31.1             |       | Certification of Chief  Executive Officer Pursuant to Rule 15d-14(a).                                                                                 |
|             |       |                                                                                                                                                  |
| 31.2             |       | Certification of Chief  Financial Officer Pursuant to Rule 15d-14(a).                                                                                 |
|             |       |                                                                                                                                                  |
| 32.1             |       | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906  of the Sarbanes-Oxley Act of 2002. |
|             |       |                                                                                                                                                  |
| 32.2             |       | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |                                                                                             |
|--------|----------------------------------------|--------------------------------------------------------------------------------------------------|
|   |                                   |                                                                                             |
|   |                                   |                                                                                             |
|   | By:                                    | /s/ SEIFI GHASEMI                                                                                |
|   |                                   | Seifi Ghasemi  Chairman of the Board and Chief Executive Officer  Date: November 15, 2004   |
|   |                                   |                                                                                             |
|   |                                   |                                                                                             |
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |                                                                                             |
|   |                                   |                                                                                             |
|   |                                   |                                                                                             |
|   | By:                                    | /s/ ROBERT J. ZATTA                                                                              |
|   |                                   | Robert J. Zatta  Senior Vice President and Chief Financial Officer  Date: November 15, 2004 |
|        |                                        |                                                                                                  |  |

 

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