**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                             | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                     |
| **For  the quarterly period ended June 30, 2005** |
| ** **                                             | ** **                                                                                               |
| **or**                                                 |
| ** **                                             | ** **                                                                                               |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commissionfile number   333-109686**

 

**RockwoodSpecialties Group, Inc.**

(Exact name ofRegistrant as 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 ofprincipal executive offices) (Zip Code)

 

**(609)-514-0300**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

As of August 12,2005, there were outstanding 382,000 shares of common stock, par value $0.01per share, of the Registrant.

 

 

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**TABLEOF CONTENTS**

**FORM 10-Q**

 
|   | PART I- FINANCIAL INFORMATION                                                                               |   |
|--------|------------------------------------------------------------------------------------------------------------------|--------|
| Item 1 | Financial Statements  (Unaudited)                                                                                |   |
|   | Condensed Consolidated  Statements of Operations for the three and six months ended June 30,  2005 and 2004 |   |
|   | Condensed Consolidated  Balance Sheets as of June 30, 2005 and December 31, 2004                       |   |
|   | Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2005 and 2004            |   |
|   | 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**

 

Item 1 – FinancialStatements (Unaudited)

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET  SALES                                    |       | $                                    | 817.4      |                               | $          | 266.9 |   | $ | 1,587.1 |   | $ | 494.3 |   |
| COST  OF PRODUCTS SOLD                        |       | 554.4                                |       | 188.3                              |       | 1,098.5 |   | 353.3 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| GROSS  PROFIT                                 |       | 263.0                                |       | 78.6                               |       | 488.6 |   | 141.0 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES |       | 157.5                                |       | 35.9                               |       | 307.7 |   | 71.1 |   |
| RESTRUCTURING  CHARGE, net                    |       | 2.9                                  |       | —                             |       | 5.8 |   | — |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| OPERATING  INCOME                             |       | 102.6                                |       | 42.7                               |       | 175.1 |   | 69.9 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| OTHER  INCOME (EXPENSES)                      |       |                                 |       |                               |       |   |   |   |   |
| Interest,  net                                |       | (55.7                                | )          | (12.5                              | )          | (103.9 | ) | (29.1 | ) |
| Foreign  exchange gain (loss), net            |       | 58.6                                 |       | (3.6                               | )          | 100.5 |   | 8.6 |   |
| Other,  net                                   |       | —                               |       | (4.0                               | )          | — |   | (4.0 | ) |
| Net                                           |       | 2.9                                  |       | (20.1                              | )          | (3.4 | ) | (24.5 | ) |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| INCOME  BEFORE TAXES AND MINORITY INTEREST    |       | 105.5                                |       | 22.6                               |       | 171.7 |   | 45.4 |   |
| INCOME  TAX PROVISION                         |       | 16.8                                 |       | 11.8                               |       | 41.7 |   | 19.6 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| NET  INCOME BEFORE MINORITY INTEREST          |       | 88.7                                 |       | 10.8                               |       | 130.0 |   | 25.8 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| MINORITY  INTEREST                            |       | 0.9                                  |       | —                             |       | 1.7 |   | — |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| NET  INCOME                                   |       | $                                    | 89.6       |                               | $          | 10.8 |   | $ | 131.7 |   | $ | 25.8 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                                                                                 |       |              |       |                  |       |
| ASSETS                                                                                               |       |              |       |                  |       |
| CURRENT  ASSETS:                                                                                     |       |              |       |                  |       |
| Cash  and cash equivalents                                                                           |       | $                 | 82.0       |                  | $          | 111.4 |   |
| Accounts  receivable, net                                                                            |       | 491.7             |       | 500.9                 |       |
| Inventories                                                                                          |       | 462.4             |       | 476.9                 |       |
| Deferred  income taxes                                                                               |       | 38.7              |       | 32.5                  |       |
| Prepaid  expenses and other current assets                                                           |       | 61.1              |       | 112.0                 |       |
| Total  current assets                                                                                |       | 1,135.9           |       | 1,233.7               |       |
|                                                                                                 |       |              |       |                  |       |
| PROPERTY,  PLANT AND EQUIPMENT, net                                                                  |       | 1,440.6           |       | 1,566.8               |       |
| GOODWILL                                                                                             |       | 1,650.5           |       | 1,805.9               |       |
| OTHER  INTANGIBLE ASSETS, net                                                                        |       | 570.7             |       | 660.1                 |       |
| DEFERRED  DEBT ISSUANCE COSTS, net                                                                   |       | 63.6              |       | 73.8                  |       |
| OTHER  ASSETS                                                                                        |       | 58.9              |       | 46.3                  |       |
| TOTAL  ASSETS                                                                                        |       | $                 | 4,920.2    |                  | $          | 5,386.6 |   |
|                                                                                                 |       |              |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                           |       |              |       |                  |       |
| CURRENT  LIABILITIES:                                                                                |       |              |       |                  |       |
| Accounts  payable                                                                                    |       | $                 | 290.1      |                  | $          | 326.1 |   |
| Income  taxes payable                                                                                |       | 19.9              |       | 19.4                  |       |
| Accrued  compensation                                                                                |       | 80.2              |       | 84.5                  |       |
| Accrued  expenses and other current liabilities                                                      |       | 216.0             |       | 261.3                 |       |
| Long-term  debt, current portion                                                                     |       | 65.1              |       | 47.2                  |       |
| Total  current liabilities                                                                           |       | 671.3             |       | 738.5                 |       |
| LONG-TERM  DEBT                                                                                      |       | 2,897.2           |       | 3,076.9               |       |
| PENSION  AND RELATED LIABILITIES                                                                     |       | 341.6             |       | 375.0                 |       |
| DEFERRED  INCOME TAXES                                                                               |       | 61.5              |       | 41.8                  |       |
| OTHER  LIABILITIES                                                                                   |       | 137.1             |       | 219.2                 |       |
| Total  liabilities                                                                                   |       | 4,108.7           |       | 4,451.4               |       |
|                                                                                                 |       |              |       |                  |       |
| MINORITY  INTEREST                                                                                   |       | 26.2              |       | 31.2                  |       |
|                                                                                                 |       |              |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                          |       |              |       |                  |       |
| Common  stock ($0.01 par value, 1,000,000 shares authorized; 382,000 shares issued  and outstanding) |       | —            |       | —                |       |
| Paid-in  capital                                                                                     |       | 878.7             |       | 878.9                 |       |
| Accumulated  other comprehensive income                                                              |       | 124.2             |       | 374.4                 |       |
| Accumulated  deficit                                                                                 |       | (217.6            | )          | (349.3                | )          |
| Total  stockholders’ equity                                                                     |       | 785.3             |       | 904.0                 |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                     |       | $                 | 4,920.2    |                  | $          | 5,386.6 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                               | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                               | ** ** | **June 30,**            | ** ** |
| ** **                                                                                               | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                |       |                         |       |   |   |
| Net  income                                                                                              |       | $                            | 131.7      |   | $ | 25.8 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                       |       |                         |       |   |   |
| Depreciation  and amortization                                                                           |       | 105.2                        |       | 28.2 |   |
| Deferred  financing costs amortization                                                                   |       | 4.7                          |       | 0.9 |   |
| Foreign  exchange gain                                                                                   |       | (100.5                       | )          | (8.6 | ) |
| Fair  value adjustment of derivatives                                                                    |       | (6.2                         | )          | (8.6 | ) |
| Bad  debt provision                                                                                      |       | 0.8                          |       | 0.9 |   |
| Deferred  income taxes                                                                                   |       | 21.0                         |       | 12.3 |   |
| Minority  interest                                                                                       |       | (1.7                         | )          | — |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |                         |       |   |   |
| Accounts  receivable                                                                                     |       | (28.8                        | )          | (23.6 | ) |
| Inventories                                                                                              |       | (24.3                        | )          | (0.2 | ) |
| Prepaid  expenses and other assets                                                                       |       | (13.3                        | )          | (0.4 | ) |
| Accounts  payable                                                                                        |       | 29.4                         |       | 11.7 |   |
| Income  taxes payable                                                                                    |       | 3.1                          |       | 1.8 |   |
| Accrued  expenses and other liabilities                                                                  |       | (58.0                        | )          | 4.5 |   |
| **Net cash provided by operating activities**                                                            |       | 63.1                         |       | 44.7 |   |
|                                                                                                     |       |                         |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                |       |                         |       |   |   |
| Capital  expenditures, excluding capital leases                                                          |       | (76.8                        | )          | (13.3 | ) |
| Proceeds  on sale of property, plant and equipment                                                       |       | 0.2                          |       | — |   |
| **Net cash used in investing activities**                                                                |       | (76.6                        | )          | (13.3 | ) |
|                                                                                                     |       |                         |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                |       |                         |       |   |   |
| Proceeds  from senior secured revolving credit facility                                                  |       | 302.0                        |       | — |   |
| Repayment  of senior secured revolving credit facility                                                   |       | (302.0                       | )          | — |   |
| Payments  on long-term debt                                                                              |       | (15.6                        | )          | (4.5 | ) |
| **Net cash used in financing activities**                                                                |       | (15.6                        | )          | (4.5 | ) |
| EFFECT  OF EXCHANGE RATE CHANGES ON CASH                                                                 |       | (0.3                         | )          | (1.3 | ) |
| NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | (29.4                        | )          | 25.6 |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 111.4                        |       | 42.7 |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                                |       | $                            | 82.0       |   | $ | 68.3 |   |
|                                                                                                     |       |                         |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                                      |       |                         |       |   |   |
| Interest  paid, net                                                                                      |       | $                            | 97.9       |   | $ | 36.3 |   |
| Income  taxes paid, net of refunds                                                                       |       | $                            | 18.1       |   | $ | 5.5 |   |
|                                                                                                     |       |                         |       |   |   |
| NON-CASH  INVESTING ACTIVITIES                                                                           |       |                         |       |   |   |
| Acquisition  of equipment under capital leases                                                           |       | $                            | 4.8        |   | $ | — |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**NotesTo Condensed Consolidated Financial Statements (Unaudited)**

 

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

 

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

 

The Company is anindirect wholly-owned subsidiary of Rockwood Holdings, Inc. (“Holdings”),an entity controlled by affiliates of Kohlberg Kravis Roberts & Co.L.P. (“KKR”) and DLJ Merchant Banking Partners III, L.P. (“DLJMB”), and wasformed in connection with an acquisition of certain assets, stock andbusinesses from Laporte plc (“Laporte”) on November 20, 2000.

 

On July 31, 2004,the Company completed the acquisition of four businesses of Dynamit Nobel frommg technologies ag and Mg North America Holdings, Inc. The businessesacquired are focused on highly specialized markets and consist of: whitepigments; surface treatment and lithium chemicals; ceramics; and pharmaceuticalintermediates. See Note 2 —Acquisitions for a more complete description of theDynamit Nobel Acquisition.

 

***Basis of Presentation*** — Theaccompanying condensed consolidated balance sheets and the related condensedconsolidated statements of operations and cash flows of Rockwood are presentedon a consolidated basis. All significant intercompany accounts and transactionshave been eliminated.

 

The interim financialstatements included herein are unaudited. The condensed consolidated financialstatements are presented based upon accounting principles generally accepted inthe United States of America (“US GAAP”), except that certain information andfootnote disclosures, normally included in financial statements prepared inaccordance with US GAAP, have been condensed or omitted. The accompanyingcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and the notes thereto contained in theCompany’s Annual Report on Form 10-K/A (Amendment No. 2) for the yearended December 31, 2004.  In the opinion of management, thisinformation contains all adjustments, consisting of normal recurring accruals,necessary for a fair presentation of the results for the periods presented.

 

The results of operationsand cash flows of the businesses acquired in the Dynamit Nobel Acquisition, theGroupe Novasep combination and the pigments and dispersions business of JohnsonMatthey Plc. are included in the condensed consolidated financial statementsfor the three and six-month periods ended June 30, 2005 and the December 31,2004 balance sheet. Such results are not included in the three and six-monthperiods ended June 30, 2004.

 

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

 

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

 

The basis for determiningan enterprise’s operating segments is the manner in which financial informationis used internally by the enterprise’s chief operating decision maker (theCompany’s Chief Executive Officer). See Note 3 — Segment Information forfurther segment reporting information.

 

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

 

6

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Such estimates alsoinclude the fair value of assets acquired and liabilities assumed allocated tothe purchase price of business combinations consummated. See Note 2 —Acquisitions.

 

***Risks Associated with International Operations and CurrencyRisk***—The Company’s international operations are subjectto risks normally associated with foreign operations, including, but notlimited to, the disruption of markets, changes in export or import laws,restrictions on currency exchanges and the modification or introduction ofother governmental policies with potentially adverse effects. A majority of theCompany’s sales and expenses are denominated in currencies other than U.S.dollars. Changes in exchange rates may have a material effect on the Company’sreported results of operations and financial position. In addition, asignificant portion of the Company’s indebtedness is denominated in euros.

 

***Related party transactions***—Rockwood has engaged in transactions withcertain related parties including KKR, DLJMB and affiliates of each.

 

Through the date of theDynamit Nobel Acquisition, KKR provided consulting and management advisoryservices to Rockwood for an annual fee of $0.6 million. Since the date of theDynamit Nobel Acquisition, KKR and DLJ Merchant Banking III, L.P. and itsaffiliates (“DLJMB”) have provided the Company with consulting and managementadvisory services for an annual fee of $2.1 million, increasing 5% annually. Inconnection with the expected initial public offering of the common stock ofRockwood Holdings, the affiliates of KKR and DLJMB have agreed to terminate themanagement services agreement effective upon the closing of such offering foran aggregate consideration of $10.0 million.

 

***Revenue Recognition***—The Companyrecognizes revenue when the earnings process is complete, except forapproximately 2% of consolidated revenues derived from long-term contractsaccounted for under the percentage of completion method within the GroupeNovasep segment. Product sales are recognized 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 the Company’s experience. Revenue under service agreementsis realized when the service is performed.

 

***Foreign Currency Translation***—The functionalcurrency of each of the Company’s foreign subsidiaries is primarily therespective local currency. Balance sheet accounts of the foreign operations aretranslated into U.S. dollars at period-end exchange rates and income andexpense accounts are translated at average exchange rates during the period.Translation gains and losses related to net assets located outside the U.S. areshown as a component of accumulated other comprehensive income. Gains andlosses resulting from foreign currency transactions (transactions denominatedin a currency other than the entity’s functional currency), are included indetermining net income for the period in which exchange rates change except forthe related gains or losses on certain intercompany transactions that are of along-term investment nature for which settlement is not planned or anticipatedin the foreseeable future which are reported and accumulated in the same manneras translation adjustments.

 

***Derivatives —***The Company accounts forderivatives based on Statement of Financial Accounting Standards (“SFAS”) 133, *Accounting for Derivative Instruments and HedgingActivities*, as amended and interpreted. SFAS 133 requires that allderivatives be recognized as either assets or liabilities at fair value.Changes in the fair value of derivatives not designated as hedging instrumentsare recognized currently in earnings. The Company uses derivative instrumentsto manage its exposure to market risks associated with fluctuations in interestrates and foreign currency exchange rates. See Note 1 — Comprehensive Income —for the impact of the Company’s net investment hedge. The Company does notenter into derivative contracts for trading purposes nor does it use leveragedor complex instruments.

 

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87, *Employers’ Accounting for Pensions*. Otherpostretirement benefit costs and liabilities have been determined in accordancewith SFAS 106, *Employers’ Accountingfor Postretirement Benefits Other Than Pensions*. Postemploymentbenefit costs and liabilities have been determined in accordance withSFAS 112, *Employers’ Accounting forPostemployment Benefits*.

 

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

 

Future realization of thetax benefit of an existing deductible temporary difference or carryforwardultimately depends on the existence

 

7

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of sufficient taxableincome of the appropriate character (for example, ordinary income or capitalgain) within the carryforward period available under the tax law. The Company’spolicy is to consider the following sources of taxable income which may beavailable under the tax law to realize a tax benefit for deductible temporarydifferences and carry forwards:

 

**•***                                         *Futurereversals of existing taxable temporary differences

**•****                                         **Futuretaxable income exclusive of reversing temporary differences and carry forwards

**•****                                         **Taxableincome in prior carry back year(s) if carryback is permitted under the tax law

**•***                                         *Taxplanning strategies that would, if necessary, be implemented to:

*(1)     *Accelerate taxableamounts to utilize expiring carryforwards

*(2)     *Change the character oftaxable or deductible amounts from ordinary income or loss to capital gain orloss

*(3)     *Switch from tax-exemptto taxable investments.

 

Evidence available abouteach of those possible sources of taxable income will vary between taxjurisdictions and, possibly, from year to year. To the extent evidence aboutone or more sources of taxable income is sufficient to support a conclusionthat a valuation allowance is not necessary, the Company’s policy is that othersources need not be considered. Consideration of each source is required,however, to determine the amount of the valuation allowance that may berequired to be recognized for deferred tax assets.

 

For any specificjurisdiction where a history of three years of cumulative losses has occurredor where there has been a substantial change in the business (e.g., a majoracquisition or divestiture), the Company does not rely on projections of futuretaxable income as described above. Instead, the Company determines its need fora valuation allowance on deferred tax assets, if any, by determining an averagesteady-state normalized taxable income amount over the last three years,adjusted for acquisitions or divestitures if necessary.

 

The Company will alsoconsider the following positive evidence in the above scenarios, if present:

 

**•****Existing contracts or firm sales backlogthat will produce more than enough taxable income to realize the deferred taxasset based on existing sales prices and cost structures.

 

**•****An excess of appreciated asset value overthe tax basis of the entity’s net assets in an amount sufficient to realize thedeferred tax asset.

 

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature aswell as minimum pension liability adjustments that are recorded directly into aseparate section of stockholders’ equity in the balance sheets. Alsoincluded is the net investment hedge discussed below.  Foreign currency translation amounts are notadjusted for income taxes since they relate to indefinite length investments innon-U.S. subsidiaries and certain intercompany debt.

 
| ** **                                  | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(millions)**                              | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net  income                                 |       | $                      | 89.6       |                 | $          | 10.8 |   | $ | 131.7 |   | $ | 25.8 |   |
| Foreign  currency translation               |       | (79.1                  | )          | (5.2                 | )          | (119.6 | ) | (9.3 | ) |
| Net  investment hedge, net of tax           |       | 25.0                   |       | —               |       | 31.2 |   | — |   |
| Intercompany  foreign currency transactions |       | (96.7                  | )          | —               |       | (161.8 | ) | — |   |
|                                        |       |                   |       |                 |       |   |   |   |   |
| Total  comprehensive (loss) income          |       | $                      | (61.2      | )                    | $          | 5.6 |   | $ | (118.5 | ) | $ | 16.5 |   |

 

8

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In November 2004, theCompany completed the sale of €375.0 million aggregate principal amount of7.625% senior subordinated notes and $200.0 million aggregate principalamount of 7.500% senior subordinated notes, both due in 2014 (“2014 Notes”). Inconnection with the 2014 Notes, the Company entered into cross-currencyinterest rate swaps with a five-year term and a notional amount of€155.6 million that effectively convert the U.S. dollar fixed-rate debt inrespect of the dollar notes sold into euro fixed-rate debt. The Company hasdesignated this contract as a hedge of the foreign currency exposure of its netinvestment in its euro denominated operations. There was no ineffective portionof the net investment hedge as of June 30, 2005. The Company does notexpect any of the loss on the net investment hedge residing in othercomprehensive income at June 30, 2005 to be reclassified into earningsduring the subsequent 12 months.

 

***Accounting for Environmental Liabilities***—Inthe ordinary course of business, Rockwood is subject to extensive and changingfederal, state, local and foreign environmental laws and regulations, and hasmade provisions for the estimated financial impact of environmental cleanuprelated costs. Rockwood’s policy has been to accrue costs of a non-capital naturerelated to environmental clean-up when those costs are believed to be probableand can be reasonably estimated. If the aggregate amount of the obligation andthe amount and timing of the cash payments for a site are fixed or reliablydeterminable, the liability is discounted. Expenditures that extend the life ofthe related property or mitigate or prevent future environmental contaminationare capitalized 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 in remediation orsettlement. In some matters, Rockwood could share costs with other parties.Rockwood does not include anticipated recoveries from insurance carriers orother third parties in its accruals for environmental liabilities.

 

***Recent Accounting Pronouncements***

 

The Company plans toimplement the financial accounting standards listed below on January 1,2006. The Company is still in the process of evaluating SFAS 123R as to itspotential impact if any but does not otherwise expect any significant impact onits financial position, results of operations, or cash flows from theimplementation of these standards.

 
| SFAS 151  | Inventory Costs                           |
|-----------|-------------------------------------------|
| SFAS 153  | Exchanges of  Nonmonetary Assets          |
| SFAS 154  | Accounting Changes and  Error Corrections |
| SFAS 123R | Share Based Payment                       |

 

SFAS 151 clarifiesthe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage), requiring that such items be recognizedas current-period charges.  Thisstatement eliminates a narrow difference between the Financial AccountingStandards Board (“FASB”) and International Accounting Standards Board (“IASB”)accounting standards to improve the comparability of cross-border financialreporting.

 

SFAS 153 eliminates the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. Thisstatement eliminates a narrow difference between the FASB and IASB accountingstandards to improve the comparability of cross-border financial reporting.

 

SFAS 154 replaces APBOpinion No. 20, *Accounting Changes*,and SFAS Statement No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a change in accountingprinciple.  SFAS 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change.  SFAS 154 also requires that (1) a changein depreciation, amortization, or depletion method for long-lived,non-financial assets be accounted for as a change in accounting estimateeffected by a change in accounting principle and (2) correction of errorsin previously issued financial statements should be termed a “restatement”.  This statement eliminates a narrow differencebetween the FASB and IASB accounting standards to improve the comparability ofcross-border financial reporting.

 

SFAS 123R revisesSFAS 123, *Accounting for Stock-BasedCompensation,* and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and its related implementation guidance. SFAS 123R requires entities tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. That costwill be recognized over the period during which the employee is required toprovide services in exchange for the award. This standard eliminates thealternative to use the intrinsic value method of accounting for share basedpayments as previously provided in APB 25. As the Company’s parent, RockwoodHoldings, Inc., the issuer of these options, is not yet a publicly tradedequity company, the Company will apply SFAS 123R on a prospective basis.As such, new awards, modifications to existing awards, repurchases orcancellations subsequent to February 11, 2005 (the date on which theCompany’s ultimate parent Holdings filed its Form S-1) will be

 

9

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accounted for inaccordance with SFAS 123R on the modified prospective basis.

 

FASB Interpretation (“FIN”)47 clarifies that the term “conditional asset retirement obligation” as used inSFAS 143, *Accounting for Asset RetirementObligations*, refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity.  FIN 47 will be effective December 31,2005 for the Company. The adoption of FIN 47 is not expected to have a materialimpact on the Company.

 

In May 2004, theFASB issued FASB Staff Position (“FSP”) 106-2, *Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003,* clarifying the accountingand disclosure requirements for employers with postretirement benefit plansthat have been or will be affected by the passage of the Medicare PrescriptionDrug Improvement and Modernization Act of 2003 (the “Act”). The Act introducedtwo new features to Medicare that an employer needs to consider in measuringits obligation and net periodic postretirement benefit costs. FSP 106-2 waseffective July 1, 2004. The adoption of FSP 106-2 did not have amaterial impact on the Company.

 

***Stock-Based Compensation***—At June 30,2005, the Company had in place the Amended and Restated 2003 Stock Purchase andOption Plan of Rockwood Holdings, Inc. and Subsidiaries, as amended (nowknown as the 2005 Amended and Restated Stock Purchase and Option Plan ofRockwood Holdings, Inc., the “Plan”). The Company accounts for the Planunder the recognition and measurement principles of APB Opinion 25,*Accounting for Stock Issued to Employees*,and related interpretations. No stock-based employee compensation related tothis Plan is reflected in net income, as all options granted had an exerciseprice at least equal to the market value of the underlying common stock on thedate of the grant. The following table illustrates the effect on net income ifthe Company had applied the fair value recognition provisions of SFAS 123,*Accounting for Stock-Based Compensation*,to stock-based employee compensation. The fair value of each option granted isestimated on the date of grant using the Black-Scholes option pricing model.Volatility is assumed to be zero as there is currently no public market for theunderlying stock. Dividend yield is also assumed to be zero. The Company usesthe appropriate treasury rates in calculating the risk free rates for optionsgranted.

 

On July 18, 2005, inconnection with the expected initial public offering of Rockwood Holdings’common stock, Holdings effected a 34.22553019-for-one stock split of its commonstock.  Also, in connection with the IPO,the number of shares authorized as available for grant under the Plan wasincreased from 5,647,212 shares post-split to 10,000,000 shares.

 
| ** **                                                                                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(millions)**                                                                                         | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net  income, as reported                                                                               |       | $                      | 89.6       |                 | $          | 10.8 |   | $ | 131.7 |   | $ | 25.8 |   |
| Less:  Stock-based employee compensation expense determined under fair value based  method, net of tax |       | (0.2                   | )          | (0.1                 | )          | (0.4 | ) | (0.2 | ) |
| Pro  forma net income                                                                                  |       | $                      | 89.4       |                 | $          | 10.7 |   | $ | 131.3 |   | $ | 25.6 |   |

 

**2.    ACQUISITIONS:**

 

**DynamitNobel**

 

On July 31, 2004,the Company consummated the Dynamit Nobel Acquisition. The Company paidapproximately €1,635.0 million (or $1,968.5 million) (excludingrepayment of certain assumed debt) in cash to mg technologies ag for thebusinesses acquired. On July 6, 2005 the Company paid $16.1 million ofadditional cash purchase price consideration (based on the July 6, 2005exchange rate of €1.00 = $1.1927) in post-closing adjustments. The fourdivisions of Dynamit Nobel acquired by Rockwood were (i) Chemetall, orSpecialty Chemicals; (ii) Sachtleben Chemie, or Titanium Dioxide 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, which is now known as Groupe Novasep. Through thisacquisition, the Company believes it has created a portfolio of distinctspecialty chemicals and advanced performance materials businesses, withdiversified geographic and end-use markets, strong market positions andmargins, and limited exposure to individual raw material fluctuations. TheCompany believes the allocation of the purchase price to the identifiableassets acquired is complete.

 

The excess of the totalpurchase price over the estimated fair value of the net assets acquired atclosing has been allocated to goodwill. Goodwill in the transaction totaled$944.8 million at June 30, 2005. This represents a $32.3 millionincrease to goodwill from the initial allocation of the purchase pricecontained in the Company’s September 30, 2004 balance sheet and wasprimarily due to: a) refinement and reallocation of identifiable assetvaluation estimates by the independent appraiser; b) the recognition ofadditional liabilities for which management was seeking additional informationand did not have sufficient information to record as of September 30,2004; c) the additional cash purchase price consideration of €13.5 million($16.3 million using July 31, 2004 exchange rate)

 

10

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that representedpost-closing adjustments; and d) changes in liabilities for pension,restructuring program and other liabilities.

 

##### **GroupeNovasep Combination**

##### ** **

In December 2004, inconnection with the combination of the three business lines of the CustomSynthesis segment (now known as the Groupe Novasep segment) with Groupe NovasepSAS, one of Rockwood’s subsidiaries acquired 69.4% of the stock of GroupeNovasep SAS for a total purchase price of approximately $139.7 million,including assumed debt of $48.6 million, cash acquired of $14.6 million and theexchange of the remaining 30.6% of the stock of Groupe Novasep SAS for stock inthe acquiring subsidiary. As a result of this transaction, the Company ownsapproximately 79% of the new Groupe Novasep. Management of Groupe Novasep ownsthe remaining 21%. The Company used cash on hand to finance this transaction.

 

This combination isaccounted for using the purchase method of accounting. The Company has notfinalized the estimated fair value of the assets acquired and liabilitiesassumed although values of inventory, identified intangible assets, andproperty, plant and equipment are completed. The Company expects to completeits research and fair value estimates on remaining purchase price components bythe third quarter of 2005. However, significant changes to the preliminarypurchase accounting are not expected.

 

**JohnsonMatthey Pigments and Dispersions Business**

 

On September 2, 2004the Company completed the acquisition of the Pigments and Dispersions businessof Johnson Matthey Plc. for approximately $50.0 million (including fees andexpenses), subject to post-closing adjustments. The acquisition expands theCompany’s global color pigments and services’ business specifically withintransparent iron oxide pigments and dispersions, color concentrates and complexinorganic color pigments for the surface and wood coatings, plastics, buildingmaterials and printing inks markets. The Company utilized the remaining undrawnfunds from the term loan portion of its senior credit facilities to financethis transaction.

 

This acquisition wasaccounted for using the purchase method of accounting. The Company willcomplete its research and fair value estimates during the third quarter of2005. However, significant changes to the preliminary purchase accounting arenot expected.

 

**3.    SEGMENT INFORMATION:**

 

Items that cannot bereadily attributed to individual segments have been classified as “corporate.”Major Corporate components within the reconciliation of net income (loss) toAdjusted EBITDA (described more fully below) include systems/organizationestablishment expenses such as outside consulting costs for Sarbanes-Oxleyinitial documentation, tax benefit resulting from corporate losses, interestexpense on external debt, foreign exchange losses or gains, and refinancingexpenses related to external debt. Corporate identifiable assets primarilyrepresent deferred financing costs that have been capitalized in connectionwith corporate external debt financing and deferred income tax assets and cashbalances maintained in accordance with centralized cash management techniques.The corporate classification also includes the results of operations, assets(primarily real estate) and liabilities (including pension and environmental)of legacy businesses formerly belonging to Dynamit Nobel. These operations aresubstantially unrelated by nature to businesses currently within the Company’soperating segments.

 

11

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Summarized financialinformation for each of the reportable segments is provided in the followingtable.

 
| ** **                                | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **                                | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Specialty** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | ** **    | ** ** | ** **       | ** ** | ** ** | ** ** |
| **(millions)**                            | ** ** | **Additives**   | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** | ** ** | ** ** |
| **Three months ended June 30, 2005** |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |       |       |
| Net  sales                                |       | $               | 190.1      |          | $          | 62.1            |       | $             | 44.9       |         | $          | 219.7        |       | $           | 109.2      |          | $          | 96.4             |       | $          | 95.0       |   | $ | — |   | $ | 817.4 |   |   |   |
| Adjusted  EBITDA                          |       | 47.2            |       | 7.4           |       | 7.0             |       | 49.4          |       | 22.1         |       | 24.1         |       | 12.8        |       | (9.5          | )          | 160.5            |       |       |       |
|                                      |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |       |       |
| **Three months ended June 30, 2004** |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |       |       |
| Net  sales                                |       | $               | 173.2      |          | $          | 52.5            |       | $             | 41.2       |         | $          | —       |       | $           | —     |          | $          | —           |       | $          | —     |   | $ | — |   | $ | 266.9 |   |   |   |
| Adjusted  EBITDA                          |       | 46.6            |       | 8.2           |       | 7.4             |       | —        |       | —       |       | —       |       | —      |       | (4.1          | )          | 58.1             |       |       |       |
|                                      |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |       |       |
| **Six months ended  June 30, 2005**  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |       |       |
| Net  sales                                |       | $               | 349.6      |          | $          | 120.2           |       | $             | 87.7       |         | $          | 439.7        |       | $           | 213.7      |          | $          | 188.3            |       | $          | 187.9      |   | — |   | $ | 1,587.1 |   |   |   |
| Adjusted  EBITDA                          |       | 81.4            |       | 14.7          |       | 12.8            |       | 92.4          |       | 43.0         |       | 45.5         |       | 23.0        |       | (19.1         | )          | 293.7            |       |       |       |
|                                      |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |       |       |
| **Six months ended  June 30, 2004**  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |       |       |
| Net  sales                                |       | $               | 312.3      |          | $          | 100.4           |       | $             | 81.6       |         | $          | —       |       | $           | —     |          | $          | —           |       | $          | —     |   | $ | — |   | $ | 494.3 |   |   |   |
| Adjusted  EBITDA                          |       | 78.7            |       | 15.0          |       | 14.0            |       | —        |       | —       |       | —       |       | —      |       | (8.5          | )          | 99.2             |       |       |       |

 
| ** **                  |       |            |       |          |       |            |       |          |       | **Titanium** |       |         |       |        |       |               |       |                  |       |             |       |
|-----------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|--------------------|------------|-----------------------|------------|------------------|------------|
| ** **                  | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Specialty** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  |       |               |       |                  |       |             |       |
| ** **                  | ** ** | **Additives**   | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Corporate  (1)** | ** ** | **Eliminations  (2)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |               |       |                  |       |             |       |
| June 30,  2005         |       | $               | 972.2      |          | $          | 231.9           |       | $             | 320.8      |         | $          | 1,502.4      |       | $           | 640.0      |               | $          | 678.8                 |       | $                | 491.6      |   | $ | 209.5 |   | $ | (127.0 | ) | $ | 4,920.2 |   |
| December 31,  2004     |       | $               | 1,014.1    |          | $          | 228.6           |       | $             | 332.7      |         | $          | 1,632.6      |       | $           | 707.4      |               | $          | 750.6                 |       | $                | 656.8      |   | $ | 153.7 |   | $ | (89.9 | ) | $ | 5,386.6 |   |

 

(1) This includes $53.5 million and $65.2million of assets from the legacy businesses formerly belonging to DynamitNobel at June 30, 2005 and December 31, 2004, respectively.

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

 

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

 

*Componentsof Adjusted EBITDA*

 

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe Dynamit Nobel Acquisition, 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 of these items include the following:

 

**•**                  *Restructuring and Related Charges*. Restructuring charges were recorded during the three and six months ended June 30,2005, for miscellaneous restructuring activities.

 

**•**                  *CCA Litigation Defense Costs.* Such**costs were incurred in connection withlitigation defense costs related to the Company’s timber treatment chemicalsbusiness line, and specifically its wood protection products based on chromatedcopper arsenate, or CCA.

 

**•    ***Systems/Organization Establishment Expenses*.  For the three and six months ended June 30, 2005, these expenses relatedto the integration of the business 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. Theseexpenses are reflected in the “corporate” column when Rockwood’s results arepresented on a segment basis.

 

**•**                  *Cancelled Acquisition and Disposal Costs*.  Such costswere incurred in connection with non-consummated acquisitions and dispositions.

 

**•    ***Inventory write-up reversal.* UnderSFAS 141, *Business Combinations*,all inventories acquired in an acquisition must be revalued to “fair value.” Inconnection with the Groupe Novasep combination, the Company allocated a portionof the total purchase price to inventory to reflect manufacturing profit ininventory at the date of the acquisition. This resulted in a consequentialreduction in gross profit of  $0.3million and $3.1 million for the three and six months ended June 30, 2005,respectively, as the inventory was sold in the normal course of business.

 

**•    ***Foreign exchange gain (loss)*.  TheCompany records foreign exchange gains or losses primarily related to itslong-term debt less cash.  These amounts reflect the non-cash translationimpact on euro-denominated debt resulting from the strengthening or weakeningof the euro against the U.S. dollar during the applicable periods.

 

**•    ***Stamp duty tax.*  In June 2004, the Company paid a stampduty tax of $4.0 million on certain assets transferred to the United

 

12

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Kingdom in connectionwith the KKR acquisition.

 

On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by our senior management to be non-recurring gains andcharges, and certain items deemed by senior management to have little or nobearing on the day-to-day operating performance of its business segments andreporting units.  The adjustments made to operating income directlycorrelate with the adjustments to net income in calculating Adjusted EBITDA ona consolidated basis pursuant to the senior secured credit agreement.  Theindentures governing the 2011 Notes and the 2014 Notes exclude certainadjustments permitted under the senior credit agreement. Senior management usesAdjusted EBITDA on a segment basis as the primary measure to evaluate theongoing performance of the Company’s business segments and reporting units.

 

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

 

Rockwood believes thisfinancial measure on a consolidated basis is helpful in highlighting trends inits overall business because Adjusted EBITDA excludes those items that havelittle or no bearing on day-to-day operating performance.

 

Because the Company viewsAdjusted EBITDA on both a segment basis and consolidated basis as an operatingperformance measure, the Company uses net income (loss) as the most comparableGAAP measure.  The following table, which sets forth the applicablecomponent of Adjusted EBITDA, presents a reconciliation of net income (loss) toAdjusted EBITDA on a GAAP basis:

 
| ** **                                   | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **       | ** ** |
|----------------------------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|------------------|------------|
| ** **                                   | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Specialty** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | ** **    | ** ** | ** **       | ** ** |
| **(millions)**                               | ** ** | **Additives**   | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three months ended June 30, 2005**    |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Net  income (loss)                           |       | $               | 21.4       |          | $          | 3.3             |       | $             | 1.2        |         | $          | 28.5         |       | $           | 1.7        |          | $          | 4.7              |       | $ | (3.3 | ) | $ | 32.1 |   | $ | 89.6 |   |
| Income  tax provision (benefit)              |       | 8.5             |       | 2.6           |       | (0.5            | )          | (1.5          | )          | 3.1          |       | 3.3          |       | 3.8         |       | (2.5          | )          | 16.8             |       |
| Interest,  net                               |       | 7.1             |       | —        |       | 1.2             |       | 9.7           |       | 7.8          |       | 8.7          |       | 3.3         |       | 17.9          |       | 55.7             | (1)        |
| Depreciation  and amortization               |       | 8.2             |       | 1.5           |       | 3.2             |       | 12.3          |       | 9.5          |       | 7.3          |       | 9.1         |       | 0.9           |       | 52.0             |       |
| Restructuring  and related charges           |       | 0.8             |       | —        |       | 2.0             |       | 0.6           |       | —       |       | —       |       | —      |       | —        |       | 3.4              | (2)        |
| CCA  litigation defense costs                |       | 1.0             |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.1           |       | 1.1              |       |
| Systems/organization  establishment expenses |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.7           |       | 0.7              |       |
| Cancelled  acquisition and disposal costs    |       | 0.2             |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.2           |       | 0.4              |       |
| Inventory  write-up reversal                 |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | 0.3         |       | —        |       | 0.3              |       |
| Foreign  exchange (gain) loss                |       | 0.1             |       | —        |       | (0.1            | )          | (0.3          | )          | —       |       | 0.1          |       | 0.3         |       | (58.7         | )          | (58.6            | )          |
| Minority  interest                           |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | (0.9        | )          | —        |       | (0.9             | )          |
| Other                                        |       | (0.1            | )          | —        |       | —          |       | 0.1           |       | —       |       | —       |       | 0.2         |       | (0.2          | )          | —           |       |
|                                         |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Total  Adjusted EBITDA                       |       | $               | 47.2       |          | $          | 7.4             |       | $             | 7.0        |         | $          | 49.4         |       | $           | 22.1       |          | $          | 24.1             |       | $ | 12.8 |   | $ | (9.5 | ) | $ | 160.5 |   |
|                                         |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| **Three months ended June 30, 2004**    |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Net  income (loss)                           |       | $               | 21.5       |          | $          | 4.6             |       | $             | 0.9        |         | $          | —       |       | $           | —     |          | $          | —           |       | $ | — |   | $ | (16.2 | ) | $ | 10.8 |   |
| Income  tax provision (benefit)              |       | 11.0            |       | 2.3           |       | —          |       | —        |       | —       |       | —       |       | —      |       | (1.5          | )          | 11.8             |       |
| Interest,  net                               |       | 7.0             |       | (0.1          | )          | 1.3             |       | —        |       | —       |       | —       |       | —      |       | 4.2           |       | 12.4             | (1)        |
| Depreciation  and amortization               |       | 7.0             |       | 1.4           |       | 5.3             |       | —        |       | —       |       | —       |       | —      |       | 0.7           |       | 14.4             |       |
| Systems/organization  establishment expenses |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 1.0           |       | 1.0              |       |
| Cancelled  acquisition and disposal costs    |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.1           |       | 0.1              |       |
| Foreign  exchange (gain) loss                |       | 0.1             |       | —        |       | (0.1            | )          | —        |       | —       |       | —       |       | —      |       | 3.6           |       | 3.6              |       |
| Stamp  duty tax                              |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 4.0           |       | 4.0              |       |
|                                         |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Total  Adjusted EBITDA                       |       | $               | 46.6       |          | $          | 8.2             |       | $             | 7.4        |         | $          | —       |       | $           | —     |          | $          | —           |       | $ | — |   | $ | (4.1 | ) | $ | 58.1 |   |
|                                         |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| **Six months ended  June 30, 2005**     |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Net  income (loss)                           |       | $               | 32.2       |          | $          | 8.6             |       | $             | 1.8        |         | $          | 35.4         |       | $           | 3.6        |          | $          | 7.5              |       | $ | (6.4 | ) | $ | 49.0 |   | $ | 131.7 |   |
| Income  tax provision (benefit)              |       | 14.9            |       | 3.3           |       | (0.3            | )          | 8.6           |       | 4.4          |       | 5.0          |       | 1.9         |       | 3.9           |       | 41.7             |       |
| Interest,  net                               |       | 13.7            |       | (0.1          | )          | 2.5             |       | 21.8          |       | 16.3         |       | 18.1         |       | 7.8         |       | 23.8          |       | 103.9            | (1)        |
| Depreciation  and amortization               |       | 16.7            |       | 2.9           |       | 8.3             |       | 24.0          |       | 18.7         |       | 14.8         |       | 18.0        |       | 1.8           |       | 105.2            |       |
| Restructuring  and related charges           |       | 3.2             |       | —        |       | 2.0             |       | 1.1           |       | —       |       | —       |       | —      |       | —        |       | 6.3              | (2)        |
| CCA  litigation defense costs                |       | 1.3             |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.2           |       | 1.5              |       |
| Systems/organization  establishment expenses |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 1.9           |       | 1.9              |       |
| Cancelled  acquisition and disposal costs    |       | 0.2             |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.4           |       | 0.6              |       |
| Inventory  write-up reversal                 |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | 3.1         |       | —        |       | 3.1              |       |
| Foreign  exchange (gain) loss                |       | (0.8            | )          | —        |       | (1.5            | )          | 1.5           |       | —       |       | 0.1          |       | 0.3         |       | (100.1        | )          | (100.5           | )          |
| Minority  interest                           |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | (1.7        | )          | —        |       | (1.7             | )          |
|                                         |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Total  Adjusted EBITDA                       |       | $               | 81.4       |          | $          | 14.7            |       | $             | 12.8       |         | $          | 92.4         |       | $           | 43.0       |          | $          | 45.5             |       | $ | 23.0 |   | $ | (19.1 | ) | $ | 293.7 |   |
|                                         |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| **Six months ended  June 30, 2004**     |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Net  income (loss)                           |       | $               | 31.8       |          | $          | 8.4             |       | $             | 1.6        |         | $          | —       |       | $           | —     |          | $          | —           |       | $ | — |   | $ | (16.0 | ) | $ | 25.8 |   |
| Income  tax provision (benefit)              |       | 19.4            |       | 4.0           |       | 1.2             |       | —        |       | —       |       | —       |       | —      |       | (5.0          | )          | 19.6             |       |
| Interest,  net                               |       | 14.6            |       | (0.2          | )          | 2.9             |       | —        |       | —       |       | —       |       | —      |       | 11.8          |       | 29.1             | (1)        |
| Depreciation  and amortization               |       | 14.1            |       | 2.8           |       | 10.3            |       | —        |       | —       |       | —       |       | —      |       | 1.0           |       | 28.2             |       |
| Systems/organization  establishment expenses |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 1.0           |       | 1.0              |       |
| Cancelled  acquisition and disposal costs    |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 0.1           |       | 0.1              |       |
| Foreign  exchange (gain) loss                |       | (1.2            | )          | —        |       | (2.0            | )          | —        |       | —       |       | —       |       | —      |       | (5.4          | )          | (8.6             | )          |
| Stamp  duty tax                              |       | —          |       | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | 4.0           |       | 4.0              |       |
|                                         |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |          |       |             |       |
| Total  Adjusted EBITDA                       |       | $               | 78.7       |          | $          | 15.0            |       | $             | 14.0       |         | $          | —       |       | $           | —     |          | $          | —           |       | $ | — |   | $ | (8.5 | ) | $ | 99.2 |   |

 

(1) Includes a lossof $1.4 million and a gain of $6.3 million for the three months ended June 30,2005 and 2004, respectively, and gains of $6.2 million and $8.6 million for thesix months ended June 30, 2005 and 2004, respectively, representing themovement in the mark-to-market valuation of our interest rate andcross-currency hedging instruments.

 

(2) Includesinventory writedowns of $0.5 million recorded in cost of products sold.

 

13

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**4.    INVENTORIES:**

 

Inventories are comprisedof the following:

 
| **(millions)**              | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------|------------|------------------------|------------|----------------------------|------------|
| Raw  materials and supplies |       | $                      | 137.4      |                       | $          | 140.4 |   |
| Work  in process            |       | 81.3                   |       | 81.6                       |       |
| Finished  goods             |       | 230.5                  |       | 240.3                      |       |
| Packaging  materials        |       | 13.2                   |       | 14.6                       |       |
|                        |       |                   |       |                       |       |
|                        |       | $                      | 462.4      |                       | $          | 476.9 |   |

 

**5.   GOODWILL:**

 

Below are goodwillbalances and activity by segment:

 
| ** **                                                            | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                                            | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Specialty** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | ** ** | ** ** |
| **(millions)**                                                        | ** ** | **Additives**   | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2004                                      |       | $               | 463.8      |          | $          | 115.5           |       | $             | 124.2      |         | $          | 665.5        |       | $           | 172.4      |       | $          | 230.7 |   | $ | 33.8 |   | $ | 1,805.9 |   |
|                                                                  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |       |       |
| Foreign  exchange                                                     |       | (15.3           | )          | (4.9          | )          | (2.4            | )          | (82.0         | )          | (18.9        | )          | (25.9        | )          | (3.7        | )          | (153.1     | )          |
|                                                                  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |       |       |
| Reversal  of deferred tax valuation allowances                        |       | —          |       | —        |       | —          |       | (3.9          | )          | —       |       | (7.2         | )          | —      |       | (11.1      | )          |
|                                                                  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |       |       |
| Post-closing  consideration and other related adjustments, net of tax |       | —          |       | —        |       | —          |       | 5.3           |       | 2.6          |       | 2.9          |       | —      |       | 10.8       |       |
|                                                                  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |       |       |
| Restructuring  reserves, net of tax                                   |       | —          |       | —        |       | —          |       | (0.6          | )          | (0.3         | )          | (1.0         | )          | —      |       | (1.9       | )          |
|                                                                  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |       |       |
| Other,  net of tax                                                    |       | 0.4             |       | —        |       | (0.2            | )          | (0.6          | )          | 0.1          |       | 0.2          |       | —      |       | (0.1       | )          |
|                                                                  |       |            |       |          |       |            |       |          |       |         |       |         |       |        |       |       |       |
| Balance,  June 30, 2005                                          |       | $               | 448.9      |          | $          | 110.6           |       | $             | 121.6      |         | $          | 583.7        |       | $           | 155.9      |       | $          | 199.7 |   | $ | 30.1 |   | $ | 1,650.5 |   |

 

**6.    OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of June 30, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Gross**                    | ** ** | ** **                       | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                 | ** ** | **Accumulated**                  | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **(millions)**                           | ** ** | **Amount (a)**               | ** ** | **Amortization**                 | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
|                                     |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Patents  and other intellectual property |       | $                            | 356.4      |                             | $          | (54.1 | ) | $ | 302.3 |   | $ | 377.3 |   | $ | (39.4 | ) | $ | 337.9 |   |
|                                     |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Trade  Names and Trademarks              |       | 102.6                        |       | (3.9                             | )          | 98.7 |   | 115.0 |   | (1.5 | ) | 113.5 |   |
|                                     |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Customer  Relationships                  |       | 178.8                        |       | (12.8                            | )          | 166.0 |   | 210.5 |   | (6.5 | ) | 204.0 |   |
|                                     |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Other                                    |       | 7.6                          |       | (3.9                             | )          | 3.7 |   | 7.8 |   | (3.1 | ) | 4.7 |   |
| Total                                    |       | $                            | 645.4      |                             | $          | (74.7 | ) | $ | 570.7 |   | $ | 710.6 |   | $ | (50.5 | ) | $ | 660.1 |   |

 

Amortization of otherintangible assets was $12.6 million and $1.6 million for the three months endedJune 30, 2005 and 2004, respectively, and $26.7 million and $3.3 millionfor the six months ended June 30, 2005 and 2004, respectively.

 

(a) Decrease from December 31, 2004 primarily due to currency effects.

 

14

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**7.    TAXES ON INCOME:**

 

The income tax expensehas been computed based on the projected effective rate for the year.  The valuation allowance for U.S. netoperating losses established at December 31, 2004 has been reduced by$24.9 million and $38.9 million due to U.S. income generated during the threeand six months ended June 30, 2005, respectively. Of this reduction, $2.2million and $11.1 million for the three and six months ended June 30,2005, respectively, have been recorded as decreases to goodwill representingthe expected utilization of certain net operating losses acquired in theDynamit Nobel Acquisition. The remaining $22.7 million and $27.8 million havebeen reflected as reductions in the income tax expense for the three and sixmonths ended June 30, 2005, respectively. The determination of the netoperating losses to be utilized is based on a “first-in, first-out”methodology.

 

**8.    EMPLOYEE BENEFIT PLANS:**

 

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 132:

 
| ** **                                   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(millions)**                               | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Service  cost                                |       | $                      | 2.7        |                 | $          | 0.4 |   | $ | 5.5 |   | $ | 0.7 |   |
| Interest  cost                               |       | 5.8                    |       | 0.7                  |       | 12.8 |   | 1.3 |   |
| Expected  return on plan assets              |       | (2.5                   | )          | (0.5                 | )          | (5.4 | ) | (0.9 | ) |
| Net  amortization of prior experience losses |       | 0.2                    |       | 0.2                  |       | 0.4 |   | 0.3 |   |
| Net  periodic benefit cost                   |       | $                      | 6.2        |                 | $          | 0.8 |   | $ | 13.3 |   | $ | 1.4 |   |

 

**9.    RESTRUCTURING LIABILITY:**

 

The Company recordsrestructuring liabilities from time to time that represent charges incurred inconnection with consolidations and cessations of certain of its operations,including operations from acquisitions, as well as headcount reductionprograms. These charges consist primarily of write-offs of surplus assets andseverance costs. Severance charges are based on various factors including theemployee’s length of service, contract provisions, salary levels and localgovernmental legislation. At the time a related charge is recorded, the Companycalculates its best estimate based upon detailed analysis. Although significantchanges are not expected, actual costs may differ from these estimates.

 

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

 

TheCompany began to assess and formulate specific plans to involuntarily terminate(relocate) certain employees and/or exit certain activities of Dynamit Nobel asof the Dynamit Nobel Acquisition date. This assessment has led to certainrestructuring measures being taken by the Company as described below.

 

The Company closed theformer corporate office of Dynamit Nobel located in Troisdorf, Germany in thefourth quarter of 2004. The Company recorded restructuring charges related tothis closure including severance costs for 44 general and administrativepersonnel of the former Dynamit Nobel company, the closure costs on this buildingand the relocation costs for the remaining 27 employees who were relocated tothe Company’s new Frankfurt, Germany location. Also in 2004, as part of theacquisition of the Pigments and Dispersions business of Johnson Matthey, theCompany enacted a restructuring program. To date, 40 positions have beeneliminated. All of these employees were selling, general and administrativepersonnel.

 

**2005 Restructuring Actions:**

 

During the first half of2005, the Company expensed $5.8 million of restructuring charges formiscellaneous restructuring actions, including $1.9 million for the announcedclosure of the Baulking, United Kingdom facility in the Clay-based Additivesbusiness. Also included is  $2.0 millionfor the announced restructuring of the Wafer Reclaim business. The Companyrecorded these costs for the closure of facilities (one each in the UK andU.S.) and the severance and related costs for employees and other facilityexpenses.  The closing of the facilitiesis anticipated in late 2005 or early 2006. The Company also signed acooperation agreement to operate its German wafer reclaim facility through anoutside party. The Company expects to record additional restructuring expensesin the third and fourth quarters of 2005 as the facility shutdowns progress.

 

15

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The restructuring reserveconsists of:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Write-** | ** ** | ** ** | ** ** |
| **(millions)**                             | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **downs**  | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2004 |       | $             | 20.8       |         | $          | 11.3           |       | $          | 2.6        |       | $          | — |   | $ | 34.7 |   |
| Purchase  accounting                       |       | 0.9           |       | (1.9         | )          | (1.3           | )          | —     |       | (2.3       | )          |
| Restructuring  charge                      |       | 5.3           |       | 0.1          |       | —         |       | 0.4        |       | 5.8        |       |
| Utilized  in 2005                          |       | (10.2         | )          | (2.9         | )          | (1.7           | )          | (0.4       | )          | (15.2      | )          |
| Foreign  exchange and other                |       | 0.3           |       | (3.1         | )          | 0.8            |       | —     |       | (2.0       | )          |
|                                       |       |          |       |         |       |           |       |       |       |       |       |
| Liability  balance, June 30, 2005     |       | $             | 17.1       |         | $          | 3.5            |       | $          | 0.4        |       | $          | — |   | $ | 21.0 |   |

 

**10.    COMMITMENTS AND CONTINGENCIES:**

 

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, 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. Althoughthe Company expects to continue to pay legal fees in connection with certainlegal actions related to chromated copper arsenate and other product liabilitymatters, based on currently available facts, the Company does not believe thatthese actions will have a material effect on the financial condition, resultsof operations or liquidity of the Company. In accordance with the Company’spolicy, reserves in connection with such product liability matters do notindividually exceed $350,000 and in the aggregate $1.5 million. TheCompany’s reserve estimates are based on available facts, including damageclaims and input from its internal and external legal counsel, past experience,and, in some instances where defense costs are being paid by its insurers,insurance coverage. The Company is unable to estimate the amount or range ofany potential incremental charges should facts and circumstances change and mayin the future revise its estimates based on new information becoming available.In addition, the Company does not believe that there is any other individuallegal proceeding that is likely to have a material adverse affect on itsbusiness or financial condition. However, the Company cannot predict theoutcome of any litigation or the potential for future litigation.

 

***Indemnity Matters***—Under the terms of theBusiness and Share Sale and Purchase Agreement, the Deed of Tax Covenant andthe Environmental Deed entered into in connection with the KKR Acquisition,Degussa UK Holdings Ltd., as successor to Laporte Plc, is obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing of the KKRAcquisition.

 

Under the terms of theSale and Purchase Agreement with mg technologies ag and its subsidiary MG NAH,mg technologies is obligated to indemnify the Company for certain legal, taxand environmental liabilities and obligations that relate to the period priorto the closing, subject to certain limits and exclusions. Pursuant to theseagreements, the Company has various claims for indemnification with Degussa andmg technologies. In addition, the Company may be subject to indemnity claimsrelating to properties or businesses it divested. In the opinion of management,and based upon information currently available, the ultimate resolution of anyindemnification obligations owed to the Company or by the Company will not havea material effect on the Company’s financial condition or results ofoperations.

 

**Safety,Health and Environmental Matters**

 

***General***

 

The Company is subject toextensive environmental, health and safety laws in the United States, theEuropean Union and elsewhere at the international, national, state, and locallevels. Many of these laws impose requirements relating to clean-up ofcontamination, and impose liability in the event of damage to human beings,natural resources or property, and provide for substantial fines, injunctionsand potential criminal sanctions for violations. The products, including theraw materials handled, are also subject to rigorous industrial hygieneregulations and investigation. The nature of the Company’s operations exposesit to risks of liability for breaches of these laws and regulations as a resultof the production, storage, transportation and sale of materials that can causecontamination or personal injury when released into the environment.Environmental laws are subject to change and have tended to become stricterover time. Such changes in environmental laws, or the enactment of newenvironmental laws, could result in materially increased capital, operating andcompliance costs.

 

16

----

 

***Safety, Health and Environmental Systems***

 

The Company is committedto achieving and maintaining compliance with all applicable safety, health andenvironmental (“SHE”) legal requirements, and the Company’s subsidiaries havedeveloped policies and management systems that are intended to identify the SHElegal requirements applicable to the operations, enhance compliance with suchrequirements, ensure the safety of the Company’s employees, contractors,community neighbors and customers and minimize the production and emission ofwastes and other pollutants. Although SHE legal requirements are constantlychanging and are often difficult to comply with, these SHE management systemsare designed to assist the Company in meeting its compliance goals and minimizingoverall risk.

 

***SHE Capital Expenditures***

 

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2004, the capital expenditures for SHEmatters totaled approximately $23.9 million, excluding costs to maintainand repair pollution control equipment. For 2005 and 2006, the Companyestimates capital expenditures for compliance with SHE laws to be at similarlevels; however, because capital expenditures for these matters are subject tochanges in existing and new SHE laws, the Company cannot provide assurance thatits recent expenditures will be indicative of future amounts required to complywith these laws.

 

***Regulatory Developments***

 

In October 2003, theEuropean Commission adopted a proposal for a new European Union framework forchemicals known as the Registration, Evaluation and Authorization of Chemicals,or REACH. While it is uncertain as to whether, when and in what form REACH willbe finalized and become law, REACH may eventually significantly expand theEuropean Union’s regulation of chemicals. As currently proposed, REACH wouldinclude requirements that certain manufacturers and importers of chemicalsregister those chemicals, perform health and environmental risk analyses of thosechemicals, and in certain instances, obtain authorizations for the use of thechemicals. As a specialty chemicals company, it is possible that the Company isthe only manufacturer of one or more substances to be regulated under REACH andthus could potentially bear the full cost of compliance with REACH for some orall of the Company’s products. The Company estimates it has over 400 productsthat might be subject to REACH.

 

Under the European UnionIntegrated Pollution Prevention and Control Directive (“IPPC”), European Unionmember governments are to adopt rules and implement a cross-media (air,water and waste) environmental permitting program for individual facilities.IPPC requires a consistent application of Best Available Techniques, or BAT,throughout the European Union. Generally, by 2007, facilities located withinthe European Union must be operating consistent with BAT. While the EUcountries are at varying stages in their respective implementation of the IPPCpermit program, the Company has submitted all necessary IPPC permitapplications required to date, and in some cases received completed permitsfrom the applicable government agency. The Company expects to submit all otherIPPC applications and related documents on a timely basis as the variouscountries implement the IPPC permit program. Although it is not known withcertainty what each IPPC permit will require, the Company believes, based uponits experience with the permits received to date, that the costs of compliancewith the IPPC permit program will not be material to its results of operations,financial position or liquidity.

 

***Remediation Liabilities***

 

Environmental laws have asignificant effect on the nature and scope of any clean-up of contamination atcurrent and former operating facilities, the costs of transportation andstorage of chemicals and finished products and the costs of the storage anddisposal of wastes. In addition, “Superfund” statutes in the United States aswell as statutes in other jurisdictions impose strict, joint and severalliability for clean-up costs on the entities that generated waste and/orarranged for its disposal at contaminated third party sites, as well as thepast and present owners and operators of contaminated sites. All responsibleparties may be required to bear some or all clean-up costs regardless of fault,legality of the original disposal or ownership of the disposal site.

 

Environmentalcontamination is known to exist at certain of the Company’s present and formerfacilities, including its facilities located in Turin, Italy, St. Fromond, St.Cheron and Sens, France; Hainhaussen, Troisdorf, Schlebusch, Stadeln, Duisburg,Plochingen, Marktredwitz, Ronnenberg-Empelde and Langelsheim, Germany; Oss, TheNetherlands; Kidsgrove, and Barrow, U.K.; Boksburg East, South Africa;Pratteln, Switzerland and in the United States, in Valdosta, Georgia,Beltsville, Maryland, Harrisburg, North Carolina, Laurens, South Carolina,Silver Peak, Nevada and La Mirada, California. Soil contamination is also knownto exist at the Company’s facilities at Freeport, Texas, Chasse-sur-Rhone,France and Sumperk in Czech Republic; however, no further regulatory remedialactions are currently required for these facilities and any liabilities arisingfrom such contamination is covered by indemnity obligations or the previousowners of these facilities with the exception of Freeport. The Company iscurrently operating groundwater remediation systems at its Hainhaussen,Valdosta, and Silver Peak facilities. The Company also operates ground waterremediation systems at its Schlebusch, Plochingen, Marktredwitz, Stadeln,Troisdorf, and Laurens facilities, for which prior owners or insurers

 

17

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have assumedresponsibility and a soil remediation project at the Company’s facility in St.Cheron, and the Company continues to monitor groundwater at the Beltsvillefacility, which was previously the subject of a soil removal action.Groundwater is also monitored at the St. Fromond and Barrow facilities due toprior spills and at the Harrisburg facility due to a landfill closure. TheCompany is also required to monitor groundwater quality at its facilities atMourenx, France and New Johnsonville, Tennessee. The Company believes thatadditional environmental studies, and possibly environmental remediations, willbe required at the Turin and Harrisburg facilities. The Company is also in theprocess of determining appropriate remedial actions with the regulatoryauthorities at the following locations: Duisburg, Pratteln, Langelsheim,Troisdorf and La Mirada. Furthermore, as a result of facility closings,divestitures and offsite disposal activities such as a former disposal site inLaurel, Maryland, the Company is responsible for the following other matters:contamination beneath divested portions of the manufacturing facility inTroisdorf; contamination at a closed Chemetall Oakite facility in Houston,Texas, contamination at a former Chemetall Foote facility in Sunbright,Virginia, contribution towards the clean-up of three industrial landfills inthe Basel, Switzerland area, groundwater remediation at Stadeln and formersites operated by Dynamit Nobel’s previously divested explosives business. TheCompany is also a *de minimis*participant in several Superfund matters.

 

Although the Companycannot provide assurances in this regard, the Company does not believe thatthese issues will have a material adverse effect on its business or financialcondition, but may have a material adverse effect on the results of operationsor cash flows in any given quarterly or annual reporting period. Nonetheless,the discovery of contamination arising from present or historical industrialoperations at some of the Company’s and the Company’s predecessor’s former andpresent properties and/or at sites it and its predecessor disposed wastes couldexpose the Company to cleanup obligations and other damages in the future.

 

**GovernmentEnforcement Proceedings and Civil Litigation**

 

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. Currently, the Company is party to a consent order withthe Metropolitan Sewer District (“MSD”) in Saint Louis, Missouri to reduceammonia concentrations in wastewater discharge to a city treatment plant. Theentry into the consent order resulted from violations of its wastewaterdischarge permit. The order is presently stayed pending MSD’s negotiation of itsown National Pollution Discharge Elimination System permit with the State ofMissouri. Although the Company may be required to make capital expenditures inconnection with this matter, it does not believe that this issue will have amaterial adverse effect on its business or financial condition.

 

**EnvironmentalIndemnities**

 

Pursuant to theenvironmental deed entered into in connection with the KKR acquisition,Degussa, as successor to Laporte, is required to indemnify the Company and itssubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR acquisition. The environmental deedprovides that Degussa will indemnify the Company and its subsidiaries forclaims for which notice is given within a period of two years for breaches ofrepresentations and warranties, which expired in 2002, and five years, whichexpires in September 2005, for claims related to the contamination of theCompany’s properties or its subsidiaries’ properties (inclusive of contaminationwhich leaks or escapes from the Company’s properties or its subsidiaries’properties). These indemnity obligations are subject to a minimum per matterloss of $0.2 million and are further subject to a $5.0 milliondeductible for the indemnity to be available. In addition, the environmentaldeed provides that Degussa will indemnify Rockwood and its subsidiaries forclaims relating to properties that were formerly owned, occupied or used as of November 20,2000, as well as properties owned by third parties (inclusive of disposal ofwaste and certain other identified issues prior to November 20, 2000). Theenvironmental deed provides that in this instance, Degussa will be responsiblefor reasonable costs and expenses incurred.

 

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition, mg technologies ag and its subsidiary, MG North AmericaHoldings Inc., are required to indemnify Rockwood and its subsidiaries for50% of the excess amount of losses over the amount of the related reserves (inthe case of known claims) and 50% of claims (in the case of unknown claims)related to the contamination of the Company or its subsidiaries’ properties, ifnotified within ten years. If mg technologies and MG North America Holdings’responsibility for contamination matters cannot be proven, a sliding scalereduces the percentage further for each year during the five-year period fromyear six to ten. mg technologies and MG North America Holdings are also obligatedto indemnify the Company for 85% of claims related to legacy site matters, suchas environmental matters relating to properties or businesses owned or operatedby Dynamit Nobel prior to, but not on, the closing of Dynamit NobelAcquisition, if notified within ten years. In addition, mg technologies and MGNorth America Holdings are obligated to indemnify the Company for 50% of theexcess amount of losses over the amount of the related reserves for operationalcompliance matters, if notified by December 31, 2006, and 50% of theexcess amount of losses over the amount of the related reserves (in the case ofknown claims) and 50% of claims (in the case of unknown claims) related tocertain environmental damage claims unknown at the time of the closing of theDynamit Nobel Acquisition, if notified within ten years. All of these indemnityobligations are subject to different minimum per-claim thresholds depending onwhether the matter was disclosed or not, and on the subject matter, rangingbetween €100,000 and €750,000 ($0.1 million and $0.9 million)depending on the type of claim. The indemnity obligations are further subjectto certain deductibles, exclusions and limitations. Furthermore, mgtechnologies and MG North America Holdings are obligated to indemnify

 

18

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the Company for certainenvironmental risks arising from certain “shared site” structures for aduration of ten years. This indemnity obligation is not subject to thepercentages, *de minimis*exclusions, deductibles and thresholds described above, and it is not subjectto most of the general limitations.

 

In the event the Companyseeks indemnity under any of these agreements or through other means, there canbe no assurance that mg technologies, MG North America Holdings, Degussa or anyother party who may have obligations to indemnify the Company will adhere totheir obligations and the Company may have to resort to legal action to enforceits rights under the indemnities. In addition, the Company may be required tomake indemnity payments in connection with certain environmental matters.However, the Company does not believe that resolution of the knownenvironmental matters subject to indemnification obligations owed to it or byit will have a material adverse effect on the Company’s business or financialcondition, but may have a material adverse effect on the results of operationsor cash flow in any given quarterly or annual reporting period.

 

***Environmental Reserves***

 

The Company hasestablished financial reserves relating to anticipated environmental cleanupobligations, site reclamation and remediation and closure costs. Liabilitiesare recorded when potential liabilities are either known or believed to beprobable and can be reasonably estimated. The Company’s liability estimates arebased upon available facts, existing technology, past experience and, in someinstances where the remediation costs are being paid directly by the Company’sinsurers, insurance recoveries, and are generated by several means, includingState-mandated schedules, environmental consultants and internal experts,depending on the circumstances. On a consolidated basis, the Company accruedapproximately $48.1 million and $51.9 million for known environmentalliabilities as of June 30, 2005 and December 31, 2004, respectively,all of which are classified as other non-current liabilities on the Company’sconsolidated balance sheets for such periods. Included in the$48.1 million and $51.9 million as of June 30, 2005 and December 31,2004 is €6.5 million ($7.9 million using the June 30, 2005exchange rate) that is discounted using 5.0% discount rate (undiscounted amountequals $12.1 million), and €2.4 million ($2.9 million) that isdiscounted using 5.5% discount rate (undiscounted amount equals$4.6 million). In certain cases, the Company’s remediation liabilities arepayable over periods of up to 30 years.

 

The Company believesthese accruals are adequate based on currently available information. TheCompany may incur losses in excess of the amounts accrued; however, based oncurrently available information the Company does not believe the additionalamount of potential losses would have a material effect on the Company’sresults of operations or financial condition, but may have a material adverseeffect on the results of operations or cash flow in any given quarterly orannual reporting period. The Company is unable to estimate the amount or rangeof any potential incremental charges should facts and circumstances change andmay in the future revise its estimates based on new information becomingavailable.

 

The Company is obligatedto undertake soil remediation at two facilities in Europe in the eventmanufacturing operations are discontinued there at some future date. TheCompany does not contemplate any such action occurring in the foreseeablefuture, as these facilities’ remaining lives are indefinite. Given theindeterminate useful life of these facilities and the correspondingindeterminate settlement date of any soil remediation obligations, the Companydoes not have sufficient information to estimate a range of potentialsettlement dates for the obligations. Consequently, the Company cannot employ apresent value technique to estimate fair value and, accordingly, it has not accruedfor any related costs.

 

The Company believesthese environmental matters will not have a material adverse effect on itsbusiness or financial condition. However, these matters may have a materialadverse effect on its results of operations or cash flows in any givenquarterly or annual reporting period.

 

**11.CONSOLIDATING FINANCIAL INFORMATION:**

 

The Company issued $375.0million principal amount of 10.625% senior subordinated notes due May 15,2011 (“the 2011 Notes”) in July 2003.  In November 2004 theCompany issued €375.0 million aggregate principal amount of 7.625% seniorsubordinated notes and $200.0 million aggregate principal amount of 7.500%senior subordinated notes, both due November 15, 2014 (“the 2014 Notes”).

 

The following unauditedconsolidating financial statements present the results of operations, financialcondition and cash flows, in separate columns, of the parent company (RockwoodSpecialties Group, Inc.), which is the issuer of the 2011 Notes and the2014 Notes, guarantor subsidiaries, non-guarantor subsidiaries, eliminationadjustments, and consolidated totals.

 

19

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENT OF OPERATIONSTHREE MONTHS ENDED JUNE 30, 2005**

**(Dollars in millions)**

 
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| NET  SALES                                    |       | $           | —     |             | $          | 240.5             |       | $                | 576.9      |   | $ | 817.4 |   |
| COST  OF PRODUCTS SOLD                        |       | —      |       | 168.2            |       | 386.2             |       | 554.4            |       |
| GROSS  PROFIT                                 |       | —      |       | 72.3             |       | 190.7             |       | 263.0            |       |
| SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES |       | 0.1         |       | 40.6             |       | 116.8             |       | 157.5            |       |
| RESTRUCTURING  CHARGE, net                    |       | —      |       | —           |       | 2.9               |       | 2.9              |       |
| OPERATING  INCOME                             |       | (0.1        | )          | 31.7             |       | 71.0              |       | 102.6            |       |
| OTHER  INCOME (EXPENSES):                     |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                     |       | 37.0        |       | (10.8            | )          | (26.2             | )          | —           |       |
| Interest,  net                                |       | (49.3       | )          | (0.2             | )          | (6.2              | )          | (55.7            | )          |
| Intergroup  other, net                        |       | —      |       | (1.0             | )          | 1.0               |       | —           |       |
| Foreign  exchange gain, net                   |       | 55.8        |       | 0.4              |       | 2.4               |       | 58.6             |       |
| Net                                           |       | 43.5        |       | (11.6            | )          | (29.0             | )          | 2.9              |       |
| INCOME  BEFORE TAXES AND MINORITY INTEREST    |       | 43.4        |       | 20.1             |       | 42.0              |       | 105.5            |       |
| INCOME  TAX PROVISION                         |       | (7.4        | )          | 3.5              |       | 20.7              |       | 16.8             |       |
| NET  INCOME BEFORE MINORITY                   |       |        |       |             |       |              |       |             |       |
| INTEREST                                      |       | 50.8        |       | 16.6             |       | 21.3              |       | 88.7             |       |
| MINORITY  INTEREST                            |       | —      |       | —           |       | 0.9               |       | 0.9              |       |
| NET  INCOME                                   |       | $           | 50.8       |             | $          | 16.6              |       | $                | 22.2       |   | $ | 89.6 |   |

 

**ROCKWOODSPECIALTIES GROUP INC. AND SUBSIDIARIESCONSOLIDATING STATEMENT OF OPERATIONSTHREE MONTHS ENDED JUNE 30, 2004**

**(Dollars in millions)**

 
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| NET  SALES                                    |       | $           | —     |             | $          | 183.1             |       | $                | 83.8       |   | $ | 266.9 |   |
| COST  OF PRODUCTS SOLD                        |       | —      |       | 124.5            |       | 63.8              |       | 188.3            |       |
| GROSS  PROFIT                                 |       | —      |       | 58.6             |       | 20.0              |       | 78.6             |       |
| SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES |       | 0.1         |       | 24.4             |       | 11.4              |       | 35.9             |       |
| OPERATING  INCOME                             |       | (0.1        | )          | 34.2             |       | 8.6               |       | 42.7             |       |
| OTHER  INCOME (EXPENSES):                     |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                     |       | 13.5        |       | (12.6            | )          | (0.9              | )          | —           |       |
| Interest,  net                                |       | (9.8        | )          | (0.4             | )          | (2.3              | )          | (12.5            | )          |
| Intergroup  other, net                        |       | —      |       | (0.8             | )          | 0.8               |       | —           |       |
| Foreign  exchange loss, net                   |       | (2.9        | )          | —           |       | (0.7              | )          | (3.6             | )          |
| Other,  net                                   |       | —      |       | —           |       | (4.0              | )          | (4.0             | )          |
| Net                                           |       | 0.8         |       | (13.8            | )          | (7.1              | )          | (20.1            | )          |
| INCOME  BEFORE TAXES AND MINORITY INTEREST    |       | 0.7         |       | 20.4             |       | 1.5               |       | 22.6             |       |
| INCOME  TAX PROVISION                         |       | 0.3         |       | 8.2              |       | 3.3               |       | 11.8             |       |
| NET  INCOME BEFORE MINORITY                   |       |        |       |             |       |              |       |             |       |
| INTEREST                                      |       | 0.4         |       | 12.2             |       | (1.8              | )          | 10.8             |       |
| MINORITY  INTEREST                            |       | —      |       | —           |       | —            |       | —           |       |
| NET  INCOME (LOSS)                            |       | $           | 0.4        |             | $          | 12.2              |       | $                | (1.8       | ) | $ | 10.8 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENT OF OPERATIONSSIX MONTHS ENDED JUNE 30, 2005**

**(Dollars in millions)**

 
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| NET  SALES                                    |       | $           | —     |             | $          | 452.4             |       | $                | 1,134.7    |   | $ | 1,587.1 |   |
| COST  OF PRODUCTS SOLD                        |       | —      |       | 320.4            |       | 778.1             |       | 1,098.5          |       |
| GROSS  PROFIT                                 |       | —      |       | 132.0            |       | 356.6             |       | 488.6            |       |
| SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES |       | 0.1         |       | 80.0             |       | 227.6             |       | 307.7            |       |
| RESTRUCTURING  CHARGE, net                    |       | —      |       | —           |       | 5.8               |       | 5.8              |       |
| OPERATING  INCOME                             |       | (0.1        | )          | 52.0             |       | 123.2             |       | 175.1            |       |
| OTHER  INCOME (EXPENSES):                     |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                     |       | 73.8        |       | (21.4            | )          | (52.4             | )          | —           |       |
| Interest,  net                                |       | (89.6       | )          | (0.4             | )          | (13.9             | )          | (103.9           | )          |
| Intergroup  other, net                        |       | —      |       | (1.8             | )          | 1.8               |       | —           |       |
| Foreign  exchange gain, net                   |       | 93.1        |       | 0.4              |       | 7.0               |       | 100.5            |       |
| Net                                           |       | 77.3        |       | (23.2            | )          | (57.5             | )          | (3.4             | )          |
| INCOME  BEFORE TAXES AND MINORITY INTEREST    |       | 77.2        |       | 28.8             |       | 65.7              |       | 171.7            |       |
| INCOME  TAX PROVISION (BENEFIT)               |       | (0.7        | )          | 11.4             |       | 31.0              |       | 41.7             |       |
| NET  INCOME BEFORE MINORITY                   |       |        |       |             |       |              |       |             |       |
| INTEREST                                      |       | 77.9        |       | 17.4             |       | 34.7              |       | 130.0            |       |
| MINORITY  INTEREST                            |       | —      |       | —           |       | 1.7               |       | 1.7              |       |
| NET  INCOME                                   |       | $           | 77.9       |             | $          | 17.4              |       | $                | 36.4       |   | $ | 131.7 |   |

 

**ROCKWOODSPECIALTIES GROUP INC. AND SUBSIDIARIESCONSOLIDATING STATEMENT OF OPERATIONSSIX MONTHS ENDED JUNE 30, 2004**

**(Dollars in millions)**

 
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| NET  SALES                                    |       | $           | —     |             | $          | 331.4             |       | $                | 162.9      |   | $ | 494.3 |   |
| COST  OF PRODUCTS SOLD                        |       | —      |       | 227.6            |       | 125.7             |       | 353.3            |       |
| GROSS  PROFIT                                 |       | —      |       | 103.8            |       | 37.2              |       | 141.0            |       |
| SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES |       | 0.1         |       | 48.0             |       | 23.0              |       | 71.1             |       |
| OPERATING  INCOME                             |       | (0.1        | )          | 55.8             |       | 14.2              |       | 69.9             |       |
| OTHER  INCOME (EXPENSES):                     |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                     |       | 27.8        |       | (26.0            | )          | (1.8              | )          | —           |       |
| Interest,  net                                |       | (23.3       | )          | (0.6             | )          | (5.2              | )          | (29.1            | )          |
| Intergroup  other, net                        |       | —      |       | (0.9             | )          | 0.9               |       | —           |       |
| Foreign  exchange (loss) gain, net            |       | (3.0        | )          | (0.1             | )          | 11.7              |       | 8.6              |       |
| Other,  net                                   |       | —      |       | —           |       | (4.0              | )          | (4.0             | )          |
| Net                                           |       | 1.5         |       | (27.6            | )          | 1.6               |       | (24.5            | )          |
| INCOME  BEFORE TAXES AND MINORITY INTEREST    |       | 1.4         |       | 28.2             |       | 15.8              |       | 45.4             |       |
| INCOME  TAX PROVISION                         |       | 0.6         |       | 11.7             |       | 7.3               |       | 19.6             |       |
| NET  INCOME BEFORE MINORITY                   |       |        |       |             |       |              |       |             |       |
| INTEREST                                      |       | 0.8         |       | 16.5             |       | 8.5               |       | 25.8             |       |
| MINORITY  INTEREST                            |       | —      |       | —           |       | —            |       | —           |       |
| NET  INCOME                                   |       | $           | 0.8        |             | $          | 16.5              |       | $                | 8.5        |   | $ | 25.8 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONSOLIDATING BALANCE SHEETJune 30, 2005(Dollars in millions)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| CURRENT  ASSETS:                                 |       |        |       |             |       |              |       |             |       |             |       |
| Cash  and cash equivalents                       |       | $           | 55.1       |             | $          | (33.9             | )          | $                | 60.8       |             | $          | — |   | $ | 82.0 |   |
| Accounts  receivable, net                        |       | —      |       | 123.1            |       | 368.6             |       | —           |       | 491.7            |       |
| Inventories                                      |       | —      |       | 94.0             |       | 368.4             |       | —           |       | 462.4            |       |
| Deferred  income taxes                           |       | (4.9        | )          | 18.2             |       | 25.4              |       | —           |       | 38.7             |       |
| Prepaid  expenses and other current assets       |       | —      |       | 4.2              |       | 56.9              |       | —           |       | 61.1             |       |
| Total  current assets                            |       | 50.2        |       | 205.6            |       | 880.1             |       | —           |       | 1,135.9          |       |
| PROPERTY,  PLANT AND EQUIPMENT, net              |       | —      |       | 233.5            |       | 1,207.1           |       | —           |       | 1,440.6          |       |
| INVESTMENT  IN SUBSIDIARIES                      |       | 1,756.6     |       | 83.0             |       | (0.1              | )          | (1,839.5         | )          | —           |       |
| GOODWILL                                         |       | —      |       | 323.6            |       | 1,326.9           |       | —           |       | 1,650.5          |       |
| INTERGROUP  RECEIVABLE                           |       | 1,735.5     |       | 763.2            |       | 4,418.9           |       | (6,917.6         | )          | —           |       |
| OTHER  INTANGIBLE ASSETS, net                    |       | —      |       | 26.5             |       | 544.2             |       | —           |       | 570.7            |       |
| DEFERRED  DEBT ISSUANCE COSTS, net               |       | 3.4         |       | 13.7             |       | 46.5              |       | —           |       | 63.6             |       |
| OTHER  ASSETS                                    |       | 12.2        |       | 6.2              |       | 40.5              |       | —           |       | 58.9             |       |
| TOTAL  ASSETS                                    |       | $           | 3,557.9    |             | $          | 1,655.3           |       | $                | 8,464.1    |             | $          | (8,757.1 | ) | $ | 4,920.2 |   |
|                                             |       |        |       |             |       |              |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |        |       |             |       |              |       |             |       |             |       |
| CURRENT  LIABILITIES:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts  payable                                |       | $           | —     |             | $          | 79.4              |       | $                | 210.7      |             | $          | — |   | $ | 290.1 |   |
| Income  taxes payable                            |       | (1.4        | )          | (0.4             | )          | 21.7              |       | —           |       | 19.9             |       |
| Accrued  compensation                            |       | —      |       | 11.5             |       | 68.7              |       | —           |       | 80.2             |       |
| Accrued  expenses and other current liabilities  |       | 30.4        |       | 24.3             |       | 161.3             |       | —           |       | 216.0            |       |
| Long-term  debt, current portion                 |       | 17.1        |       | —           |       | 48.0              |       | —           |       | 65.1             |       |
| Total  current liabilities                       |       | 46.1        |       | 114.8            |       | 510.4             |       | —           |       | 671.3            |       |
| LONG-TERM  DEBT                                  |       | 2,536.9     |       | —           |       | 360.3             |       | —           |       | 2,897.2          |       |
| PENSION  AND RELATED LIABILITIES                 |       | —      |       | 15.5             |       | 326.1             |       | —           |       | 341.6            |       |
| INTERGROUP  PAYABLE                              |       | 80.0        |       | 1,074.0          |       | 5,763.6           |       | (6,917.6         | )          | —           |       |
| DEFERRED  INCOME TAXES                           |       | (35.0       | )          | 48.6             |       | 47.9              |       | —           |       | 61.5             |       |
| OTHER  LIABILITIES                               |       | 6.5         |       | 19.0             |       | 111.6             |       | —           |       | 137.1            |       |
| Total  liabilities                               |       | 2,634.5     |       | 1,271.9          |       | 7,119.9           |       | (6,917.6         | )          | 4,108.7          |       |
|                                             |       |        |       |             |       |              |       |             |       |             |       |
| MINORITY  INTEREST                               |       | —      |       | —           |       | 26.2              |       | —           |       | 26.2             |       |
|                                             |       |        |       |             |       |              |       |             |       |             |       |
| STOCKHOLDERS’  EQUITY:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common  stock                                    |       | —      |       | 285.1            |       | 70.2              |       | (355.3           | )          | —           |       |
| Paid-in  capital                                 |       | 889.3       |       | 244.3            |       | 1,229.3           |       | (1,484.2         | )          | 878.7            |       |
| Accumulated  other comprehensive income          |       | 40.1        |       | 0.4              |       | 83.7              |       | —           |       | 124.2            |       |
| Accumulated  deficit                             |       | (6.0        | )          | (146.4           | )          | (65.2             | )          | —           |       | (217.6           | )          |
| Total  stockholders’ equity                 |       | 923.4       |       | 383.4            |       | 1,318.0           |       | (1,839.5         | )          | 785.3            |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY |       | $           | 3,557.9    |             | $          | 1,655.3           |       | $                | 8,464.1    |             | $          | (8,757.1 | ) | $ | 4,920.2 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONSOLIDATING BALANCE SHEETDECEMBER 31, 2004(Dollars in millions)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| CURRENT  ASSETS:                                 |       |        |       |             |       |              |       |             |       |             |       |
| Cash  and cash equivalents                       |       | $           | 79.1       |             | $          | 48.2              |       | $                | (15.9      | )                | $          | — |   | $ | 111.4 |   |
| Accounts  receivable, net                        |       | —      |       | 112.4            |       | 388.5             |       | —           |       | 500.9            |       |
| Inventories                                      |       | —      |       | 84.2             |       | 392.7             |       | —           |       | 476.9            |       |
| Deferred  income taxes                           |       | (4.9        | )          | 16.9             |       | 20.5              |       | —           |       | 32.5             |       |
| Prepaid  expenses and other current assets       |       | 0.1         |       | 7.6              |       | 104.3             |       | —           |       | 112.0            |       |
| Total  current assets                            |       | 74.3        |       | 269.3            |       | 890.1             |       | —           |       | 1,233.7          |       |
| PROPERTY,  PLANT AND EQUIPMENT, net              |       | —      |       | 196.7            |       | 1,370.1           |       | —           |       | 1,566.8          |       |
| INVESTMENT  IN SUBSIDIARIES                      |       | 1,756.1     |       | 83.0             |       | —            |       | (1,839.1         | )          | —           |       |
| GOODWILL                                         |       | —      |       | 347.9            |       | 1,458.0           |       | —           |       | 1,805.9          |       |
| INTERGROUP  RECEIVABLE                           |       | 1,880.6     |       | 782.0            |       | 5,334.5           |       | (7,997.1         | )          | —           |       |
| OTHER  INTANGIBLE ASSETS, net                    |       | —      |       | 52.3             |       | 607.8             |       | —           |       | 660.1            |       |
| DEFERRED  DEBT ISSUANCE COSTS, net               |       | 3.7         |       | 7.8              |       | 62.3              |       | —           |       | 73.8             |       |
| OTHER  ASSETS                                    |       | 1.0         |       | 2.3              |       | 43.0              |       | —           |       | 46.3             |       |
| TOTAL  ASSETS                                    |       | $           | 3,715.7    |             | $          | 1,741.3           |       | $                | 9,765.8    |             | $          | (9,836.2 | ) | $ | 5,386.6 |   |
|                                             |       |        |       |             |       |              |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |        |       |             |       |              |       |             |       |             |       |
| CURRENT  LIABILITIES:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts  payable                                |       | $           | —     |             | $          | 66.7              |       | $                | 259.4      |             | $          | — |   | $ | 326.1 |   |
| Income  taxes payable                            |       | (1.4        | )          | 1.6              |       | 19.2              |       | —           |       | 19.4             |       |
| Accrued  compensation                            |       | —      |       | 20.3             |       | 64.2              |       | —           |       | 84.5             |       |
| Accrued  expenses and other current liabilities  |       | 22.3        |       | 41.2             |       | 197.8             |       | —           |       | 261.3            |       |
| Long-term  debt, current portion                 |       | 7.6         |       | —           |       | 39.6              |       | —           |       | 47.2             |       |
| Total  current liabilities                       |       | 28.5        |       | 129.8            |       | 580.2             |       | —           |       | 738.5            |       |
| LONG-TERM  DEBT                                  |       | 2,648.9     |       | —           |       | 428.0             |       | —           |       | 3,076.9          |       |
| PENSION  AND RELATED LIABILITIES                 |       | —      |       | 12.3             |       | 362.7             |       | —           |       | 375.0            |       |
| INTERGROUP  PAYABLE                              |       | 78.5        |       | 1,252.3          |       | 6,666.3           |       | (7,997.1         | )          | —           |       |
| DEFERRED  INCOME TAXES                           |       | (34.3       | )          | 47.9             |       | 28.2              |       | —           |       | 41.8             |       |
| OTHER  LIABILITIES                               |       | 33.4        |       | 18.2             |       | 167.6             |       | —           |       | 219.2            |       |
| Total  liabilities                               |       | 2,755.0     |       | 1,460.5          |       | 8,233.0           |       | (7,997.1         | )          | 4,451.4          |       |
|                                             |       |        |       |             |       |              |       |             |       |             |       |
| MINORITY  INTEREST                               |       | —      |       | —           |       | 31.2              |       | —           |       | 31.2             |       |
|                                             |       |        |       |             |       |              |       |             |       |             |       |
| STOCKHOLDERS’  EQUITY:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common  stock                                    |       | —      |       | 285.3            |       | 70.0              |       | (355.3           | )          | —           |       |
| Paid-in  capital                                 |       | 889.3       |       | 146.3            |       | 1,327.1           |       | (1,483.8         | )          | 878.9            |       |
| Accumulated  other comprehensive income          |       | 155.3       |       | 13.1             |       | 206.0             |       | —           |       | 374.4            |       |
| Accumulated  deficit                             |       | (83.9       | )          | (163.9           | )          | (101.5            | )          | —           |       | (349.3           | )          |
| Total  stockholders’ equity                 |       | 960.7       |       | 280.8            |       | 1,501.6           |       | (1,839.1         | )          | 904.0            |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY |       | $           | 3,715.7    |             | $          | 1,741.3           |       | $                | 9,765.8    |             | $          | (9,836.2 | ) | $ | 5,386.6 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENT OF CASH FLOWSSIX MONTHS ENDED JUNE 30, 2005(Dollars in millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Net  income                                                                                              |       | $           | 77.9       |             | $          | 17.4              |       | $                | 36.4       |   | $ | 131.7 |   |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities:               |       |        |       |             |       |              |       |             |       |
| Depreciation  and amortization                                                                           |       | —      |       | 14.7             |       | 90.5              |       | 105.2            |       |
| Amortization  of deferred financing costs                                                                |       | 0.3         |       | 1.1              |       | 3.3               |       | 4.7              |       |
| Minority  Interest                                                                                       |       | —      |       | —           |       | (1.7              | )          | (1.7             | )          |
| Foreign  exchange gain                                                                                   |       | (93.1       | )          | —           |       | (7.4              | )          | (100.5           | )          |
| Fair  value adjustments of derivatives                                                                   |       | (2.9        | )          | —           |       | (3.3              | )          | (6.2             | )          |
| Bad  debt provision                                                                                      |       | —      |       | 0.1              |       | 0.7               |       | 0.8              |       |
| Deferred  income taxes                                                                                   |       | (0.7        | )          | 11.0             |       | 10.7              |       | 21.0             |       |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | (6.3             | )          | (22.5             | )          | (28.8            | )          |
| Inventories                                                                                              |       | —      |       | (9.7             | )          | (14.6             | )          | (24.3            | )          |
| Prepaid  expenses and other assets                                                                       |       | 0.1         |       | (3.0             | )          | (10.4             | )          | (13.3            | )          |
| Accounts  payable                                                                                        |       | —      |       | 12.7             |       | 16.7              |       | 29.4             |       |
| Income  taxes payable                                                                                    |       | —      |       | (0.7             | )          | 3.8               |       | 3.1              |       |
| Accrued  expenses and other liabilities                                                                  |       | 1.2         |       | (110.9           | )          | 51.7              |       | (58.0            | )          |
| Net  cash (used in) provided by operating activities                                                     |       | (17.2       | )          | (73.6            | )          | 153.9             |       | 63.1             |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (8.5             | )          | (68.3             | )          | (76.8            | )          |
| Proceeds  on sale of property, plant and equipment                                                       |       | —      |       | —           |       | 0.2               |       | 0.2              |       |
| Net  cash used in investing activities                                                                   |       | —      |       | (8.5             | )          | (68.1             | )          | (76.6            | )          |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Capital  contribution                                                                                    |       | (0.5        | )          | —           |       | 0.5               |       | —           |       |
| Proceeds  from senior secured revolving credit facility                                                  |       | 302.0       |       | —           |       | —            |       | 302.0            |       |
| Repayment  of senior secured revolving credit facility                                                   |       | (302.0      | )          | —           |       | —            |       | (302.0           | )          |
| Payments  on long-term debt                                                                              |       | —      |       | —           |       | (15.6             | )          | (15.6            | )          |
| Net  cash used in financing activities                                                                   |       | (0.5        | )          | —           |       | (15.1             | )          | (15.6            | )          |
| EFFECT  OF EXCHANGE RATE CHANGES ON CASH                                                                 |       | (6.3        | )          | —           |       | 6.0               |       | (0.3             | )          |
| NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | (24.0       | )          | (82.1            | )          | 76.7              |       | (29.4            | )          |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 79.1        |       | 48.2             |       | (15.9             | )          | 111.4            |       |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                                |       | $           | 55.1       |             | $          | (33.9             | )          | $                | 60.8       |   | $ | 82.0 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENT OF CASH FLOWSSIX MONTHS ENDED JUNE 30, 2004(Dollars in millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Net  income                                                                                              |       | $           | 0.8        |             | $          | 16.5              |       | $                | 8.5        |   | $ | 25.8 |   |
| Adjustments  to reconcile net loss to net cash provided by operating activities:                         |       |        |       |             |       |              |       |             |       |
| Depreciation  and amortization                                                                           |       | —      |       | 11.8             |       | 16.4              |       | 28.2             |       |
| Amortization  of deferred financing costs                                                                |       | 0.1         |       | 0.6              |       | 0.2               |       | 0.9              |       |
| Foreign  exchange loss (gain)                                                                            |       | 3.0         |       | —           |       | (11.6             | )          | (8.6             | )          |
| Fair  value adjustments of derivatives                                                                   |       | (6.7        | )          | —           |       | (1.9              | )          | (8.6             | )          |
| Bad  debt provision                                                                                      |       | —      |       | 0.9              |       | —            |       | 0.9              |       |
| Deferred  income taxes                                                                                   |       | 0.6         |       | 11.7             |       | —            |       | 12.3             |       |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | (13.7            | )          | (9.9              | )          | (23.6            | )          |
| Inventories                                                                                              |       | —      |       | 1.0              |       | (1.2              | )          | (0.2             | )          |
| Prepaid  expenses and other assets                                                                       |       | (0.3        | )          | —           |       | (0.1              | )          | (0.4             | )          |
| Accounts  payable                                                                                        |       | —      |       | 6.8              |       | 4.9               |       | 11.7             |       |
| Income  taxes payable                                                                                    |       | —      |       | (1.5             | )          | 3.3               |       | 1.8              |       |
| Accrued  expenses and other liabilities                                                                  |       | 19.0        |       | (16.7            | )          | 2.2               |       | 4.5              |       |
| Net  cash provided by operating activities                                                               |       | 16.5        |       | 17.4             |       | 10.8              |       | 44.7             |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Capital  expenditures                                                                                    |       | —      |       | (7.0             | )          | (6.3              | )          | (13.3            | )          |
| Net  cash used in investing activities                                                                   |       | —      |       | (7.0             | )          | (6.3              | )          | (13.3            | )          |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Payments  on long-term debt                                                                              |       | (1.3        | )          | —           |       | (3.2              | )          | (4.5             | )          |
| Net  cash used in financing activities                                                                   |       | (1.3        | )          | —           |       | (3.2              | )          | (4.5             | )          |
| EFFECT  OF EXCHANGE RATE CHANGES ON CASH                                                                 |       | —      |       | —           |       | (1.3              | )          | (1.3             | )          |
| NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | 15.2        |       | 10.4             |       | —            |       | 25.6             |       |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | (43.2       | )          | 79.2             |       | 6.7               |       | 42.7             |       |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                                |       | $           | (28.0      | )                | $          | 89.6              |       | $                | 6.7        |   | $ | 68.3 |   |

 

25

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**Item 2.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations covers periods prior and subsequent to the Dynamit Nobel Acquisitionconsummated on July 31, 2004. In connection with the Dynamit NobelAcquisition, we entered into new financing arrangements and significantlyaltered our capital structure. The historical financial information of Rockwoodduring the periods prior to the Dynamit Nobel Acquisition included in thisQuarterly Report does not reflect the significant impact the Dynamit NobelAcquisition has had and will have on us. The results of operations for thethree and six months ended June 30, 2005 include the results of thebusinesses acquired in the Dynamit Nobel Acquisition.*

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties. See description of Forward-Looking Statements at the end of thisManagement Discussion and Analysis section and a discussion of riskfactors in the Company’s Annual Report on Form 10-K/A (Amendment No. 2)for the year ended December 31, 2004. You should read the following discussion and analysis and ourconsolidated financial statements and the notes to those statements that appearelsewhere in this Quarterly Report. Amounts may not recalculate due to roundingdifferences.*

 

*Giventhe significance of the Dynamit Nobel Acquisition,  we have included a limited discussion of theresults of our operations on a pro forma basis as if the Dynamit NobelAcquisition had taken place at January 1, 2004.  See “—Results ofOperations— Pro Forma Net Sales, Net Income (Loss) and Adjusted EBITDA” below.The results of operations on a pro forma basis also assume the pigments anddispersions acquisition and the Groupe Novasep combination had also taken placeat January 1, 2004.*

 

**General**

 

We are a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-added specialty chemicals and advanced materials.  We serve more than 60,000 customers across awide variety of industries and geographic areas.  Since the completion of the Dynamit NobelAcquisition, we operate through seven business segments:  (1) Performance Additives; (2) SpecialtyCompounds; (3) Electronics; (4) Specialty Chemicals; (5) TitaniumDioxide Pigments; (6) Advanced Ceramics; and (7) Groupe Novasep.  Of these seven segments, we acquiredSpecialty Chemicals, Titanium Dioxide Pigments, Advanced Ceramics and GroupeNovasep (then known as our Custom Synthesis segment) in the Dynamit NobelAcquisition.

 

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

 

Our cost of products soldconsists of variable and fixed components. Our variable costs are proportional to volume and consist principally ofraw materials, packaging and related supplies, certain energy costs, andcertain distribution costs including inbound, outbound, and internal shippingand transfer costs. Our fixed costs are not significantly impacted byproduction volume and consist principally of certain fixed manufacturing costsand other distribution network costs, including warehousing. Fixedmanufacturing costs comprise headcount-related costs and overhead, includingdepreciation, periodic maintenance costs, purchasing and receiving costs,inspection costs and certain energy costs.

 

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

 

We financed the DynamitNobel Acquisition primarily through the proceeds of net equity investments inHoldings of $404.0 million from KKR and DLJMB, term loans of approximately$1,454.2 million and a senior subordinated loan facility of approximately$854.5 million, as described in detail under “Liquidity and CapitalResources” below. Also, we refinanced significant portions of this indebtednesswith indebtedness bearing lower interest rates. Nonetheless, as a result of theDynamit Nobel Acquisition, our interest expense currently is, and will continueto be, higher than it was prior to the Dynamit Nobel Acquisition.

 

We are focused onincreasing sales, improving productivity, reducing costs, expanding margins andreducing debt. In connection with this focus, since the KKR acquisition, amongother things:

 

*•**                 *we reducedoverhead costs and eliminated management redundancies. We have implementedplans to cut costs, reduce overhead and eliminate duplicative positions in theacquired Dynamit Nobel businesses and the acquired pigments and dispersionsbusiness of Johnson Matthey Plc. For example, we closed the former headquartersof Dynamit Nobel in Troisdorf, Germany and the New Lebanon, New Yorkmanufacturing facility of our Advanced Ceramics segment and implemented otherrestructuring measures at our Specialty Chemicals and Groupe Novasep segments. Inaddition, we eliminated 40 positions in connection with the acquisition of thepigments and dispersions business;

 

26

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

 

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

 

**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

Because the businesses inour segments generally serve many unrelated end-use markets, we discuss theprincipal market conditions on a segment basis rather than a consolidatedbasis. The principal market conditions in our segments and regions in which weoperate that impacted our results of operations during the periods presentedinclude the following:

 

***Performance Additives***

 

•                  During2004 and in the first half of 2005, a general economic improvement resulted inimproved sales by our Performance Additives segment.

 

•                  Thecontinued growth in demand in certain North American end-use markets, such asconstruction, has favorably impacted our Color Pigments and Services and TimberTreatment Chemicals businesses. In particular, a continuing trend towards theincreased use of colored concrete products in the North American constructionmarket has had a positive effect on our Color Pigments and Services businessline. Timber Treatment Chemicals also benefited from high levels of activity inhome improvement areas. However, growth in demand for treated wood has beennegatively impacted by the increasing use of wood substitutes and poor weatherduring the first half of 2005 in many regions.

 

•                  Demandin certain European end-use markets over the last few years has slowed. Thisaffected sales of Color Pigments and Services in the construction market,particularly in Germany, and, in certain regions, sales of Clay-based Additivesin the coatings and paint markets. Demand in Europe improved in the second halfof 2004 but we have experienced a decrease in European construction volumes inour Color Pigments and Services business in 2005.

 

•                  Thechange in the market to environmentally advanced wood treatment chemicalproducts, such as alkaline copper quaternary, or ACQ, and the phase out of chromatedcopper arsenate, or CCA, for residential use have had a positive impact on ourTimber Treatment Chemicals business, which is a leading supplier of thesehigher margin products.

 

•                  Inrecent years, we exited a number of lower margin product lines in ourClay-based Additives business, which negatively impacted our net sales. We arenow focusing on increasing high margin specialty applications to offset theselost sales.

 

•                  Rawmaterial costs increased in general in the Performance Additives segment in 2004and continue to trend upward in 2005, particularly in the Timber TreatmentChemicals and Color Pigments and Services businesses. Increased raw materialcosts for copper and mono-ethanolamine, primary components in the ACQproduction process, are expected to continue to increase in the near future.The ability to continue to pass on some or all of these increases is uncertain.

 

***Specialty Compounds***

*** ***

•                  Ourlargest product line in the Specialty Compounds segment is wire and cablecompounds. Sales within this product line are dependent upon thetelecommunications market and related sectors, specifically demand for high-endvoice and data communication wire and cable, for which our Specialty Compoundssegment is a significant provider of sheathing materials. Sales of theseproducts improved moderately in the second half of 2004 and continued toexperience gains in the first half of 2005.

 

•                  Mostof the other end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product. We are focusing more of ourefforts towards increasing high margin specialty applications to offset thisimpact, in particular, thermoplastic elastomers, and less of our efforts inregulated packaging because we have been

 

27

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unable to successfullypenetrate this market to date.

 

•                  Rawmaterial costs increased in the Specialty Compounds segment during 2004 andcontinue to trend upward in 2005. This is particularly true with respect to PVCresin and plasticizers prices, primary components in the production of wire andcable products. Also, the price of ammonium octamolybdate, another key rawmaterial used in the production of wire and cable products, has increased in2005 and we expect this trend to continue. The ability to pass on some or allof these increases is uncertain.

 

***Electronics***

 

•                  Demandfor our Electronics products generally follows the activity levels ofsemiconductor and printed circuit board manufacturers. The global semiconductorand printed circuit board markets are cyclical in nature. Market conditionsgenerally improved during 2004, resulting in higher volumes in 2004 as comparedto 2003. General electronic market conditions slowed down in the fourth quarterof 2004 and in early 2005. However, the semiconductor industry is nowpredicting growth over 2004, largely in Asia.

 

•                  Theprice of certain of our products is insulated to some degree from the effect ofchanges in the price of semiconductors and printed circuit boards due to the factthat the cost of these products is generally a small component of the cost ofthe end product. Despite this, in 2004 and continuing into 2005 there has beenheavy pricing pressure in certain businesses, particularly wafer reclaim andphotomasks, due to very aggressive competition.

 

***Specialty Chemicals***

 

•                  Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aircraft industries. During 2004, less favorableglobal market conditions in the automotive and aircraft industries were offsetby more favorable conditions in the steel industry. Despite the less favorableautomotive conditions, we have been able to sustain sales growth due to marketpenetration.  In 2005, we have benefitedfrom an improved automotive and aerospace market.

 

•                  Demandfor our lithium products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven in part by demand of lithium carbonate inindustrial applications, the aluminum business, battery products and highergeneral demand in China. Sales of lithium products specifically used in lifescience applications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. Market conditions forlithium products in the industries served were stable in 2004. Through thesecond quarter of 2005, we have experienced price increases related to a keyraw material used in producing metal sulfides. Pricing for lithium products isvery competitive, particularly in the butyllithium market.

 

•                  Boththe Surface Treatment and Fine Chemicals businesses have a diversified base ofcustomers and end use markets and are well positioned to take advantage ofgrowth opportunities.

 

***Titanium Dioxide Pigments***

 

•                  Demandfor our titanium dioxide products in anatase form is driven mainly by demand inthe synthetic fiber industry, while demand for titanium dioxide products inrutile form and our functional additives is driven by demand in the coatings,paper and plastics industries. Volumes sold of our titanium dioxide products inanatase form increased from mid-2002 through 2004. Volumes sold of our titaniumdioxide products in rutile form remained flat in 2004. We have experienced adecrease in volume in our titanium dioxide business line in 2005 due, in part,to the lower cost of cotton, which has negatively affected demand for syntheticfibers and in turn our products.

 

•                  During2004 and continuing into 2005, we experienced pricing pressure in Europe fromglobal suppliers and in Asia from Chinese suppliers related to titanium dioxideproducts in anatase form.  We alsoexperienced pricing pressures on our titanium products in rutile form.

 

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***Advanced Ceramics***

 

•                  Demandfor our ceramic medical devices is mainly tied to the aging population inEurope and the United States. As a result of this demographic as well as ourmarket share penetration, the volume of our products used in medical deviceapplications sold has experienced double-digit growth each year since 2001. Weexpect demand for ceramic components in artificial hip joints to continue toincrease.

 

•                  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.We have experienced some pricing pressure in our electronic products businessin 2005. Similarly, sales of ceramic products for use in cutting tool productsand mechanical applications have been negatively impacted by strong pricingpressure from Asian competitors in 2003 and 2004. We also experienced lowermarket growth as these applications are for more mature industries.

 

***Groupe Novasep***

 

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

 

##### **Global Exposure**

##### ** **

We operate ageographically diverse business. Of our 2004 pro forma net sales, 50% wereshipments to Europe, 34% to North America (predominantly the United States) and16% to the rest of the world.

 

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 100 manufacturing facilities in25 countries. Consequently, we are exposed to global economic andpolitical changes, particularly currency fluctuations that could impact ourprofitability.

 

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Therefore, our resultsof operations and financial condition have been historically impacted primarilyby the fluctuation of the euro against our reporting currency, the U.S. dollar.For the three and six month periods ended June 30, 2005, net sales, grossprofit and operating income increased compared to the same periods in 2004 dueto the strengthening of the euro against the U.S. dollar. The euro was weakerat June 30, 2005 compared to December 31, 2004, which in turn has had apositive impact on the “foreign exchange gain (loss), net” component of “otherincome (expenses)” as a result of our euro-denominated debt being remeasuredinto U.S. dollars. Historically, however, our pro forma operating margins havenot been significantly impacted by currency fluctuations because, in general,sales and costs of products sold are generated or incurred in the samecurrency, subject to certain exceptions, particularly in our Groupe Novasepsegment.

 

**RawMaterials**

 

Raw materials constitutedapproximately 48% of our 2004 pro forma cost of products sold. We have a broadraw material base, with the cost of no single raw material representing morethan 5% of our pro forma cost of products sold in 2004. Nonetheless, thesignificant price fluctuations our raw materials have experienced in the pastduring periods of high demand have had an adverse impact on our results ofoperations. We cannot accurately predict the impact of any future priceincreases for raw materials or any raw material shortages on our business as awhole or in specific geographic regions. In addition, we may not be able tocontinue to pass on some or all of the raw material price increases to ourcustomers.

 

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**EnergyCosts**

 

In 2004, energy purchasesrepresented approximately 4% of Rockwood’s historical cost of products sold and5% of Dynamit Nobel’s historical cost of products sold. However, within certainbusiness lines, such as our Titanium Dioxide Pigments segment and the ColorPigments and Services and Clay-based Additives businesses of our PerformanceAdditives segment, energy costs are more significant. The cost of products soldfor certain of our businesses, including Color Pigments and Services andClay-based Additives, increases when the price of natural gas in North Americarises. In 2004, natural gas prices were volatile in North America and havecontinued to increase through the second quarter of 2005. Energy cost increaseshave been mainly due to global political conditions and extreme weatherconditions. In contrast, natural gas prices in Europe, where our TitaniumDioxide Pigments segment is located, have historically been relatively stable.

 

**IncomeTaxes**

 

As of June 30, 2005,we have global tax loss carryforwards (excluding state and local amounts) ofapproximately $352.5 million, of which $199.8 million expire in years 2008through 2025 and $152.7 million have no current expiration date. Forfinancial reporting purposes, a valuation allowance has been recognized toreduce the deferred tax assets related to certain tax loss carryforwards forwhich it is more likely than not that the related tax benefits will not berealized. Our net deferred tax assets include certain amounts of tax loss carryforwardsas well as certain tax deductible temporary differences which we believe arerealizable through a combination of forecasted future taxable income, reversalof deferred tax liabilities and anticipated tax planning strategies. Failure toachieve forecasted future taxable income might affect the ultimate realizationof any remaining recorded net deferred tax assets.

 

Based on the U.S. incomegenerated in the first half of 2005, $38.9 million of the valuation allowancehas been reversed. $11.1 million of the reversal related to the anticipatedutilization of acquired net operating losses has been recorded as a reductionto goodwill.  The remaining reduction inthe valuation allowance of $27.8 million has been reflected as a reduction inincome tax expense.

 

**Acquisitions**

 

Since February 2002,pursuant to our business strategy of achieving profitable growth throughselective acquisitions, we have acquired seven businesses at purchase pricesranging from approximately $3.0 million (a Canadian color pigments assetacquisition by our Performance Additives segment) to $2,290.3 million,including net debt assumed, (the four businesses of Dynamit Nobel); andcombined the three business lines of our Custom Synthesis segment (now known asGroupe Novasep segment) with the acquired businesses of Groupe Novasep SAS.

 

We accounted for theDynamit Nobel Acquisition using the purchase method of accounting. We haveallocated the total purchase price to the assets acquired and liabilitiesassumed of Dynamit Nobel based on management’s estimates of their fair values.We retained independent valuation specialists to assist in the determination offair value of a significant portion of these assets, including property, plantand equipment and identified intangible assets. The consolidated statements ofoperations for the three and six months ended June 30, 2005 reflect theresults of the acquired businesses of Dynamit Nobel. See Item 1 – FinancialStatements (Unaudited) - Note 2 - Acquisitions, Note 5 - Goodwill and Note 6 -Other Intangible Assets.

 

We believe the allocationof the purchase price to the identifiable assets acquired is complete. On July 6,2005, we paid $16.1 million of additional cash purchase price consideration (basedon the July 6, 2005 exchange rate of €1.00 = $1.1927) in post-closingadjustments.

 

The excess of the totalpurchase price over the fair value of the net assets acquired at closing hasbeen allocated to goodwill and this indefinite-lived asset is subject to annualimpairment review. Based on the allocation of the total purchase price,goodwill in the transaction totaled $944.8 million as of the acquisition date.

 

In December 2004, wecompleted a combination (total purchase price of approximately$139.7 million including assumed debt of $48.6 million; cash purchaseprice including fees and acquisition costs of $74.5 million; and the shares contributed to the management of the newcombined company valued at $31.2 million less cash acquired of $14.6 million)of the three business lines of our Custom Synthesis segment (now known as ourGroupe Novasep segment) with Groupe Novasep SAS, or Groupe Novasep. As a resultof the combination, we own approximately 79% of the combined new GroupeNovasep. We believe this combination strengthens this segment by joiningtogether Groupe Novasep’s proprietary separation technologies with ourcapabilities of developing and manufacturing advanced intermediates and activeingredients for the pharmaceutical and performance chemical industries, whichwe expect will position us better in this highly competitive market.

 

We accounted for theGroupe Novasep combination using the purchase method of accounting. We haveallocated the total estimated

 

30

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purchase price to theassets acquired and liabilities assumed of Groupe Novasep SAS. We have notfinalized the estimated fair value of the assets acquired and liabilitiesassumed although values of inventory, identified intangible assets, andproperty, plant and equipment are completed. We expect to complete our researchand fair value estimates on remaining purchase price components by the thirdquarter of 2005. The excess of the total purchase price over the estimated fairvalue of the net assets acquired at closing has been allocated to goodwill andthis indefinite lived asset is subject to annual impairment review. Based onthe preliminary allocation of the total estimated purchase price, goodwill inthe transaction totaled $33.8 million as of the combination date. This amountmay change at a subsequent date when we finalize the purchase accounting forthe Groupe Novasep combination. The consolidated statements of operations forthe three months and six months ended June 30, 2005 reflect the results ofGroupe Novasep. See Item 1 – Financial Statements (Unaudited)  Note 2 - Acquisitions, Note 5 - Goodwill andNote 6 - Other Intangible Assets.

 

**SpecialCharges**

 

During the periodspresented, we have incurred certain special charges, substantially inconnection with the process of refocusing and restructuring the historicRockwood businesses after the completion of the KKR acquisition and theestablishment of the post-acquisition corporate entity that incorporates thefour business segments acquired in the Dynamit Nobel Acquisition. These itemsinclude the following:

 

*•**                  Non-recurringcharges/gains:*

 

*•   Systems/organizationestablishment expenses:* In the three and six months ended June 30,2005 respectively, these expenses primarily related to**professional fees for the initialimplementation of systems and internal control documentation in connection withthe Sarbanes-Oxley Act of 2002. We have previously estimated non-recurringcosts of approximately $1.9 million remaining to complete initialSarbanes-Oxley compliance. However, this estimate was prepared based on ouroriginal compliance timetable of the year ending December 31, 2005. Giventhe recent extension of the compliance deadline until the year ended December 31,2006, and the expectations articulated in SEC Release 33-8545 that announcedthis extension, we are reevaluating the scope and estimated cost of ourdocumentation and initial compliance plan.

 

*•  Inventory write-up reversal:* Under Statement of Financial AccountingStandards (“SFAS”) 141, *BusinessCombinations*, all inventories acquired in an acquisition must berevalued to “fair value.” In connection with the Groupe Novasep combination, weallocated a portion of the total purchase price to inventory to reflectmanufacturing profit in inventory at the date of the acquisition. This resultedin a consequential reduction in gross profit of $0.3 million and $3.1 millionfor the three and six months ended June 30, 2005, respectively, as theinventory was sold in the normal course of business.

 

*•   Stampduty tax:*  In June 2004, we paida stamp duty tax of $4.0 million on certain assets transferred to the UnitedKingdom in connection with the KKR acquisition.

 

*•   Cancelledacquisition and disposition costs:* We incurred cancelled acquisition and disposition costs in connectionwith non-consummated acquisitions and dispositions.

 

*•**                  Other specialgains/charges:*

 

*•   Restructuringcharges:* Charges of $3.4 million and $6.3 million for the three and sixmonths ended June 30, 2005, respectively were recorded for restructuring andrelated charges including $0.5 million of charges recorded in cost of productssold in the statements of operations for these periods.

 

*•  CCA litigation defense costs:* During the three and six months ended June 30,2005, we incurred $1.1 million and $1.5 million, respectively, inconnection with litigation defense costs related to our Timber TreatmentChemicals business of our Performance Additives segment.

 

*•  Foreign exchange gain/(losses):*During the periods presented, wehave recorded foreign exchange gains/(losses) primarily related to ourlong-term debt. These amounts reflect $58.6 million and ($3.6 million) duringthe three months ended June 30, 2005 and 2004, respectively and $100.5million and $8.6 million during the six months ended June 30, 2005 and2004, respectively, primarily for the non-cash translation impact on oureuro-denominated debt resulting from the weakening (strengthening) of the euroagainst the U.S. dollar during these periods.

 

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**SpecialNote Regarding Non-GAAP Financial Measures**

 

A non-GAAP financialmeasure is generally defined by the SEC as one that purports to measurehistorical or future financial performance, financial position or cash flowsbut excludes or includes amounts that would not be so adjusted in the mostcomparable U.S. GAAP measure. From time to time in this management’s discussionand analysis, we disclose non-GAAP financial measures, primarily AdjustedEBITDA, as defined below.

 

**Definitionof Adjusted EBITDA**

 

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

 

•                  interestexpense;

•                  depreciationexpense;

•                  amortizationexpense, including amortization of deferred financing fees;

•                  extraordinarylosses and non-recurring charges;

•                  non-cashcharges;

•                  losseson asset sales;

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

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

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

•                  anyfees and expenses related to permitted acquisitions;

•                  anydeduction for minority interest expense; and

•                  itemsarising in connection with litigation related to our Timber Treatment Chemicalsbusiness of our Performance Additives segment;

 

less:

 

•                  extraordinarygains and non-recurring gains;

•                  non-cashgains; and

•                  gainson asset sales,

 

in all cases, subject tocertain exclusions.

 

Withrespect to entities acquired, we include Adjusted EBITDA for such entities incalculating our pro forma Adjusted EBITDA. The adjustments made to the incomefrom continuing operations before income taxes and extraordinary items of suchentities directly correlate to the adjustments to net income in calculatingAdjusted EBITDA on a consolidated basis pursuant to the senior secured creditagreement.

 

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

 

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**Management’sUses**

 

We use Adjusted EBITDA ona consolidated basis to assess our operating performance. We believe thisfinancial measure on a consolidated basis is helpful in highlighting trends inour overall business because the items excluded in calculating Adjusted EBITDA have little or no bearing on our day-to-day operating performance.It is also the most significant criterion in our calculation ofperformance-based cash bonuses and our determination of whether certainperformance-based stock options vest, both of which are tied to Adjusted EBITDAtargets.

 

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated basis is important in analyzing ourliquidity because our senior secured credit agreement and indentures governingthe 2011 Notes and 2014 Notes contain financial covenants that are determinedbased on Adjusted EBITDA. These covenants are material terms of theseagreements, which are material because they govern substantially all of ourlong-term debt, which in turn represents a substantial portion of our capitalization.Non-compliance with these financial covenants under our senior secured creditfacilities—our maximum total leverage ratio and our minimum interest coverageratio, in particular—could result in the lenders requiring us to immediatelyrepay all amounts borrowed. Any such acceleration could also lead to thenoteholders accelerating the maturity of the 2011 Notes and the 2014 Notes. Inaddition, if we cannot satisfy these financial covenants in the indenturesgoverning the 2011 Notes and 2014 Notes, we cannot engage in certainactivities, such as incurring additional indebtedness or making certainpayments. Consequently, Adjusted EBITDA is critical to our assessment of ourliquidity.

 

We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker to evaluate the ongoing performance of our business segments andreporting units. On a segment basis, we define Adjusted EBITDA as operatingincome excluding depreciation and amortization, certain non-cash gains andcharges, certain other special gains and charges determined by our seniormanagement to be non-recurring gains and charges and certain items deemed byour senior management to have little or no bearing on the day-to-day operatingperformance of our business segments and reporting units. The adjustments madeto operating income directly correlate with the adjustments to net income incalculating Adjusted EBITDA on a consolidated basis pursuant to the seniorsecured credit agreement.

 

**Limitations**

 

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

 

•                  thecash portion of interest expense, net, income tax (benefit) provision, andrestructuring as well as non-recurring charges related to securities issuance,acquisition activities, and systems/organization establishment, generallyrepresent charges (gains) which may significantly affect funds available to usein our operating, investing and financing activities;

 

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

 

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

 

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

 

Adjusted EBITDA is not analternative to net (loss) income or operating income or cash flows fromoperating activities as calculated and presented in accordance with U.S. GAAP.You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAPfinancial measures. We strongly urge you to review the reconciliations ofAdjusted EBITDA to GAAP financial measures and other financial information, ineach case included elsewhere in this report. We also strongly urge you not torely on any single financial measure to evaluate our business.

 

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**Resultsof Operations**

 

**ActualResults of Operations**

 

Thefollowing table presents the major components of our operations on an actualbasis and Adjusted EBITDA (the reconciliation to net income is set forth in—Reconciliation of Pro Forma Net Income (Loss) to Pro Forma Adjusted EBITDA forthe Three Months Ended and Six Months June 30, 2004), including as apercentage of net sales, for the periods presented. See Note 3 to ourunaudited condensed financial statements included in Item 1, FinancialStatements (Unaudited), for segment information and reconciliation toconsolidated net income.

 

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| ** **                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(dollars in millions)**                      | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statement  of operations data:**             |       |                            |       |                          |       |   |   |   |   |
| **Net  sales:**                                |       |                            |       |                          |       |   |   |   |   |
| Performance  Additives                         |       | $                               | 190.1      |                          | $          | 173.2 |   | $ | 349.6 |   | $ | 312.3 |   |
| Specialty Compounds                            |       | 62.1                            |       | 52.5                          |       | 120.2 |   | 100.4 |   |
| Electronics                                    |       | 44.9                            |       | 41.2                          |       | 87.7 |   | 81.6 |   |
| Specialty  Chemicals                           |       | 219.7                           |       | —                        |       | 439.7 |   | — |   |
| Titanium Dioxide  Pigments                     |       | 109.2                           |       | —                        |       | 213.7 |   | — |   |
| Advanced  Ceramics                             |       | 96.4                            |       | —                        |       | 188.3 |   | — |   |
| Groupe Novasep                                 |       | 95.0                            |       | —                        |       | 187.9 |   | — |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Total net sales                                |       | 817.4                           |       | 266.9                         |       | 1,587.1 |   | 494.3 |   |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Gross profit                                   |       | 263.0                           |       | 78.6                          |       | 488.6 |   | 141.0 |   |
|                                           |       | 32.2                            | %          | 29.4                          | %          | 30.8 | % | 28.5 | % |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Selling, general  and administrative expenses  |       | 157.5                           |       | 35.9                          |       | 307.7 |   | 71.1 |   |
|                                           |       | 19.3                            | %          | 13.5                          | %          | 19.4 | % | 14.4 | % |
| Restructuring  charges                         |       | 2.9                             |       | —                        |       | 5.8 |   | — |   |
| **Operating  income (loss):**                  |       |                            |       |                          |       |   |   |   |   |
| Performance  Additives                         |       | 37.0                            |       | 39.7                          |       | 60.0 |   | 64.6 |   |
|                                           |       | 19.5                            | %          | 22.9                          | %          | 17.2 | % | 20.7 | % |
| Specialty  Compounds                           |       | 5.9                             |       | 6.8                           |       | 11.8 |   | 12.2 |   |
|                                           |       | 9.5                             | %          | 13.0                          | %          | 9.8 | % | 12.2 | % |
| Electronics                                    |       | 1.8                             |       | 2.1                           |       | 2.5 |   | 3.7 |   |
|                                           |       | 4.0                             | %          | 5.1                           | %          | 2.9 | % | 4.5 | % |
| Specialty  Chemicals                           |       | 36.5                            |       | —                        |       | 67.3 |   | — |   |
|                                           |       | 16.6                            | %          |                          |       | 15.3 | % |   |   |
| Titanium Dioxide  Pigments                     |       | 12.6                            |       | —                        |       | 24.3 |   | — |   |
|                                           |       | 11.5                            | %          |                          |       | 11.4 | % |   |   |
| Advanced  Ceramics                             |       | 16.8                            |       | —                        |       | 30.7 |   | — |   |
|                                           |       | 17.4                            | %          |                          |       | 16.3 | % |   |   |
| Groupe Novasep                                 |       | 3.4                             |       | —                        |       | 1.9 |   | — |   |
|                                           |       | 3.6                             | %          |                          |       | 1.0 | % |   |   |
| Corporate costs                                |       | (11.4                           | )          | (5.9                          | )          | (23.4 | ) | (10.6 | ) |
|                                           |       |                            |       |                          |       |   |   |   |   |
| Total operating  income                        |       | 102.6                           |       | 42.7                          |       | 175.1 |   | 69.9 |   |
|                                           |       | 12.6                            | %          | 16.0                          | %          | 11.0 | % | 14.1 | % |
| **Other  (expense) income:**                   |       |                            |       |                          |       |   |   |   |   |
| Interest  expense, net                         |       | (55.7                           | )          | (12.5                         | )          | (103.9 | ) | (29.1 | ) |
| Foreign exchange  gain (loss), net             |       | 58.6                            |       | (3.6                          | )          | 100.5 |   | 8.6 |   |
| Other, net                                     |       | —                          |       | (4.0                          | )          | — |   | (4.0 | ) |
| **Income  before taxes and minority interest** |       | 105.5                           |       | 22.6                          |       | 171.7 |   | 45.4 |   |
| Income tax  provision                          |       | 16.8                            |       | 11.8                          |       | 41.7 |   | 19.6 |   |
| Net income  before minority interest           |       | 88.7                            |       | 10.8                          |       | 130.0 |   | 25.8 |   |
| Minority  interest                             |       | 0.9                             |       | —                        |       | 1.7 |   | — |   |
| Net income                                     |       | $                               | 89.6       |                          | $          | 10.8 |   | $ | 131.7 |   | $ | 25.8 |   |
| **Adjusted  EBITDA:**                          |       |                            |       |                          |       |   |   |   |   |
| Performance  Additives                         |       | $                               | 47.2       |                          | $          | 46.6 |   | $ | 81.4 |   | $ | 78.7 |   |
|                                           |       | 24.8                            | %          | 26.9                          | %          | 23.3 | % | 25.2 | % |
| Specialty  Compounds                           |       | 7.4                             |       | 8.2                           |       | 14.7 |   | 15.0 |   |
|                                           |       | 11.9                            | %          | 15.6                          | %          | 12.2 | % | 14.9 | % |
| Electronics                                    |       | 7.0                             |       | 7.4                           |       | 12.8 |   | 14.0 |   |
|                                           |       | 15.6                            | %          | 18.0                          | %          | 14.6 | % | 17.2 | % |
| Specialty  Chemicals                           |       | 49.4                            |       | —                        |       | 92.4 |   | — |   |
|                                           |       | 22.5                            | %          |                          |       | 21.0 | % |   |   |
| Titanium Dioxide  Pigments                     |       | 22.1                            |       | —                        |       | 43.0 |   | — |   |
|                                           |       | 20.2                            | %          |                          |       | 20.1 | % |   |   |
| Advanced  Ceramics                             |       | 24.1                            |       | —                        |       | 45.5 |   | — |   |
|                                           |       | 25.0                            | %          |                          |       | 24.2 | % |   |   |
| Groupe Novasep                                 |       | 12.8                            |       | —                        |       | 23.0 |   | — |   |
|                                           |       | 13.5                            | %          |                          |       | 12.2 | % |   |   |
| Corporate costs                                |       | (9.5                            | )          | (4.1                          | )          | (19.1 | ) | (8.5 | ) |
| Total Adjusted  EBITDA                         |       | $                               | 160.5      |                          | $          | 58.1 |   | $ | 293.7 |   | $ | 99.2 |   |

 

35

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| ** **                                        | ** ** | **Change:Three  Months ended June 30, 2005 versus 2004** | ** ** | **Change:Six  Months ended June 30, 2005 versus 2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **(dollars in millions)**                         | ** ** | **Total**                                                     | ** ** | **%****Change**                                             | ** ** | **FX****Effect  (1)** | ** ** | **Acquisitions****Divestitures****net (2)** | ** ** | **Organic** | ** ** | **Total** | ** ** | **%****Change** | ** ** | **FX****Effect  (1)** | ** ** | **Acquisitions****Divestitures****net (2)** | ** ** | **Organic** | ** ** |
| **Statement  of operations data:**                |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  sales:**                                   |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                            |       | $                                                             | 16.9       |                                                        | 9.8        | % | $ | 1.8 |   | $ | 16.4 |   | $ | (1.3 | ) | $ | 37.3 |   | 11.9 | % | $ | 3.8 |   | $ | 32.7 |   | $ | 0.8 |   |
| Specialty  Compounds                              |       | 9.6                                                           |       | 18.3                                                        |       | 0.8 |   | — |   | 8.8 |   | 19.8 |   | 19.7 |   | 1.5 |   | — |   | 18.3 |   |
| Electronics                                       |       | 3.7                                                           |       | 9.0                                                         |       | 1.1 |   | — |   | 2.6 |   | 6.1 |   | 7.5 |   | 2.4 |   | — |   | 3.7 |   |
| Specialty  Chemicals                              |       | 219.7                                                         |       |                                                        |       | — |   | 219.7 |   | — |   | 439.7 |   |   |   | — |   | 439.7 |   | — |   |
| Titanium Dioxide  Pigments                        |       | 109.2                                                         |       |                                                        |       | — |   | 109.2 |   | — |   | 213.7 |   |   |   | — |   | 213.7 |   | — |   |
| Advanced Ceramics                                 |       | 96.4                                                          |       |                                                        |       | — |   | 96.4 |   | — |   | 188.3 |   |   |   | — |   | 188.3 |   | — |   |
| Groupe Novasep                                    |       | 95.0                                                          |       |                                                        |       | — |   | 95.0 |   | — |   | 187.9 |   |   |   | — |   | 187.9 |   | — |   |
| Total net sales                                   |       | 550.5                                                         |       | 206.3                                                       |       | 3.7 |   | 536.7 |   | 10.1 |   | 1,092.8 |   | 221.1 |   | 7.7 |   | 1,062.3 |   | 22.8 |   |
|                                              |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gross  profit**                                 |       | 184.4                                                         |       | 234.6                                                       |       | 0.9 |   | 190.3 |   | (6.8 | ) | 347.6 |   | 246.5 |   | 1.8 |   | 351.0 |   | (5.2 | ) |
|                                              |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Selling,  general and administrative expenses** |       | 121.6                                                         |       | 338.7                                                       |       | 0.5 |   | 115.0 |   | 6.1 |   | 236.6 |   | 332.8 |   | 1.3 |   | 223.7 |   | 11.6 |   |
| **Restructuring  charges**                        |       | 2.9                                                           |       |                                                        |       | — |   | — |   | 2.9 |   | 5.8 |   |   |   | — |   | — |   | 5.8 |   |
| **Total  operating expenses**                     |       | 124.5                                                         |       | 346.8                                                       |       | 0.5 |   | 115.0 |   | 9.0 |   | 242.4 |   | 340.9 |   | 1.3 |   | 223.7 |   | 17.4 |   |
|                                              |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating  income (loss) :**                    |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                            |       | (2.7                                                          | )          | (6.8                                                        | )          | 0.4 |   | 1.3 |   | (4.4 | ) | (4.6 | ) | (7.1 | ) | 0.7 |   | 2.6 |   | (7.9 | ) |
| Specialty  Compounds                              |       | (0.9                                                          | )          | (13.2                                                       | )          | — |   | — |   | (0.9 | ) | (0.4 | ) | (3.3 | ) | 0.1 |   | — |   | (0.5 | ) |
| Electronics                                       |       | (0.3                                                          | )          | (14.3                                                       | )          | — |   | — |   | (0.3 | ) | (1.2 | ) | (32.4 | ) | (0.2 | ) | — |   | (1.0 | ) |
| Specialty  Chemicals                              |       | 36.5                                                          |       |                                                        |       | — |   | 36.5 |   | — |   | 67.3 |   |   |   | — |   | 67.3 |   | — |   |
| Titanium Dioxide  Pigments                        |       | 12.6                                                          |       |                                                        |       | — |   | 12.6 |   | — |   | 24.3 |   |   |   | — |   | 24.3 |   | — |   |
| Advanced Ceramics                                 |       | 16.8                                                          |       |                                                        |       | — |   | 16.8 |   | — |   | 30.7 |   |   |   | — |   | 30.7 |   | — |   |
| Groupe Novasep                                    |       | 3.4                                                           |       |                                                        |       | — |   | 3.4 |   | — |   | 1.9 |   |   |   | — |   | 1.9 |   | — |   |
| Corporate costs                                   |       | (5.5                                                          | )          | 93.2                                                        |       | — |   |   |   | (5.5 | ) | (12.8 | ) | 120.8 |   | (0.1 | ) | — |   | (12.7 | ) |
| Total                                             |       | 59.9                                                          |       | 140.3                                                       |       | 0.4 |   | 70.6 |   | (11.1 | ) | 105.2 |   | 150.5 |   | 0.5 |   | 126.8 |   | (22.1 | ) |
|                                              |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other  income (expenses):**                     |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  expense,net                             |       | (43.2                                                         | )          | 345.6                                                       |       | 0.4 |   | — |   | (43.6 | ) | (74.8 | ) | 257.0 |   | (5.6 | ) | — |   | (69.2 | ) |
| Foreign exchange  gain, net                       |       | 62.2                                                          |       |                                                        |       |   |   |   |   |   |   | 91.9 |   |   |   |   |   |   |   |   |   |
| Other, net                                        |       | 4.0                                                           |       |                                                        |       |   |   |   |   |   |   | 4.0 |   |   |   |   |   |   |   |   |   |
| **Income  before taxes and minority interest**    |       | 82.9                                                          |       |                                                        |       |   |   |   |   |   |   | 126.3 |   |   |   |   |   |   |   |   |   |
|                                              |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax  provision                             |       | 5.0                                                           |       |                                                        |       |   |   |   |   |   |   | 22.1 |   |   |   |   |   |   |   |   |   |
| Net income before  minority interest              |       | 77.9                                                          |       |                                                        |       |   |   |   |   |   |   | 104.2 |   |   |   |   |   |   |   |   |   |
| Minority interest                                 |       | 0.9                                                           |       |                                                        |       |   |   |   |   |   |   | 1.7 |   |   |   |   |   |   |   |   |   |
| **Net  income (loss):**                           |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                            |       | (0.1                                                          | )          |                                                        |       |   |   |   |   |   |   | 0.4 |   |   |   |   |   |   |   |   |   |
| Specialty  Compounds                              |       | (1.3                                                          | )          |                                                        |       |   |   |   |   |   |   | 0.3 |   |   |   |   |   |   |   |   |   |
| Electronics                                       |       | 0.3                                                           |       |                                                        |       |   |   |   |   |   |   | 0.2 |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                              |       | 28.5                                                          |       |                                                        |       |   |   |   |   |   |   | 35.4 |   |   |   |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                        |       | 1.7                                                           |       |                                                        |       |   |   |   |   |   |   | 3.6 |   |   |   |   |   |   |   |   |   |
| Advanced Ceramics                                 |       | 4.7                                                           |       |                                                        |       |   |   |   |   |   |   | 7.5 |   |   |   |   |   |   |   |   |   |
| Groupe Novasep                                    |       | (3.3                                                          | )          |                                                        |       |   |   |   |   |   |   | (6.4 | ) |   |   |   |   |   |   |   |   |
| Corporate costs                                   |       | 48.3                                                          |       |                                                        |       |   |   |   |   |   |   | 64.9 |   |   |   |   |   |   |   |   |   |
| Total                                             |       | $                                                             | 78.8       |                                                        |       |   |   |   |   |   |   |   | $ | 105.9 |   |   |   |   |   |   |   |   |   |
|                                              |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                             |       |                                                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives                            |       | $                                                             | 0.6        |                                                        | 1.3        |   | $ | 0.6 |   | $ | 1.7 |   | $ | (1.7 | ) | $ | 2.7 |   | 3.4 |   | $ | 1.1 |   | $ | 3.9 |   | $ | (2.3 | ) |
| Specialty  Compounds                              |       | (0.8                                                          | )          | (9.8                                                        | )          | 0.1 |   | — |   | (0.9 | ) | (0.3 | ) | (2.0 | ) | 0.2 |   | — |   | (0.5 | ) |
| Electronics                                       |       | (0.4                                                          | )          | (5.4                                                        | )          | 0.1 |   | — |   | (0.5 | ) | (1.2 | ) | (8.6 | ) | — |   | — |   | (1.2 | ) |
| Specialty  Chemicals                              |       | 49.4                                                          |       |                                                        |       | — |   | 49.4 |   | — |   | 92.4 |   |   |   | — |   | 92.4 |   | — |   |
| Titanium Dioxide  Pigments                        |       | 22.1                                                          |       |                                                        |       | — |   | 22.1 |   | — |   | 43.0 |   |   |   | — |   | 43.0 |   | — |   |
| Advanced Ceramics                                 |       | 24.1                                                          |       |                                                        |       | — |   | 24.1 |   | — |   | 45.5 |   |   |   | — |   | 45.5 |   | — |   |
| Groupe Novasep                                    |       | 12.8                                                          |       |                                                        |       | — |   | 12.8 |   | — |   | 23.0 |   |   |   | — |   | 23.0 |   | — |   |
| Corporate costs                                   |       | (5.4                                                          | )          | 131.7                                                       |       | (0.2 | ) | — |   | (5.2 | ) | (10.6 | ) | 124.7 |   | (0.2 | ) | — |   | (10.4 | ) |
| Total                                             |       | $                                                             | 102.4      |                                                        | 176.2      | % | $ | 0.6 |   | $ | 110.1 |   | $ | (8.3 | ) | $ | 194.5 |   | 196.1 | % | $ | 1.1 |   | $ | 207.8 |   | $ | (14.4 | ) |

 

----

*(1)*Theforeign exchange effect was calculated based on the change in the euro to U.S.dollar exchange rate for the applicable period.

*(2)*Theacquisition effect represents the current year inclusion of three and sixmonths of operations for the segments acquired as part of the Dynamit NobelAcquisition as well as other acquisitions consummated in 2004.

 

***Three months endedJune 30, 2005 compared with three months ended June 30, 2004***

 

**Overview**

 

Net sales increased $550.5 million primarily as a result of theacquisitions ($536.7 million) and currency changes. The remaining sales improvementof $10.1 million or 3.8 % was primarily in the Specialty Compounds andElectronics segments (aggregating $11.4 million) due to the impact of higherselling prices ($4.9 million in Specialty Compounds) to offset higher rawmaterial costs, and volume increases in the Specialty Compounds and Electronicssegments.

 

36

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Gross profit increased $184.4 million primarily as a result ofacquisitions ($190.3 million) and currency changes ($0.9 million).  The remaining decrease of $6.8 million wasprimarily due to raw material cost increases of $10.6 million, as well ashigher manufacturing costs ($2.3 million), partially offset by the salesincreases discussed above.

 

Operating income increased $59.9 million with $70.6 million due toacquisitions and $0.4 million due to currency changes. The remaining decreaseof $11.1 million was due primarily to $4.5 million of higher central costs tooperate the significantly larger business due to the acquisitions, $4.4 millionin Performance Additives due to higher raw material costs, as well asrestructuring and other special charges.

 

Adjusted EBITDA increased $102.4 million due to the effect ofacquisitions ($110.1 million) offset in part primarily by higher corporatecosts.

 

##### **Netsales**

 

*Performance Additives.*    Netsales for our Performance Additives segment increased $16.9 million primarilydue to acquisitions ($16.4 million) and currency changes.  The remaining decrease was due to lower salesvolumes.

 

*Specialty Compounds.*    Netsales for our Specialty Compounds segment increased  $9.6 million or 18.3 % over the prior yearincluding the impact of higher selling prices ($4.9 million) to offset higherraw material costs. The remaining increase was primarily due to stronger salesvolume in our wire and cable compounds business.

 

*Electronics.*    Netsales for our Electronics segment increased $3.7 million over the prior yearperiod with $1.1 million due to currency changes. The remaining increaseoccurred primarily due to increases in sales volumes, offset in part by $0.6million in selling price declines.

 

##### **Grossprofit**

 

Gross profit increased $184.4 million due to acquisitions ($190.3million) and currency changes ($0.9 million). The remaining net decline of $6.8 million in gross profit was primarilydue to higher raw material costs of $10.6 million, including $5.7 million inthe Specialty Compounds segment due to PVC resin and another key raw materialcost increases and $5.8 million in the Performance Additives segment primarilydue to higher copper costs in the Timber Treatment Chemicals business,partially offset by the sales improvement noted above.

 

Gross profit as a percentage of net sales was 32.2 % in the secondquarter of 2005 versus 29.4 % in the second quarter of 2004 due to theinclusion of the Dynamit Nobel businesses which have a higher average grossmargin percentage than the historical Rockwood businesses (offset by higherselling, general and administrative expenses as a percentage of net sales inthe Dynamit Nobel businesses versus the historical Rockwood businesses), andoffset in part by the impact of the higher raw material costs.

 

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

 

Selling, general and administrative expenses, or SG&A, increased$121.6 million primarily due to the acquisitions ($115.0 million) and currencychanges ($0.5 million). The remaining increase of $6.1 million was dueprimarily to special charges, primarily related to the integration of theDynamit Nobel Acquisition and costs for initial compliance with Sarbanes-Oxleyas well as higher central costs to operate the significantly larger businessresulting from the acquisitions as discussed above.

 

SG&A expenses as a percentage of net sales were 19.3 % in thesecond quarter of 2005 as compared to 13.5 % for the second quarter of 2004,primarily due to the inclusion of the Dynamit Nobel businesses which havehigher weighted average SG&A expenses as a percentage of net sales than thehistorical Rockwood businesses.

 

##### **Restructuringcharges**

 

We recorded $2.9 million of restructuring charges in the second quarterof 2005 primarily in the Electronics segment relating to the wafer reclaimrestructuring.

 

##### **Operatingincome**

 

*Performance Additives.*   Operatingincome decreased  $2.7 million despitethe favorable impact of acquisitions due to $0.7 million of restructuringcharges with the balance primarily due to the higher raw material costsdescribed above.

 

37

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*Specialty Compounds.*    Operatingincome decreased $0.9 million primarily due to the increase in net sales offsetby the higher PVC and raw material costs discussed above.

 

*Electronics.*    Operatingincome decreased  $0.3 millionprimarily due to lower selling prices ($0.6 million) and increased manufacturingcosts ($1.1 million), offset in part by higher sales volume.

 

*Corporate.*    Operatingloss at Corporate increased $5.5 million primarily due to the specialcharges and higher central costs discussed in “SG&A” above.

 

**Other income (expenses)**

 

*Interest expense, net.*   Forthe second quarter of 2005, interest expense, net, increased $43.2 million. Thesecond quarter of 2005 and 2004 included a loss of $1.4 million and a gainof $6.3 million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments as wellas $2.2 million and $0.4 million, respectively, of amortization expense relatedto deferred financing costs. The remaining increase of $33.7 million wasprimarily due to higher debt levels from the Acquisitions.

 

*Foreign exchange gain.*   Inthe second quarter of 2005, the foreign exchange gains increased by $62.2million reflecting the non-cash currency impact on our euro-denominated debtdue to the weaker euro as of June 30, 2005 versus March 31, 2005.

 

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

 

The effective income tax rate for the second quarter of 2005 and 2004was 15.9 % and 52.2%, respectively. The effective tax rate in the secondquarter of 2005 was favorably impacted by the reversal of $22.7 million ofvaluation allowances related to U.S. federal income generated. The effectivetax rate in both periods was impacted by the recording of valuation allowancesin certain other jurisdictions as well as the impact of foreign tax ratedifferentials.

 

##### **Minorityinterest**

 

Minority interest represents the minority interest portion of theGroupe Novasep segment net income/(loss).

 

##### **Netincome**

 

Net income for the second quarter of 2005 was $89.6 million as comparedto net income of $10.8 million for the second quarter of 2004 for the reasonsdescribed above.

 

##### **AdjustedEBITDA**

 

*Performance Additives.*    AdjustedEBITDA for our Performance Additives segment increased 1.3% due to acquisitionsand currency changes, partially offset by the reasons stated above.

 

*Specialty Compounds.*    AdjustedEBITDA for our Specialty Compounds segment decreased 9.8% primarily due tohigher raw material costs, partially offset by higher selling prices describedabove.

 

*Electronics.*    AdjustedEBITDA for our Electronics segment decreased from $7.4 million to $7.0 millionor (5.4%) primarily due to the lower selling prices and higher manufacturingcosts.

 

*Corporate.*    AdjustedEBITDA loss at Corporate increased from $4.1 million to $9.5 million due tohigher central costs to operate the significantly larger business due to theDynamit Nobel Acquisition.

 

***Six months endedJune 30, 2005 compared with six months ended June 30, 2004***

 

##### **Overview**

 

Net sales increased $1,092.8 million primarily as a result of theacquisitions ($1,062.3 million) and $7.7 million due to currency changes. Theremaining sales improvement of $22.8 million or 4.6 % was primarily in theSpecialty Compounds segments ($18.3 million) due to the impact of higherselling prices ($9.1 million) to offset higher raw material costs, and volumeincreases.

 

Gross profit increased $347.6 million primarily as a result of theacquisitions discussed above ($351.0 million) and $1.8 million due to

 

38

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currency changes.  The remainingdecrease was due to raw material cost increases of $18.9 million, as well ashigher manufacturing costs ($2.7 million) offset by sales prices increases of$16.8 million.

 

Operating income increased $105.2 million with $126.8 million due toacquisitions and $0.5 million due to currency changes. The remaining decreaseof $22.1 million was due primarily to $10.3 million of higher central costs tooperate the significantly larger business due to the acquisitions, $7.9 millionin Performance Additives due to higher raw material costs, as well asrestructuring and other special charges.

 

Adjusted EBITDA increased $194.5 million due to the effect ofacquisitions ($207.8 million) offset primarily by higher corporate costs ($10.4million).

 

##### **Netsales**

 

*Performance Additives.*    Netsales for our Performance Additives segment increased $37.3 million over theprior year period primarily due to acquisitions as well as currency changes.

 

*Specialty Compounds.*    Netsales for our Specialty Compounds segment increased $19.8 million or 19.7 %over the prior year period including the impact of higher selling prices ($9.1million) to offset higher raw material costs. The remaining increase wasprimarily due to stronger sales volume in our wire and cable compoundsbusiness.

 

*Electronics.*    Netsales for our Electronics segment increased $6.1 million over the prior yearperiod with $2.4 million due to currency changes. Despite $1.4 million of pricedeclines from continued pricing pressures in the wafer reclaim business, aremaining increase of  $3.7 million or4.5% occurred primarily due to increases in sales volumes.

 

##### **Grossprofit**

 

Gross profit increased $347.6 million primarily due to acquisitions($351.0 million) and $1.8 million due to currency changes.  The remaining $5.2 million net decline ingross profit occurred as the remaining sales improvement above was offsetprimarily by higher raw material costs of $18.9 million (including $10.4million in the Specialty Compounds segment due to PVC resin and ammoniumoctamolybdate (AOM) cost increases and $9.3 million in the PerformanceAdditives segment primarily due to higher copper costs in the Timber TreatmentChemicals business) as well as by higher manufacturing costs.

 

Gross profit as a percentage of net sales was 30.8% for the first sixmonths of 2005 versus 28.5% for the first six months of 2004 due to theinclusion of the Dynamit Nobel businesses which have a higher average grossmargin percentage than the historical Rockwood businesses (offset by higherselling, general and administrative expenses as a percentage of net sales inthe Dynamit Nobel businesses versus the historical Rockwood businesses), andoffset in part by the impact of the higher raw material costs.

 

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

 

Selling, general and administrative expenses, or SG&A, increased$236.6 million primarily due to the acquisitions ($223.7 million), as well as$1.3 million due to currency changes. The remaining increase of $11.6 millionwas due primarily to higher central costs to operate the significantly largerbusiness resulting from the acquisitions as discussed above, higher specialcharges including CCA litigation ($1.5 million) and systems/organizationestablishment expenses ($1.9 million) primarily related to initial documentationand compliance with Sarbanes-Oxley.

 

SG&A expenses as a percentage of net sales were 19.4% for the firstsix months of 2005 as compared to 14.4 % for the first six months of 2004,primarily due to the inclusion of the Dynamit Nobel businesses which have higherweighted average SG&A expenses as a percentage of net sales than thehistorical Rockwood businesses.

 

##### **Restructuringcharges**

 

We recorded $5.8 million of restructuring charges in the first half of2005 for miscellaneous restructuring actions, primarily in the Electronicssegment relating to the wafer reclaim restructuring and previously announcedrestructuring in the Performance Additives and Specialty Chemicals segments.

 

##### **Operatingincome**

 

*Performance Additives.*   Operatingincome decreased $4.6 million due to $3.2 million of restructuring charges withthe balance primarily due to the higher raw material costs described above,partially offset by the $2.6 million favorable impact of acquisitions.

 

39

----

 

*Specialty Compounds.*    Operatingincome decreased $0.4 million primarily due to higher PVC and AOM raw materialcosts partially offset by the increase in net sales discussed above.

 

*Electronics.*    Operatingincome decreased  $1.2 millionprimarily due to lower selling prices ($1.4 million) and higher manufacturingcosts of $1.7 million, partially offset by increased sales volumes.

 

*Corporate.*    Operatingloss at Corporate increased $12.8 million primarily due to the specialcharges and higher central costs discussed in “SG&A” above.

 

**Other income (expenses)**

 

*Interest expense, net.*   Forthe first six months of 2005, interest expense, net, increased $74.8 million.The first six months of 2005 and 2004 included a gain of $6.2 millionand  $8.6 million, respectively,representing the movement in the mark-to-market valuation of our interest rateand cross-currency hedging instruments as well as $4.7 million and$0.9 million, respectively, of amortization expense related to deferredfinancing costs. The remaining increase of $68.6 million was primarily dueto higher debt levels from the Acquisitions.

 

*Foreign exchange gain.*   Inthe first six months of 2005, the foreign exchange gains increased by $91.9million reflecting the non-cash currency impact on our euro-denominated debtdue to the weaker euro as of June 30, 2005 versus December 31, 2004.

 

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

 

The effective income tax rate for the first half of 2005 and 2004 was24.3% and 43.2%, respectively. The effective tax rate in the six months endedJune 30, 2005 was favorably impacted by the reversal of $27.8 million ofvaluation allowances related to US federal income generated. The effective taxrate in both periods was impacted by the recording of valuation allowances incertain other jurisdictions, as well as by the impact of foreign tax ratedifferentials.

 

##### **Minorityinterest**

 

Minority interest income represents the minority interest portion ofthe Groupe Novasep segment net income (loss).

 

##### **Netincome**

 

Net income for the first six months of 2005 was $131.7 million ascompared to net income of $25.8 million for the first six months of 2004 forthe reasons described above.

 

##### **AdjustedEBITDA**

 

*Performance Additives.*    AdjustedEBITDA for our Performance Additives segment increased from $78.7 millionto $81.4 million, or 3.4 %, primarily due to a $3.9 million impact fromacquisitions and $1.1 million from currency changes.  The remaining decrease was primarily due tohigher raw material costs discussed above.

 

*Specialty Compounds.*    AdjustedEBITDA for our Specialty Compounds segment decreased from  $15.0 millionto $14.7 million or 2.0% primarily due to higher raw material prices,partially offset by higher selling prices described above.

 

*Electronics.*    AdjustedEBITDA for our Electronics segment decreased from  $14.0 million to $12.8 million or (8.6%) primarily due to $1.4 million in selling pricedecreases and higher manufacturing costs, partially offset by higher salesvolumes.

 

*Corporate.*    AdjustedEBITDA loss at Corporate increased from  $8.5 million to  $19.1million due to higher central costs to operate the significantly largerbusiness due to the Dynamit Nobel Acquisition.

 

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

 

Because we view Adjusted EBITDA on both a consolidated basis and segmentbasis as an operating performance measure, we use net income as the mostcomparable U.S. GAAP measure. The following table, which sets forth theapplicable components of Adjusted EBITDA, presents a reconciliation of netincome to Adjusted EBITDA:

 

40

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| ** **                                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(millions)**                               | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                   |       | $                               | 89.6       |                          | $          | 10.8 |   | $ | 131.7 |   | $ | 25.8 |   |
| Income tax  provision                        |       | 16.8                            |       | 11.8                          |       | 41.7 |   | 19.6 |   |
| Interest, net  (1)                           |       | 55.7                            |       | 12.4                          |       | 103.9 |   | 29.1 |   |
| Depreciation and  amortization               |       | 52.0                            |       | 14.4                          |       | 105.2 |   | 28.1 |   |
| Restructuring  and related charges (2)       |       | 3.4                             |       | —                        |       | 6.3 |   | — |   |
| Inventory  write-up reversal                 |       | 0.3                             |       | —                        |       | 3.1 |   | — |   |
| CCA litigation  defense costs                |       | 1.1                             |       | —                        |       | 1.5 |   | — |   |
| Systems/organization  establishment expenses |       | 0.7                             |       | 1.0                           |       | 1.9 |   | 1.1 |   |
| Cancelled  acquisition and disposition costs |       | 0.4                             |       | 0.1                           |       | 0.6 |   | 0.1 |   |
| Foreign exchange  gain (loss)                |       | (58.6                           | )          | 3.6                           |       | (100.5 | ) | (8.6 | ) |
| Minority  interest                           |       | (0.9                            | )          | —                        |       | (1.7 | ) | — |   |
| Stamp duty tax                               |       | —                          |       | 4.0                           |       | — |   | 4.0 |   |
|                                         |       |                            |       |                          |       |   |   |   |   |
| Total Adjusted  EBITDA                       |       | $                               | 160.5      |                          | $          | 58.1 |   | $ | 293.7 |   | $ | 99.2 |   |

 

----

(1)   Includes a loss of $1.4 million and a gain of$6.3 million for the three months ended June 30, 2005 and 2004, respectively,and gains of $6.2 million and $8.6 million for the six months ended June 30,2005 and 2004, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments.

 

(2)   Includes inventory write-downs of $0.5million recorded in cost of products sold.

 

41

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##### **ProForma Net Sales, Net Income (Loss) and Adjusted EBITDA**

 

***Actual three monthsended June 30, 2005 compared with pro forma three months ended June 30, 2004and actual six months ended June 30, 2005 compared with pro forma six monthsJune 30, 2004***

*** ***
| ** **                 | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(millions)**             | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(Actual)**                     | ** ** | **(Pro Forma)**                | ** ** | **(Actual)** | ** ** | **(Pro Forma)** | ** ** |
|                       |       |                             |       |                           |       |   |   |   |   |
| **Net  sales:**            |       |                             |       |                           |       |   |   |   |   |
| Performance  Additives     |       | $                                | 190.1      |                           | $          | 190.0 |   | $ | 349.6 |   | $ | 345.0 |   |
| Specialty  Compounds       |       | 62.1                             |       | 52.5                           |       | 120.2 |   | 100.4 |   |
| Electronics                |       | 44.9                             |       | 41.2                           |       | 87.7 |   | 81.6 |   |
| Specialty  Chemicals       |       | 219.7                            |       | 188.8                          |       | 439.7 |   | 376.7 |   |
| Titanium Dioxide  Pigments |       | 109.2                            |       | 103.6                          |       | 213.7 |   | 212.8 |   |
| Advanced  Ceramics         |       | 96.4                             |       | 86.7                           |       | 188.3 |   | 173.2 |   |
| Groupe Novasep             |       | 95.0                             |       | 82.0                           |       | 187.9 |   | 154.3 |   |
|                       |       |                             |       |                           |       |   |   |   |   |
| Total                      |       | $                                | 817.4      |                           | $          | 744.8 |   | $ | 1,587.1 |   | $ | 1,444.0 |   |
|                       |       |                             |       |                           |       |   |   |   |   |
| **Net  Income (Loss):**    |       |                             |       |                           |       |   |   |   |   |
| Performance  Additives     |       | $                                | 21.4       |                           | $          | 21.4 |   | $ | 32.2 |   | $ | 32.5 |   |
| Specialty  Compounds       |       | 3.3                              |       | 4.3                            |       | 8.6 |   | 7.7 |   |
| Electronics                |       | 1.2                              |       | 0.7                            |       | 1.8 |   | 1.3 |   |
| Specialty  Chemicals       |       | 28.5                             |       | 11.7                           |       | 35.4 |   | 16.5 |   |
| Titanium Dioxide  Pigments |       | 1.7                              |       | 8.2                            |       | 3.6 |   | 10.8 |   |
| Advanced Ceramics          |       | 4.7                              |       | 11.5                           |       | 7.5 |   | 11.5 |   |
| Groupe Novasep             |       | (3.3                             | )          | 5.2                            |       | (6.4 | ) | 5.0 |   |
| Corporate                  |       | 32.1                             |       | (19.8                          | )          | 49.0 |   | (33.4 | ) |
|                       |       |                             |       |                           |       |   |   |   |   |
| Total                      |       | $                                | 89.6       |                           | $          | 43.2 |   | $ | 131.7 |   | $ | 51.9 |   |
|                       |       |                             |       |                           |       |   |   |   |   |
| **Adjusted  EBITDA:**      |       |                             |       |                           |       |   |   |   |   |
| Performance  Additives     |       | $                                | 47.2       |                           | $          | 48.6 |   | $ | 81.4 |   | $ | 83.2 |   |
| Specialty  Compounds       |       | 7.4                              |       | 8.2                            |       | 14.7 |   | 15.0 |   |
| Electronics                |       | 7.0                              |       | 7.4                            |       | 12.8 |   | 14.0 |   |
| Specialty  Chemicals       |       | 49.4                             |       | 34.3                           |       | 92.4 |   | 71.3 |   |
| Titanium Dioxide  Pigments |       | 22.1                             |       | 19.9                           |       | 43.0 |   | 40.3 |   |
| Advanced  Ceramics         |       | 24.1                             |       | 19.2                           |       | 45.5 |   | 38.6 |   |
| Groupe Novasep             |       | 12.8                             |       | 12.9                           |       | 23.0 |   | 26.2 |   |
| Corporate                  |       | (9.5                             | )          | (9.9                           | )          | (19.1 | ) | (19.5 | ) |
|                       |       |                             |       |                           |       |   |   |   |   |
| Total                      |       | $                                | 160.5      |                           | $          | 140.6 |   | $ | 293.7 |   | $ | 269.1 |   |

 

42

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| ** **                      | ** ** | **Change:  Pro Forma Three Months Ended June 30, 2005 vs. June 30, 2004** | ** ** | **Change:  Pro Forma Six Months Ended June 30, 2005 vs. June 30, 2004** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **(millions)**                  | ** ** | **Total  Change In $**                                                    | ** ** | **Total  Change in %**                                                  | ** ** | **Foreign  Exchange  Effect in $** | ** ** | **Organic  Change in in $** | ** ** | **Organic  Change  in %** | ** ** | **Total  Change In $** | ** ** | **Total  Change in %** | ** ** | **Foreign  Exchange  Effect in $** | ** ** | **Organic  Change in in $** | ** ** | **Organic  Change  in %** | ** ** |
|                            |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Pro  forma net sales:**       |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives          |       | $                                                                         | 0.1        |                                                                    | 0.1        | % | $ | 1.8 |   | $ | (1.7 | ) | (0.9 | )% | $ | 4.6 |   | 1.3 | % | $ | 3.8 |   | $ | 0.8 |   | 0.2 | % |
| Specialty  Compounds            |       | 9.6                                                                       |       | 18.3                                                                    |       | 0.8 |   | 8.8 |   | 16.8 |   | 19.8 |   | 19.7 |   | 1.5 |   | 18.3 |   | 18.2 |   |
| Electronics                     |       | 3.7                                                                       |       | 9.0                                                                     |       | 1.1 |   | 2.6 |   | 6.3 |   | 6.1 |   | 7.5 |   | 2.4 |   | 3.7 |   | 4.5 |   |
| Specialty  Chemicals            |       | 30.9                                                                      |       | 16.4                                                                    |       | 7.4 |   | 23.5 |   | 12.4 |   | 63.0 |   | 16.7 |   | 16.3 |   | 46.7 |   | 12.4 |   |
| Titanium Dioxide  Pigments      |       | 5.6                                                                       |       | 5.4                                                                     |       | 4.3 |   | 1.3 |   | 1.3 |   | 0.9 |   | 0.4 |   | 9.5 |   | (8.6 | ) | (4.0 | ) |
| Advanced Ceramics               |       | 9.7                                                                       |       | 11.2                                                                    |       | 3.4 |   | 6.3 |   | 7.3 |   | 15.1 |   | 8.7 |   | 7.7 |   | 7.4 |   | 4.3 |   |
| Groupe Novasep                  |       | 13.0                                                                      |       | 15.9                                                                    |       | 1.8 |   | 11.2 |   | 13.7 |   | 33.6 |   | 21.8 |   | 6.6 |   | 27.0 |   | 17.5 |   |
|                            |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                           |       | $                                                                         | 72.6       |                                                                    | 9.7        | % | $ | 20.6 |   | $ | 52.0 |   | 7.0 | % | $ | 143.1 |   | 9.9 | % | $ | 47.8 |   | $ | 95.3 |   | 6.6 | % |
|                            |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Pro  forma Net Income :**     |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives          |       | $                                                                         | —     |                                                                    | —     | % |   |   |   |   |   |   | $ | (0.3 | ) | (0.9 | )% |   |   |   |   |   |   |
| Specialty  Compounds            |       | (1.0                                                                      | )          | (23.3                                                                   | )          |   |   |   |   |   |   | 0.9 |   | 11.7 |   |   |   |   |   |   |   |
| Electronics                     |       | 0.5                                                                       |       | 71.4                                                                    |       |   |   |   |   |   |   | 0.5 |   | 38.5 |   |   |   |   |   |   |   |
| Specialty  Chemicals            |       | 16.8                                                                      |       | 143.6                                                                   |       |   |   |   |   |   |   | 18.9 |   | 114.5 |   |   |   |   |   |   |   |
| Titanium Dioxide  Pigments      |       | (6.5                                                                      | )          | (79.3                                                                   | )          |   |   |   |   |   |   | (7.2 | ) | (66.7 | ) |   |   |   |   |   |   |
| Advanced Ceramics               |       | (6.8                                                                      | )          | (59.1                                                                   | )          |   |   |   |   |   |   | (4.0 | ) | (34.8 | ) |   |   |   |   |   |   |
| Groupe Novasep                  |       | (8.5                                                                      | )          | (163.5                                                                  | )          |   |   |   |   |   |   | (11.4 | ) | (228.0 | ) |   |   |   |   |   |   |
| Corporate                       |       | 51.9                                                                      |       | 262.1                                                                   |       |   |   |   |   |   |   | 82.4 |   | 246.7 |   |   |   |   |   |   |   |
|                            |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                           |       | $                                                                         | 46.4       |                                                                    | 107.4      | % |   |   |   |   |   |   | $ | 79.8 |   | 153.8 | % |   |   |   |   |   |   |
|                            |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Pro  forma Adjusted EBITDA:** |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance  Additives          |       | $                                                                         | (1.4       | )                                                                       | (2.9       | )% | $ | 0.6 |   | $ | (2.0 | ) | (4.1 | )% | $ | (1.8 | ) | (2.2 | )% | $ | 1.1 |   | $ | (2.9 | ) | (3.5 | )% |
| Specialty  Compounds            |       | (0.8                                                                      | )          | (9.8                                                                    | )          | 0.1 |   | (0.9 | ) | (11.0 | ) | (0.3 | ) | (2.0 | ) | 0.2 |   | (0.5 | ) | (3.3 | ) |
| Electronics                     |       | (0.4                                                                      | )          | (5.4                                                                    | )          | 0.1 |   | (0.5 | ) | (6.8 | ) | (1.2 | ) | (8.6 | ) | — |   | (1.2 | ) | (8.6 | ) |
| Specialty  Chemicals            |       | 15.1                                                                      |       | 44.0                                                                    |       | 1.3 |   | 13.8 |   | 40.2 |   | 21.1 |   | 29.6 |   | 3.6 |   | 17.5 |   | 24.5 |   |
| Titanium Dioxide  Pigments      |       | 2.2                                                                       |       | 11.1                                                                    |       | 0.9 |   | 1.3 |   | 6.5 |   | 2.7 |   | 6.7 |   | 2.0 |   | 0.7 |   | 1.7 |   |
| Advanced Ceramics               |       | 4.9                                                                       |       | 25.5                                                                    |       | 0.8 |   | 4.1 |   | 21.4 |   | 6.9 |   | 17.9 |   | 2.0 |   | 4.9 |   | 12.7 |   |
| Groupe Novasep                  |       | (0.1                                                                      | )          | (0.8                                                                    | )          | 0.4 |   | (0.5 | ) | (3.9 | ) | (3.2 | ) | (12.2 | ) | 0.8 |   | (4.0 | ) | (15.3 | ) |
| Corporate                       |       | 0.4                                                                       |       | 4.0                                                                     |       | (1.0 | ) | 1.4 |   | 14.1 |   | 0.4 |   | 2.1 |   | (1.2 | ) | 1.6 |   | 8.2 |   |
|                            |       |                                                                      |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                           |       | $                                                                         | 19.9       |                                                                    | 14.2       | % | $ | 3.2 |   | $ | 16.7 |   | 11.9 | % | $ | 24.6 |   | 9.1 | % | $ | 8.5 |   | $ | 16.1 |   | 6.0 | % |

 

###### **Overview – Actual threemonths ended June 30, 2005 compared with pro forma three months ended June 30,2004**

 

Net sales increased $72.6 million on a pro forma basis with $20.6million due to currency changes. The remaining sales improvement of $52.0million or 7.0 % was primarily in the Specialty Chemicals segment, the AdvancedCeramics segment and the Specialty Compounds segment due to the impact ofhigher selling prices in each of the segments to offset higher raw materialcosts, and volume increases in the Specialty Compounds segment. Also, net salesfor our Groupe Novasep segment were favorably impacted by $13.0 millionprimarily due to acquisitions made by Groupe Novasep after the second quarterof 2004.

 

Adjusted EBITDA increased $19.9 million on a pro forma basis with$3.2 million due to currency changes. The remaining increase of $16.7 millionwas due to higher selling prices offset by higher raw material costs and lowerselling, general and administrative expenses incurred at the operatingsegments.

 

Net income on a pro forma basis increased by $46.4 million in thesecond quarter of 2005.

 

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

 

*Performance Additives.*  Netsales on a pro forma basis for our Performance Additives were flat, as currencychanges and selling price increases offset lower volume.

 

*Specialty Compounds.*    Netsales for our Specialty Compounds segment increased  $9.6 million or 18.3 % over the prior periodincluding the impact of higher selling prices ($4.9 million) to offset higherraw material costs. The remaining increase was primarily due to stronger salesvolume in our wire and cable compounds business.

 

*Electronics.*    Netsales for our Electronics segment increased $3.7 million over the prior yearperiod with $1.1 million due to currency changes. Despite $0.6 million of pricedeclines from continued pricing pressures in the wafer reclaim business, aremaining increase of $2.6 million or 6.3% occurred primarily due to increasesin sales volumes.

 

*Specialty Chemicals.*Net sales for our Specialty Chemicals segment increased $30.9 million on a proforma basis over the prior period, including $7.4 million related to currencychanges. The remaining increase of $23.5 million or 12.4 % was primarily due tohigher sales prices ($5.4 million) primarily in metal sulfide products realizeddue to the pass through of raw material cost increases and volume growth in theSurface Treatment businesses.

 

*Titanium Dioxide**Pigments*. Net sales for our Titanium Dioxide Pigments segment increased on a proforma basis versus the prior year period, primarily due to favorable currencychanges.

 

43

----

 

*Advanced Ceramics.*Net sales for our Advanced Ceramics segment increased $9.7 million on a proforma basis over the prior year period, including $3.4 million related tocurrency changes. The remaining increase was primarily due to a better mix ofmedical products and Piezo applications.

 

*Groupe Novasep.*Net sales for our Groupe Novasep segment increased $13.0 million on a pro formabasis as compared to the prior year period. However, this increase primarilyrelated to Novasep acquisitions made after the second quarter of 2004.

 

**Pro Forma Net Income (Loss)**

 

Net income increased $46.4 million on a pro forma basis over the prioryear period primarily due to increases of $51.9 million in Corporate dueprimarily to foreign exchange gains resulting from the weakening of the euroduring the second quarter of 2005 and $16.8 million in the Specialty Chemicalssegment resulting primarily from the sales volume growth and favorable currencyeffects in the Surface Treatment business described above, partially offset bydecreases in other segments.

 

###### **Pro Forma Adjusted EBITDA**

 

*Performance Additives.*    AdjustedEBITDA on a pro forma basis for our Performance Additives segment decreasedfrom $48.6 million to $47.2 million despite $0.6 million of favorablecurrency changes. The remaining decrease of $2.0 million was primarily due tohigher raw material prices of $3.0 million partially offset by lower SG&Acosts.

 

*Specialty Compounds.*    AdjustedEBITDA for our Specialty Compounds segment decreased from  $8.2 millionto $7.4 million or  9.8% primarilydue to higher raw material prices of $5.7 million, partially offset by higherselling prices and stronger volume described above.

 

*Electronics.*    AdjustedEBITDA for our Electronics segment decreased from  $7.4 million to $7.0 million primarily due to selling price decreases.

 

*Specialty Chemicals.*Adjusted EBITDA for our Specialty Chemicals segment increased $15.1 million ona pro forma basis over the prior period, including $1.3 million related tocurrency changes. The remaining increase of $13.8 million was primarily due tovolume growth in the Surface Treatment businesses. Also, higher sales pricesprimarily in metal sulfide products were realized due to the pass through ofraw material cost increases.

 

*Titanium Dioxide**Pigments*. Adjusted EBITDA for our Titanium Dioxide Pigments segment increased $2.2million on a pro forma basis over the prior year period, with $0.9 million offavorable currency changes. The remaining increase of $1.3 million wasprimarily due to cost reduction measures.

 

*Advanced Ceramics.*Adjusted EBITDA for our Advanced Ceramics segment increased $4.9 million on apro forma basis over the prior year period, including $0.8 million related tocurrency changes. The remaining increase of $4.1 million is primarily due to abetter mix of medical products and Piezo applications.

 

*Groupe Novasep.*Adjusted EBITDA for our Groupe Novasep segment decreased $0.1 million on a proforma basis as compared to the prior year period despite $0.4 million relatedto favorable currency changes.  Theremaining decrease of $0.5 million in Adjusted EBITDA occurred, as theincreased sales discussed above did not yield a proportionate increase inAdjusted EBITDA as this higher sales level stemmed from lower margin business.In addition 2005 Adjusted EBITDA was impacted by losses on foreign currencyderivatives.

 

*Corporate.*    AdjustedEBITDA loss at Corporate decreased $0.4 million as higher central costs tooperate the significantly larger business due to the Dynamit Nobel Acquisitionwere offset by savings from headcount reductions at the former Dynamit Nobelcorporate headquarters.

 

###### **Overview – Actual sixmonths ended June 30, 2005 compared with pro forma six months ended June 30,2004**

 

Net sales increased $143.1 million on a pro forma basis with $47.8million due to currency changes. The remaining sales improvement of $95.3million or 6.6 % was primarily in the Specialty Chemicals segment, thePerformance Additives segment and the Specialty Compounds segment due to theimpact of higher selling prices in each of the segments to offset higher rawmaterial costs, and volume increases in the Specialty Compounds segment. Netsales for our Groupe Novasep segment were favorably impacted by $33.6 milliondue primarily to acquisitions made by Groupe Novasep after the second quarterof 2004. Titanium Dioxide Pigments sales were down due to weaker demand forsynthetic fiber caused by lower prices for cotton, which is a competing fiber.

 

Adjusted EBITDA increased $24.6 million on a pro forma basis with$8.5 million due to currency changes. The remaining increase of

 

44

----

 

$16.1 million was due to higher selling prices and by lower selling,general and administrative expenses incurred at the operating segments offsetby higher raw material costs.

 

Net income on a pro forma basis increased by $79.8 million for thefirst six months of 2005.

 

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

 

*Performance Additives.*  Netsales on a pro forma basis for our Performance Additives segment increased $4.6million with $3.8 million due to currency changes.  The remaining increase was $0.8 million or0.2 %.

 

*Specialty Compounds.*    Netsales for our Specialty Compounds segment increased  $19.8 million or 19.7 % over the prior periodincluding the impact of higher selling prices ($9.1 million) to offset higherraw material costs. The remaining increase was primarily due to stronger salesvolume in our wire and cable compounds business.

 

*Electronics.*    Netsales for our Electronics segment increased $6.1 million over the prior yearperiod with $2.4 million due to currency changes. The remaining increase of$3.7 million or 4.5 % occurred despite $1.4 million of continued pricing pressuresin the wafer reclaim business due to increases in sales volumes.

 

*Specialty Chemicals.*Net sales for our Specialty Chemicals segment increased $63.0 million on a proforma basis over the prior period, including $16.3 million related to currencychanges. The remaining increase of $46.7 million or 12.4 % was primarily due tohigher sales prices ($13.0 million) primarily in metal sulfide productsrealized due to the pass through of raw material cost increases and volumegrowth in the Surface Treatment businesses.

 

*TitaniumDioxide**Pigments*. Net sales for our Titanium Dioxide Pigments segment increasedslightly on a pro forma basis versus the prior year period, with favorablecurrency changes largely offset by weaker demand for synthetic fiber caused bylower prices for cotton, a competing fiber.

 

*Advanced Ceramics.*Net sales for our Advanced Ceramics segment increased $15.1 million on a proforma basis over the prior year period, including $7.7 million related tocurrency changes. The remaining increase of $7.4 million is primarily due to abetter mix of medical products and Piezo applications.

 

*Groupe Novasep.*Net sales for our Groupe Novasep segment increased $33.6 million on a pro formabasis as compared to the prior year period with $6.6 million related tocurrency changes.  The remaining increasewas primarily related to Novasep acquisitions made after the second quarter of2004.

 

**Pro Forma Net Income (Loss)**

 

Net income increased $79.8 million on a pro forma basis over the prioryear period primarily due to increases of $82.4 million in Corporate dueprimarily to foreign exchange gains resulting from the weakening of the euroduring the first six months of 2005 and $18.9 million in the SpecialtyChemicals segment resulting primarily from the sales volume growth andfavorable currency effects in the surface treatment business described above,partially offset by decreases in other segments.

 

###### **Pro Forma Adjusted EBITDA**

 

*Performance Additives.*    AdjustedEBITDA on a pro forma basis for our Performance Additives segment decreasedfrom $83.2 million to $81.4 million despite $1.1 million of favorablecurrency changes. The remaining decrease of $2.9 million was primarily due tothe impact of higher raw material prices.

 

*Specialty Compounds.*    AdjustedEBITDA for our Specialty Compounds segment decreased from  $15.0 millionto $14.7 million or 2.0 % primarily due to higher raw material prices of$10.4 million, partially offset by higher selling prices of $9.1 million andstronger sales volume described above.

 

*Electronics.*    AdjustedEBITDA for our Electronics segment decreased from  $14.0 million to $12.8 million or 8.6 % primarily due to $1.4 million in selling pricedecreases.

 

*Specialty Chemicals.*Adjusted EBITDA for our Specialty Chemicals segment increased $21.1 million ona pro forma basis over the prior period, including $3.6 million related tocurrency changes. The remaining increase of $17.5 million was primarily due tovolume growth in the Surface Treatment businesses. Also, higher sales pricesprimarily in metal sulfide products were realized due to the pass through ofraw material cost increases.

 

45

----

 

*TitaniumDioxide**Pigments*. Adjusted EBITDA for our Titanium Dioxide Pigments segmentincreased $2.7 million on a pro forma basis over the prior year period, with$2.0 million of favorable currency changes. The remaining increase of  $0.7 million was due to cost reductionmeasures partially offset by soft demand for synthetic fiber used in clothingcaused by lower prices for cotton, a competing fiber.

 

*Advanced Ceramics.*Adjusted EBITDA for our Advanced Ceramics segment increased $6.9 million on apro forma basis over the prior year period, including $2.0 million related tocurrency changes. The remaining increase of $4.9 million is primarily due to abetter mix of medical products and Piezo applications.

 

*Groupe Novasep.*Adjusted EBITDA for our Groupe Novasep segment decreased $3.2 million on a proforma basis as compared to the prior year period despite $0.8 million relatedto favorable currency changes.  Theremaining decrease of  $4.0 million wasprimarily due to continued capacity utilization issues at the Rohner plantwhile higher sales at the remaining facilities did not yield a proportionateincrease in Adjusted EBITDA as the higher sales level stemmed from lower marginbusiness.  In addition, 2005 AdjustedEBITDA was impacted by losses on foreign currency derivatives.

 

*Corporate.*    AdjustedEBITDA loss at Corporate decreased $0.4 million as higher central costs tooperate the significantly larger business due to the Dynamit Nobel Acquisitionwere offset by savings from headcount reductions at the former Dynamit Nobelcorporate headquarters.

*** ***

***Reconciliation of ProForma Net Income (Loss) to Pro Forma Adjusted EBITDA***

 

Because we view Adjusted EBITDA on both a consolidated and segmentbasis as an operating performance measure, we use net income (loss) as the mostcomparable U.S. GAAP measure. The following table, which sets forth theapplicable components of Adjusted EBITDA, presents a reconciliation of proforma net income (loss) to pro forma Adjusted EBITDA on a consolidated andsegment basis for the three months and six months ended June 30, 2004:

 
| **(in millions)**                             | ** ** | **Performance  Additives** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Specialty  Chemicals** | ** ** | **Titanium  Dioxide** | ** ** | **Advanced  Ceramics** | ** ** | **Group  Novasep** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------|------------|--------------------------|------------|-----------------------|------------|------------------------|------------|--------------------|------------|---------------|------------|------------------|------------|
| **Three  months ended June 30, 2004**         |       |                       |       |                     |       |            |       |                     |       |                  |       |                   |       |               |       |          |       |             |       |
| Net income (loss)                             |       | $                          | 21.4       |                     | $          | 4.3             |       | $                        | 0.7        |                  | $          | 11.7                   |       | $                  | 8.2        |          | $          | 11.5             |       | $ | 5.2 |   | $ | (19.8 | ) | $ | 43.2 |   |
|                                          |       |                       |       |                     |       |            |       |                     |       |                  |       |                   |       |               |       |          |       |             |       |
| Income tax  provision (benefit)               |       | 11.0                       |       | 2.1                      |       | 0.1             |       | 3.4                      |       | (2.3                  | )          | (5.9                   | )          | (0.9               | )          | (13.8         | )          | (6.3             | )          |
| Interest expense,  net                        |       | 7.5                        |       | (0.2                     | )          | 1.6             |       | 10.5                     |       | 6.9                   |       | 7.2                    |       | 2.3                |       | 14.9          |       | 50.7             |       |
| Depreciation and  amortization                |       | 8.5                        |       | 2.0                      |       | 5.2             |       | 9.6                      |       | 7.1                   |       | 6.4                    |       | 6.1                |       | 0.2           |       | 45.1             |       |
| Restructuring and  related charges            |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | —                 |       | 0.2                |       | —        |       | 0.2              |       |
| Systems  /organization establishment expenses |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | —                 |       | —             |       | 1.0           |       | 1.0              |       |
| Cancelled  acquisition and disposal costs     |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | —                 |       | —             |       | 0.1           |       | 0.1              |       |
| Stamp duty tax                                |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | —                 |       | —             |       | 4.0           |       | 4.0              |       |
| Foreign exchange  gain                        |       | 0.2                        |       | —                   |       | (0.2            | )          | (0.9                     | )          | —                |       | —                 |       | —             |       | 3.5           |       | 2.6              |       |
|                                          |       |                       |       |                     |       |            |       |                     |       |                  |       |                   |       |               |       |          |       |             |       |
| Total Adjusted  EBITDA                        |       | $                          | 48.6       |                     | $          | 8.2             |       | $                        | 7.4        |                  | $          | 34.3                   |       | $                  | 19.9       |          | $          | 19.2             |       | $ | 12.9 |   | $ | (9.9 | ) | $ | 140.6 |   |
|                                          |       |                       |       |                     |       |            |       |                     |       |                  |       |                   |       |               |       |          |       |             |       |
| **Six  months ended June 30, 2004**           |       |                       |       |                     |       |            |       |                     |       |                  |       |                   |       |               |       |          |       |             |       |
| Net income (loss)                             |       | $                          | 32.5       |                     | $          | 7.7             |       | $                        | 1.3        |                  | $          | 16.5                   |       | $                  | 10.8       |          | $          | 11.5             |       | $ | 5.0 |   | $ | (33.4 | ) | $ | 51.9 |   |
|                                          |       |                       |       |                     |       |            |       |                     |       |                  |       |                   |       |               |       |          |       |             |       |
| Income tax  provision (benefit)               |       | 19.8                       |       | 3.7                      |       | 1.0             |       | 14.3                     |       | 0.7                   |       | (1.4                   | )          | 3.6                |       | (16.8         | )          | 24.9             |       |
| Interest expense,  net                        |       | 15.0                       |       | (0.3                     | )          | 3.3             |       | 22.5                     |       | 14.6                  |       | 15.4                   |       | 5.0                |       | 30.0          |       | 105.5            |       |
| Depreciation and  amortization                |       | 17.1                       |       | 3.9                      |       | 10.4            |       | 19.1                     |       | 14.2                  |       | 12.8                   |       | 12.1               |       | 0.5           |       | 90.1             |       |
| Restructuring and  related charges            |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | 0.1                    |       | 0.3                |       | —        |       | 0.4              |       |
| Systems  /organization establishment expenses |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | —                 |       | —             |       | 1.0           |       | 1.0              |       |
| Cancelled  acquisition and disposal costs     |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | —                 |       | —             |       | 0.1           |       | 0.1              |       |
| Stamp duty tax                                |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | —                 |       | —             |       | 4.0           |       | 4.0              |       |
| Foreign exchange  gain                        |       | (1.2                       | )          | —                   |       | (2.0            | )          | (1.1                     | )          | —                |       | —                 |       | —             |       | (5.4          | )          | (9.7             | )          |
| Other                                         |       | —                     |       | —                   |       | —          |       | —                   |       | —                |       | 0.2                    |       | 0.2                |       | 0.5           |       | 0.9              |       |
|                                          |       |                       |       |                     |       |            |       |                     |       |                  |       |                   |       |               |       |          |       |             |       |
| Total Adjusted  EBITDA                        |       | $                          | 83.2       |                     | $          | 15.0            |       | $                        | 14.0       |                  | $          | 71.3                   |       | $                  | 40.3       |          | $          | 38.6             |       | $ | 26.2 |   | $ | (19.5 | ) | $ | 269.1 |   |

 

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**Liquidity and Capital Resources**

 

**Cash Flows**

 

*Unless otherwise noted, all amountsbelow which are denominated in currencies other than the U.S. dollar areconverted at June 30, 2005 exchange rates.*

 

*Operating Activities.*    Netcash provided by operating activities was $63.1 million and $44.7 millionfor the six months ended June 30, 2005 and 2004, respectively. Net cash fromoperating activities increased in 2005 from higher Adjusted EBITDA offset by anincrease in working capital primarily due to the inclusion of the businessesacquired in the 2004 acquisitions and the impact of seasonality on some of ourbusinesses.

 

*Investing Activities.*    Netcash used in investing activities was $76.6 million and $13.3 million forthe six months ended June 30, 2005 and 2004, respectively. Investing activitiesprimarily represented capital expenditures, which increased due mostly to theDynamit Nobel Acquisition.

 

*Financing Activities.*    Netcash used in financing activities was $15.6 million and $4.5 million forthe six months ended June 30, 2005 and 2004, respectively, which representedscheduled payments for long-term debt.

 

**Liquidity**

 

Our primary source of liquidity has been and will continue to be cashgenerated from operations. Our primary liquidity requirements are workingcapital, debt service, capital expenditures and acquisitions. Our debt servicerequirements and other contractual obligations and commitments over the nextseveral years are significant and are substantially higher than historicalamounts. We believe that our currently available sources of liquidity will besufficient for these needs. Furthermore, any future major acquisitions,business combinations or similar transactions will likely require additionalcapital resources. If our present operating performance and current marketconditions continue, we believe that such resources will be available to us forsmall transactions. We would need access to alternative sources of liquidityfor larger acquisitions such as through additional borrowings, equity issuancesor other sources. We may not have access to these sources of cash for a varietyof reasons.

 

We believe that based on current and anticipated levels of operationsand conditions in our industry and markets, cash flows from operations andborrowings available under our revolving credit facility will be adequate for2005 and the foreseeable future to make required payments of principal andinterest on our debt and fund our working capital and capital expenditurerequirements. We are taking actions to reduce overhead and excess orunprofitable manufacturing capacity, in part to improve our long-termliquidity.   As noted in Item 2 — Management’s Discussionand Analysis of Financial Condition and Results of Operations — General sectionabove, we are also applying the same initiatives used after the KKR Acquisition- reducing net working capital as a percentage of net sales through improvedsystems and manager incentives as well as implementation of stringent controlsto help ensure that maintenance capital expenditures are appropriate and thatexpansion capital expenditures are in line with both capacity and marketdemands. We expect this to further improve our short and long-termliquidity.  If our cash flow fromoperations and borrowings under our revolving credit facility were to beinsufficient to fund our currently existing liquidity requirements, we may beforced to use other means available to us, such as reduce or delay capitalexpenditures and seek additional capital. We may not have adequate capital forworking capital, future acquisitions, business combinations or similartransactions.

 

As of June 30, 2005, we had actual total indebtedness of$2,962.3 million.

 

*Senior secured credit facilities.*    Thesenior secured credit facilities, as amended, consist of:

 

•                  tranche A-1 termloans in an aggregate principal amount of €39.1 million (or approximately$47.4 million) and tranche A-2 term loans in an aggregate principal amountof €170.4 million (or approximately $206.3 million), each maturing onJuly 30, 2011 and bearing interest at Group’s option of either(i) Adjusted LIBOR plus 2.50% or (ii) ABR plus 1.25%;

 

•                  tranche C termloans in an aggregate principal amount of €274.8 million (or approximately$332.7 million) maturing on July 30, 2012 and bearing interest ofAdjusted LIBOR plus 3.00%;

 

•                  tranche D termloans in an aggregate principal amount of $1,145.0 million maturing onJuly 30, 2012 and bearing interest at Group’s option of either(i) Adjusted LIBOR plus 2.25% or (ii) ABR plus 1.00%; and

 

•                  a revolvingcredit facility in an aggregate principal amount of $250.0 millionmaturing on July 30, 2010, bearing interest at Group’s option of either(i) Adjusted LIBOR plus 2.50% or (ii) ABR plus 1.25%. As of June 30,2005 we had no amounts outstanding under this facility but had borrowingsoutstanding of $20.0 million as of August 2, 2005. In addition we haveoutstanding letters of credit of $18.9 million that reduce our availabilityunder the credit facility.

 

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The U.S. dollar equivalents of term loans denominated in euros areshown based on the exchange rate on June 30, 2005 of €1.00=$1.2106. In eachcase, the interest rates per year (other than under the tranche C term loanfacility) are subject to step-downs determined by reference to a performancetest. Adjusted LIBOR is the London inter-bank offered rate adjusted forstatutory reserves. ABR is the alternate base rate, which is the highest ofCredit Suisse First Boston’s prime rate and the federal funds effective rateplus 1/2 of 1%. Tranche A-1 and A-2 term loans are payable in January and Julyof each year at escalating percentages of the original principal amount.Tranche C and tranche D term loans are payable in January and July of each yearat amounts equal to 0.5% of the original principal balance, with the remainderdue at the final maturity date.

 

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

 

In addition to the financial covenants described below under “—CovenantCompliance,” the Company’s senior secured credit facilities contain variousaffirmative and restrictive covenants. The restrictive covenants limit ourability to, among other things, incur indebtedness and other liabilities;create liens; merge or consolidate; dispose of assets; make investments; paydividends and make payments to shareholders; make payments on certainindebtedness or to amend documents related to certain indebtedness and to enterinto sale leaseback transactions.

 

*2011 Notes and 2014 Notes.*    TheCompany’s 2011 Notes have an aggregate principal amount of $375.0 million,and mature on May 15, 2011 and the 2014 Notes have an aggregate principalamount of €375.0 million ($454.0 million) in the case of the euroNotes and $200.0 million in the case of the dollar notes, and mature onNovember 15, 2014. Interest on both the 2011 Notes and 2014 Notes ispayable semi-annually on May 15 and November 15. Interest on the 2011Notes accrues at the rate of 10.625% per year, and interest on the 2014 notesaccrues at the rate of 7.625% in the case of euro Notes and 7.500% in the caseof dollar Notes. Certain of our domestic subsidiaries guarantee the 2011 Notesand 2014 Notes on a senior subordinated unsecured basis.

 

The Company’s 2011 Notes and 2014 Notes contain various affirmative andrestrictive covenants. The restrictive covenants limit our ability, and theability of our restricted subsidiaries, to, among other things, incur orguarantee additional indebtedness (as described below under “—CovenantCompliance”); pay dividends or make other equity distributions or repurchasecapital stock (as described below under “—Covenant Compliance”); makeinvestments or other restricted payments (as described below under “—CovenantCompliance”); create liens; transfer or sell assets; restrict dividends orother payments to us; engage in transactions with affiliates; and merge orconsolidate with other companies or sell substantially all of our assets.

 

In connection with the expected initial public offering of the commonstock of Rockwood Holdings, we expect to redeem $131.3 million or 35% of the2011 Notes and pay a redemption premium of $14.0 million and accrued and unpaidinterest. As a result of the redemption, we anticipate  $13.9 million in annual interest expensesavings.

 

*Covenant compliance.*    Inaddition to the affirmative and restrictive covenants, the Company’s seniorsecured credit agreement contains the following financial covenants that aredetermined based on our Adjusted EBITDA:

 

•                  a maximum totalleverage ratio: for the twelve-month period ended June 30, 2005, net debt toAdjusted EBITDA must be less than 6.75 to 1.

 

•                  a minimuminterest coverage ratio: for the twelve-month period ended June 30, 2005,Adjusted EBITDA to cash interest expense (interest expense, net excludingdeferred debt issuance cost amortization and the movements in themark-to-market value of our interest rate and cross-currency interest ratederivatives) must be at least 1.70 to 1.

 

These covenants are material terms of the senior secured credit agreement.Non-compliance with these covenants could result in a default under the seniorsecured credit agreement and the lenders could elect to declare all amountsborrowed immediately due and payable. Any such acceleration would also resultin a default under the indentures governing the 2011 Notes and the 2014 Notes, whichcould lead to the noteholders electing to declare the principal, premium, ifany, and interest on the then outstanding notes immediately due and payable.

 

The indentures governing the 2011 Notes and 2014 Notes prohibit us fromincurring additional debt, subject to certain permitted incurrences, unless thefixed charge coverage ratio, which is the ratio of Adjusted EBITDA (as definedtherein excluding certain adjustments permitted under the senior secured creditagreement) to fixed charges (as defined therein), for the most recently endedfour fiscal quarters is at least 2.00 to 1. In addition, the indenturesprohibit us from making restricted payments (such as dividends or other equity distributions,repurchases of capital stock or restricted investments), subject to certainpermitted payments, unless, among other things, the fixed charge coverage ratiofor the most recently ended four fiscal quarters is at least 2.00 to 1.  These covenants are material terms of theindentures governing the 2011 Notes and 2014 Notes.

 

We were in compliance with all of the above covenants as of June 30,2005 and December 31, 2004.

 

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

 
| ** **                                                                                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **(millions)**                                                                                                         | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                                                                                                   |       |                          |       |   |   |
| Net cash  provided by operating activities                                                                             |       | $                             | 63.1       |   | $ | 44.7 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 95.6                          |       | 6.2 |   |
| Current portion  of income tax provision                                                                               |       | 20.6                          |       | 7.6 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 105.4                         |       | 36.8 |   |
| Restructuring  and related charges                                                                                     |       | 5.8                           |       | — |   |
| CCA litigation  defense costs                                                                                          |       | 1.5                           |       | — |   |
| Systems/organization  establishment expenses                                                                           |       | 1.9                           |       | 1.0 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.6                           |       | 0.1 |   |
| Stamp duty tax                                                                                                         |       | —                        |       | 4.0 |   |
| Foreign currency  gain                                                                                                 |       | —                        |       | (0.3 | ) |
| Bad debt  provision                                                                                                    |       | (0.8                          | )          | (0.9 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                             | 293.7      |   | $ | 99.2 |   |

 

*Assumed debt.*   Certainof our subsidiaries acquired in the Dynamit Nobel Acquisition are borrowersunder ten euro-denominated term loan facilities that provide aggregateoutstanding borrowings of approximately €25.6 million ($30.9 million) asof June 30, 2005.  These term loansmature between 2006 and 2010 and bear annual interest rates ranging between1.00% and 4.25% or EURIBOR plus 1.45% or LIBOR plus 0.39%.  In addition, certain of our subsidiariesacquired in the Dynamit Nobel Acquisition are borrowers under eight term loanfacilities denominated in other foreign currencies, including Swiss Francs,Taiwanese Dollars, Chinese Renminbi and Japanese Yen, providing for borrowingsof an aggregate U.S. dollar equivalent amount of approximately $41.3 millionas of June 30, 2005. These term loans mature between 2005 and 2011 and bearannual interest rates ranging between 2.22% and 5.64%. The term loan facilitiesdescribed above contain customary events of default and some of them aresecured by mortgages or accounts receivables.

 

Additionally, Groupe Novasep (including subsidiaries) has threetranches of bank debt at the Novasep parent level totaling €13.0 million($15.7 million) and $10.8 million ($26.5 million in total), each with a maturity date of 2010 andinterest rates of EURIBOR plus 1.75% in the case of two of the tranches, andLIBOR plus 1.75% for the remaining tranche. In addition, there is bank debt atthe Novasep subsidiary level totaling €5.9 million ($7.2 million)with maturity dates ranging from 2006 to 2010 and interest rates ranging fromEURIBOR plus 0.7% to EURIBOR plus 1.25%. The remaining amount of assumed debtof €11.0 million ($13.3 million) consists primarily of capital leaseswith maturity dates ranging from 2006 to 2013.

 

“Assumed debt” includes certain capitalized lease obligations, a fullrecourse receivables factoring arrangement and subsidiary preferred stock inaddition to the long-term debt described in the preceding two paragraphs.

 

***CapitalExpenditures***

 

For the six months ended June 30, 2005 and 2004, our capitalexpenditures, excluding capital leases, amounted to $76.8 million and $13.3million, respectively. The capital expenditures of Rockwood and Dynamit Nobelhave averaged $61.0 million and $108.7 million, respectively per yearover the last three years. Rockwood’s capital expenditures consisted primarilyof replacements of worn, obsolete or damaged equipment as well as investmentsin new equipment, mostly for our Color Pigments and Services and TimberTreatment Chemicals business lines of our Performance Additives segment. Inaddition, Rockwood also made a significant investment in a new facility toexpand capacity across our business lines including expenditures made in connectionwith the expansion of our ACQ production capabilities in our Timber TreatmentChemicals business line. Also, we are currently expanding our medical productsproduction in our Advanced Ceramics segment through a new facility in Germany.In addition to maintenance capital expenditures, Dynamit Nobel’s growth capitalexpenditures consisted of expansion of current Good Manufacturing Practiceproduction lines and new equipment relating to multi-column chromatography inour Groupe Novasep segment, expansion of our titanium dioxide capacity for ourTitanium Dioxide Pigments segment and capacity expansion for our AdvancedCeramics segment.

 

We intend to apply our capital discipline and stringent controls toreduce our future capital expenditures as compared to historical levels for theacquired businesses of Dynamit Nobel. Our annual capital expenditures willincrease in amount, but we do not believe

 

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they will change significantly from current levels in proportion to thesize of the combined entity or as a percentage of net sales.

 

***Foreign currencyrelated transactions***

 

As of June 30, 2005, $1,168.6 million of the debt outstanding isdenominated in euros.

 

***Management andtransaction fees***

 

KKR and DLJ Merchant Banking III, Inc. provide us with consultingand management advisory services for an aggregate annual fee of $2.1 million,increasing 5% annually.  In connectionwith the expected initial public offering of the common stock of RockwoodHoldings, the affiliates of KKR and DLJMB have agreed to terminate themanagement services agreement effective upon the closing of such offering foran aggregate consideration of $10.0 million.

 

***Commitments andContingencies***

 

*Legal Matters*

 

We are involved in various legal proceedings, including commercial,intellectual property, product liability 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 5, *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. Although we expect tocontinue to pay legal fees in connection with certain legal actions related tochromated copper arsenate and other product liability matters, based oncurrently available facts, we do not believe that these actions will have amaterial effect on the financial condition, results of operations or liquidityof the Company. In accordance with our policy, reserves in connection with suchproduct liability matters do not individually exceed $350,000 and in theaggregate $1.5 million. Our reserve estimates are based on availablefacts, including damage claims and input from our internal and external legalcounsel, past experience, and, in some instances where defense costs are beingpaid by our insurers, insurance coverage. We are unable to estimate the amountor range of any potential incremental charges should facts and circumstanceschange and may in the future revise our estimates based on new informationbecoming available. In addition, we do not believe that there is any otherindividual legal proceeding that is likely to have a material adverse affect onour business or financial condition. However, we cannot predict the outcome ofany litigation or the potential for future litigation.

 

*Indemnities*

 

Under the terms of the business and share sale and purchase agreement,the deed of tax covenant and the environmental deed entered into in connectionwith the KKR acquisition, Degussa UK Holdings Ltd., or Degussa, assuccessor to Laporte, plc, or Laporte, is required to indemnify us for certainlegal, tax and environmental liabilities and obligations that relate to theperiod prior to the closing of the KKR acquisition. In addition, under the saleand purchase agreement entered into in connection with the Dynamit NobelAcquisition, mg technologies ag and MG North America Holdings Inc. arerequired to indemnify us for certain legal, tax and environmental liabilitiesand obligations that relate to the period prior to the closing of the DynamitNobel Acquisition.  Pursuant to theseagreements, we have made various claims for indemnification with Degussa, mgtechnologies ag and MG North America Holdings, Inc. In the opinion ofmanagement, and based upon information currently available, we do not expectthe ultimate resolution of any of these claims to have a material effect on ourfinancial condition or results of operations.

 

## ***Safety, Healthand Environmental Matters***

 

***General***

 

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

 

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***Safety, Health and Environmental Systems***

 

We are committed to achieving and maintainingcompliance with all applicable safety, health and environmental (“SHE”) legalrequirements, and the Company’s subsidiaries have developed policies andmanagement systems that are intended to identify the SHE legal requirementsapplicable to the operations, enhance compliance with such requirements, ensurethe safety of the Company’s employees, contractors, community neighbors andcustomers and minimize the production and emission of wastes and otherpollutants. Although SHE legal requirements are constantly changing and areoften difficult to comply with, these SHE management systems are designed toassist the Company in meeting our compliance goals and minimizing overall risk.

 

***Regulatory Developments***

 

In October 2003, the European Commission adopted a proposal for a newEuropean Union framework for chemicals known as the Registration, Evaluationand Authorization of Chemicals, or REACH. While it is uncertain as to whether,when and in what form REACH will be finalized and become law, REACH mayeventually significantly expand the European Union’s regulation of chemicals.As currently proposed, REACH would include requirements that certainmanufacturers and importers of chemicals register those chemicals, performhealth and environmental risk analyses of those chemicals, and in certaininstances, obtain authorizations for the use of the chemicals. As a specialtychemicals company, it is possible that we are the only manufacturer of one ormore substances to be regulated under REACH and thus could potentially bear thefull cost of compliance with REACH for some or all of the Company’s products.The Company estimates it has over 400 products that might be subject to REACH.

 

Under the European Union Integrated Pollution Prevention and ControlDirective (“IPPC”), European Union member governments are to adopt rules andimplement a cross-media (air, water and waste) environmental permitting programfor individual facilities. While the EU countries are at varying stages intheir respective implementation of the IPPC permit program, we submitted allnecessary IPPC permit applications required to date, and in some cases receivedcompleted permits from the applicable government agency.****We expect to submit all other IPPCapplications and related documents on a timely basis as the various countriesimplement the IPPC permit program. Although it is not known with certainty whateach IPPC permit will require, we believe, based upon our experience with thepermits received to date, that the costs of compliance with the IPPC permitprogram will not be material to our results of operations, financial positionor liquidity.

 

*SHECapital Expenditures*

 

We may incur future costs for capital improvements and generalcompliance under SHE laws. For the year December 31, 2004, the capitalexpenditures for SHE matters totaled approximately $23.9 million, excludingcosts to maintain and repair pollution control equipment. For 2005 and 2006, weestimate capital expenditures for compliance with SHE laws to be at similarlevels; however, because capital expenditures for these matters are subject tochanges in existing and new SHE laws, we cannot provide assurance that ourrecent expenditures will be indicative of future amounts required to complywith these laws.

 

***Remediation Liabilities***

 

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

 

Environmental contamination is known to exist at certain of our presentand former facilities, including our facilities located in Turin, Italy, St.Fromond, St. Cheron and Sens, France; Hainhaussen, Troisdorf, Schlebusch,Stadeln, Duisburg, Plochingen, Marktredwitz, Ronnenberg-Empelde andLangelsheim, Germany; Oss, The Netherlands; Kidsgrove, and Barrow, U.K.;Boksburg East, South Africa; Pratteln, Switzerland and in the United States, inValdosta, Georgia, Beltsville, Maryland, Harrisburg, North Carolina, Laurens,South Carolina, Silver Peak, Nevada and La Mirada, California. Soilcontamination is also known to exist at our facilities at Freeport, Texas,Chasse-sur-Rhone, France and Sumperk in Czech Republic; however, no furtherregulatory remedial actions are currently required for these facilities and anyliabilities arising from such contamination is covered by indemnity obligationsor the previous owners of these facilities with the exception of Freeport. Weare currently operating groundwater remediation systems at ourHainhaussen,  Valdosta, and Silver Peakfacilities. We also operate ground water remediation systems at our Schlebusch,Plochingen, Marktredwitz, Stadeln, Troisdorf and Laurens facilities, for whichprior owners or insurers have assumed responsibility and a soil remediationproject at our facility in St. Cheron, and we continue to monitor groundwaterat the Beltsville facility, which was 

 

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previously the subject of a soil removal action. Groundwater is alsomonitored at the St. Fromond and Barrow facilities due to prior spills and atthe Harrisburg facility due to a landfill closure. We are also required to monitorgroundwater quality at our facilities at Mourenx, France and New Johnsonville,Tennessee. We believe that additional environmental studies, and possiblyenvironmental remediations, will be required at the Turin and Harrisburgfacilities. We are also in the process of determining appropriate remedialactions with the regulatory authorities at the following locations: Duisburg,Pratteln, Langelsheim, Troisdorf and La Mirada. Furthermore, as a result offacility closings, divestitures and offsite disposal activities such as aformer disposal site in Laurel, Maryland, we are responsible for the followingother matters: contamination beneath divested portions of the manufacturingfacility in Troisdorf; contamination at a closed Chemetall Oakite facility in Houston,Texas, contamination at a former Chemetall Foote facility in Sunbright,Virginia, contribution towards the clean-up of three industrial landfills inthe Basel, Switzerland area, groundwater remediation at Stadeln and formersites operated by   Dynamit Nobel’spreviously divested explosives business. We are also a *de minimis* participant in severalSuperfund matters.

 

Although we cannot provide assurances in this regard, we do not believethat these issues will have a material adverse effect on our business orfinancial condition, but we do believe these issues may have a material adverseimpact on the results of operations or cash flow in any given quarterly orannual reporting period. Nonetheless, the discovery of contamination arisingfrom present or historical industrial operations at some of our and ourpredecessor’s former and present properties and/or at sites we and ourpredecessor disposed wastes could expose us to cleanup obligations and otherdamages in the future.

 

# ***GovernmentEnforcement Proceedings and Civil Litigation***

 

During the course of the Company’s business, we may receive notices ofviolation, enforcement and other complaints from regulatory agencies allegingnon-compliance with applicable SHE laws. Currently, we are party to a consent order with the Metropolitan SewerDistrict (“MSD”) in Saint Louis, Missouri to reduce ammonia concentrations inwastewater discharge to a city treatment plant. The entry into the consent order resulted from violations of ourwastewater discharge permit. The order is presently stayed pending MSD’snegotiation of our own National Pollution Discharge Elimination System****permit with the State of Missouri.Although we may be required to make capital expenditures in connection withthis matter, it does not believe that this issue will have a material adverseeffect on our business or financial condition.

 

# ***EnvironmentalIndemnities***

 

Pursuant to the environmental deed entered into in connection with theKKR acquisition, Degussa, as successor to Laporte, is required to indemnify usand our subsidiaries for certain environmental matters that relate to thebusiness as conducted prior to the closing of the KKR acquisition. Theenvironmental deed provides that Degussa will indemnify us and our subsidiariesfor claims for which notice is given within a period of two years for breachesof representations and warranties, which expired in 2002, and five years forclaims related to the contamination of our and our subsidiaries’ properties(inclusive of contamination which leaks or escapes from our or our subsidiaries’properties), which expires in September 2005. These indemnity obligations aresubject to a minimum per matter loss of $0.2 million and are further subject toa $5.0 million deductible for the indemnity to be available. In addition,the environmental deed provides that Degussa will indemnify us and oursubsidiaries for claims relating to properties that were formerly owned,occupied or used as of November 20, 2000, as well as properties owned bythird parties (inclusive of disposal of waste and certain other identifiedissues prior to November 20, 2000). The environmental deed provides thatin this instance, Degussa will be responsible for reasonable costs and expensesincurred.

 

In addition, pursuant to the sale and purchase agreement entered intoin connection with the Dynamit Nobel Acquisition, mg technologies ag and itssubsidiary, MG North America Holdings Inc., are required to indemnify us andour subsidiaries for 50% of the excess amount of losses over the amount of therelated reserves (in the case of known claims) and 50% of claims (in the caseof unknown claims) related to the contamination of our properties, if notifiedwithin ten years. If mg technologies and MG North America Holdings’responsibility for contamination matters cannot be proven, a sliding scalereduces the percentage further for each year during the five-year period fromyear six to ten mg technologies and MG North America Holdings are alsoobligated to indemnify us for 85% of claims related to legacy site matters,such as environmental matters relating to properties or businesses owned oroperated by Dynamit Nobel prior to, but not on, the closing of Dynamit NobelAcquisition, if notified within ten years. In addition, mg technologies and MGNorth America Holdings are obligated to indemnify us for 50% of the excessamount of losses over the amount of the related reserves for operationalcompliance matters, if notified by December 31, 2006, and 50% of theexcess amount of losses over the amount of the related reserves (in the case ofknown claims) and 50% of claims (in the case of unknown claims) related tocertain environmental damage claims unknown at the time of the closing of theDynamit Nobel Acquisition, if notified within ten years. All of these indemnityobligations are subject to different minimum per-claim thresholds depending onwhether the matter was disclosed or not, and on the subject matter, rangingbetween €100,000 and €750,000 ($0.1 million and $0.9 million) depending on thetype of claim. The indemnity obligations are further subject to certaindeductibles, exclusions and limitations. Furthermore, mg technologies and MGNorth America Holdings are obligated to indemnify us for certain environmental

 

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risks arising from certain “shared site” structures for a duration often years. This indemnity obligation is not subject to the percentages, *de minimis* exclusions, deductibles andthresholds described above, and it is not subject to most of the generallimitations.

 

In the event we seek indemnity under any of these agreements or throughother means, there can be no assurance that mg technologies, MG North AmericaHoldings, Degussa or any other party who may have obligations to indemnify uswill adhere to their obligations and we may have to resort to legal action toenforce our rights under the indemnities. In addition, we may be required tomake indemnity payments in connection with certain environmental matters.However, we do not believe that resolution of the known environmental matterssubject to indemnification obligations owed to us or by us will have a materialadverse effect on our business or financial condition, but may have a materialadverse effect on the results of operations or cash flow in any given quarterlyor annual reporting period.

 

*EnvironmentalReserves*

 

We have established financial reserves relating to anticipatedenvironmental cleanup obligations, site reclamation and remediation and closurecosts. Liabilities are recorded when potential liabilities are either known orbelieved to be probable and can be reasonably estimated. Our liabilityestimates are based upon available facts, existing technology, past experienceand, in some instances where the remediation costs are being paid directly byour insurers, insurance recoveries, and are generated by several means,including State-mandated schedules, environmental consultants and internalexperts, depending on the circumstances. On a consolidated basis, we accrued approximately $48.1 million and$51.9 million for known environmental liabilities as of June 30, 2005 andDecember 31, 2004, respectively, all of which are classified as othernon-current liabilities on our consolidated balance sheets for such periods. Includedin the $48.1 million and $51.9 million as of June 30, 2005 and December 31,2004 is €6.5 million ($7.9 million using the exchange rate on June 30, 2005 of€1.00 = $1.2106) that is discounted using 5.0% discount rate (undiscountedamount equals $12.1 million), and €2.4 million ($2.9 million) that isdiscounted using 5.5% discount rate (undiscounted amount equals $4.6 million).In certain cases, our remediation liabilities are payable over periods of up to30 years.

 

We believe these accruals are adequate based on currently availableinformation. We may incur losses in excess of the amounts accrued; however,based on currently available information we do not believe the additionalamount of potential losses would have a material effect on the Company’s resultsof operations or cash flow in any given quarterly or annual reportingperiod.  We are unable to estimate theamount or range of any potential incremental charges should facts andcircumstances change and may in the future revise our estimates based on newinformation becoming available.

 

We are obligated to undertake soil remediation at twofacilities in Europe in the event manufacturing operations are discontinuedthere at some future date. We do not contemplate any such action occurring inthe foreseeable future, as these facilities’ remaining lives are indefinite.Given the indeterminate useful life of these facilities and the correspondingindeterminate settlement date of any soil remediation obligations we do nothave sufficient information to estimate a range of potential settlement datesfor the obligations. Consequently, we cannot employ a present value techniqueto estimate fair value and, accordingly, we have not accrued for any relatedcosts.

 

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

##### ** **

##### **Off-BalanceSheet Arrangements**

 

None.

 

**Critical Accounting Policies andEstimates**

 

 Ourdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with U.S. GAAP. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure ofcontingent assets and liabilities. These estimates include assessing, amongother things:

 

•              thefair values of assets acquired and liabilities assumed in businesscombinations;

 

•           the use andrecoverability of inventory;

 

•           the valuation ofdeferred tax assets;

 

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

 

•           the useful lives oftangible and intangible assets.

 

We evaluate our estimates on an ongoing basis, based on historicalexperience and various other assumptions that we believe to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

 

See Note 1—Description of Business and Summary of SignificantAccounting Policies to Rockwood’s unaudited condensed consolidated financialstatements included in Item 1—Financial Statements for a summary of our significantaccounting policies. We believe the following to be the most criticalaccounting policies and estimates affecting preparation of our consolidatedfinancial statements:

 

*Revenue Recognition.*    Werecognize revenue when the earnings process is complete. Product sales arerecognized when products are shipped to the customer in accordance with theterms of the contract of sale, title and risk of loss have been transferred andcollectibility is reasonably assured. We believe that we have adequate credit grantingprocedures in place and operating effectively so that collectibility isreasonably assured. We have a low incidence of uncollectible accounts.Additionally, credit insurance is purchased at times by certain of ourbusinesses, particularly in Europe, to protect against collection risk.Accruals are made for sales returns based on our experience and for otherallowances based on the terms of allowance programs put in place. Although webelieve that sufficient experience and history exists to make reasonableestimates as to such accruals and allowances, actual results can differdepending on market conditions.

 

*Impairment Accounting.*    Therecoverability of goodwill is reviewed on an annual basis during the fourthquarter. Additionally, the recoverability of goodwill, long-lived tangible, andcertain intangible assets is reviewed when events or changes in circumstancesoccur indicating that the carrying value of the assets may not be recoverable.

 

Initial goodwill impairment review begins with the estimate of fairvalue of each reporting unit generally based on an industry metric such as theratio of enterprise value (commonly defined as market capitalization, pluslong-term debt, less cash) to Adjusted EBITDA for the current year and thefollowing year budget. If potential impairment is identified, we may expand thereview to take into account expected future cash flows in subsequent years.Similarly, when we test for impairment of long-lived assets other than goodwillwe initially review the estimated future undiscounted cash flows to be derivedfrom the asset or asset group (collectively “asset”). If it appears that theasset is impaired based on undiscounted cash flows, the estimated fair value ofthe asset is calculated on a present value basis by multiplying the estimatedfuture annual cash flows of the asset by the then current enterprise valueratio (a discounted measure) or by a discount factor appropriate to the relatedreporting unit, in accordance with paragraph 23 of SFAS 144. An impairmentloss is recognized when the carrying value of the asset or goodwill exceeds thediscounted cash flow (or other measure of) fair value.

 

These calculations are based on inherent assumptions and estimatesabout future cash flows and appropriate benchmark peer companies or groups.Subsequent changes in these assumptions could result in future impairment.Although we consistently use the same methods in developing the assumptions andestimates underlying the fair value calculations, such estimates are uncertainby nature and can vary from actual results. For example, if the peer groupmultiples used in 2004 had been 10% lower, no additional goodwill impairmentwould have been recorded. However, if the peer group multiples used in 2003 hadbeen 10% lower, we might have had an additional goodwill impairment ofapproximately $8.0 million in one of our reporting units. As noted above,if we had discovered such a potential impairment we might have expanded thereview to prepare more detailed estimates of future cash flows in subsequentyears which might have resulted in a different impairment assessment.

 

We have not to date had circumstances occur that caused us to reviewthe values of individual long-lived assets for impairment. However, in 2004 and2003 we did review for impairment the assets of an entire reporting unit withinour Electronics segment. Had the calculation multiple in 2003 or the futurecash flow estimates in 2004 been 10% lower, we would have recorded anadditional impairment in this reporting unit of approximately $3.5 millionin 2003 and $1.1 million in 2004.

 

*Business Combinations –*Weaccount for business combinations using the purchase method of accounting asrequired by SFAS 141 *Business Combinations*.  Under the purchase method of accounting weare required to allocate the purchase price to the estimated fair value ofassets acquired and liabilities assumed. Examples of material estimates from our previous acquisitions are:

 

•                  The fair valuesof work-in-process and finished goods inventories are estimated based onselling price less selling profit.  Thecalculation of selling profit requires a judgment on the relative marginsderived from manufacturing vs. marketing efforts.

 

•                  The fair valueof property, plant and equipment can be estimated by a variety of methodstaking into account market values,

 

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replacement cost, and remaining useful life.  Although market value and replacement cost issometime readily obtainable, often this requires judgment, as does determiningthe estimated remaining useful life. When we believe that property, plant and equipment acquired will bematerial to our overall balance sheet, or that fair value might represent asignificant difference from the historical cost (net of accumulateddepreciation) of such assets, we have engaged an independent appraiser toprovide us with expert advice on such estimates, as we have done in our recentacquisitions and combinations of Dynamit Nobel and Groupe Novasep.  However, it is not uncommon for appraisers todiffer on the valuation of items (such as manufacturing equipment) where aready secondary market does not exist.

 

•                  The fair valueof identifiable intangible assets such as patents and other intellectualproperty, customer lists, and trademarks, can be estimated by discounted cashflow and return on royalties.  Theprocess utilized to identify intangible assets is consistent with therequirements of SFAS 141. When considered material, we have engaged anindependent appraiser to provide expert advice in the identification ofintangible assets acquired, valuation of such assets and determination of theestimated useful life. An independent appraiser, with management’s oversightand input, is required to make judgments and estimates that could cause suchappraisals to differ from those of other appraisal experts.

 

•                  In order todetermine the fair value of intangible assets and other long terms assets, adiscount rate and royalty rate is determined in conjunction with ourindependent appraiser.  As we are not apublicly traded company, the discount rate is based on the capital structureand a beta analysis of our closest peers in order to determine the weightedaverage cost of capital.  The royaltyrate is based on professional judgment taking into consideration the type ofproduct, market and perceived strength. The discount rate and royalty rate has a material impact on thedetermination of the fair value.

 

•                  Purchaseaccounting often involves the same critical estimates that are required in ourordinary course of business including estimates of the following items:

•                  Deferred taxasset or liability

•                  Pensionliability

•                  Restructuringliability

•                  Legal andenvironmental reserves

We use many of the same criteria and outside expertadvice when determining the range of potential amounts as their counterpartsdescribed below.

 

Goodwill is an intangible asset that represents the excess of thepurchase price over the fair value of identifiable assets acquired andliabilities assumed.  While goodwillitself does not represent an estimate, under SFAS 141 we must assign goodwillto one or more reporting units. Allocation of goodwill to reporting unitsrequires judgments about the relative fair values of reporting units includingthe fair value of their identifiable assets and estimates as to the presentvalue of future cash flows expected from the reporting units as adjusted by aweighted average and or risk-adjusted costs of capital. Goodwill is assessedfor impairment at least annually.

 

Some of our business combinations have complex terms that may result inconflicting claims between buyer and seller concerning the purchase priceitself.  Management is required to assessthe probability and amount (or range of amounts) of such claims, and, where possible,determine the most likely amount due.

 

*Legal Matters.*    Weare involved in various legal proceedings, including commercial, productliability, intellectual property and environmental matters, of a nature thatcan be expected in our business. It is our policy to accrue for amounts relatedto these matters in accordance with SFAS 5, *Accountingfor Contingencies*, if it is probable that a liability has beenincurred and an amount can be reasonably estimated. The probability that acontingent liability has been incurred is regularly assessed by our legalstaff, based on periodic reviews of available facts and circumstances for ourlegal matters, with senior operating and finance management both at thebusiness accountable for the potential liability and at our corporate offices.This is supplemented where applicable by consultation with outside counsel. Wedo not believe it is informative to quantify past experience at assessingprobability or estimating exposure since material matters of this nature at Rockwoodoften represent unique situations with little applicability to the assessmentof probability or estimation of potential liability regarding other legalmatters. It is our policy to disclose such matters when there is at least areasonable possibility that a loss may have been incurred.

 

*Environmental Matters.*    Weaccrue costs of a non-capital nature related to environmental clean-up whenthose costs are believed to be probable and can be reasonably estimated.Expenditures that extend the life of the related property or mitigate orprevent future environmental contamination are capitalized, and expendituresrelated to existing conditions resulting from past or present operations andfrom which no current or future benefit is discernible are immediatelyexpensed. The quantification of environmental exposures requires an assessmentof many factors, including changing laws and regulations, advancements inenvironmental technologies, the quality of information available related tospecific sites, the assessment stage of each site investigation and the lengthof time involved in remediation or settlement. As such, it can be extremelydifficult to accurately estimate such costs. We do not include anticipatedrecoveries from insurance carriers or other third parties in our accruals forenvironmental liabilities.

 

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We have estimated and established financial reserves relating toanticipated environmental cleanup obligations, site reclamation and remediationand closure costs. On a consolidated basis, we have accrued approximately $48.1million for known environmental liabilities as of June 30, 2005. Included inthe $48.1 million and $51.9 million as of June 30, 2005 and December 31, 2004is €6.5 million ($7.9 million using the exchange rate on June 30, 2005 of €1.00= $1.2106) that is discounted using 5.0% discount rate (undiscounted amountequals $12.1 million), and €2.4 million ($2.9 million) that is discounted using5.5% discount rate (undiscounted amount equals $4.6 million). Some of theseliabilities were assumed as part of business combinations, others resulted fromcharges to operations when the underlying costs were probable and could bereasonably estimated. Given that these obligations may be paid/relieved overextended time periods (30 years in some cases), charges or credits tooperations may be required as information is gathered and estimates refined.

 

We have evaluated our total environmental exposure based on currently availabledata and believe that such environmental matters will not have a materialadverse impact on our financial position or results of operations. If matterspreviously identified by management are resolved in a manner different fromoriginal estimates, there is the potential for a material adverse effect onoperating results or cash flows in any one accounting period. See Commitmentsand Contingencies.

 

*Restructuring.*    Werecord restructuring charges from time to time that represent expenses incurredin connection with consolidations and cessations of certain of our operationsas well as headcount reduction programs. These charges consist primarily ofwrite-offs of surplus assets and severance costs. These charges are based onvarious factors including the employee’s length of service, contractprovisions, salary levels and local governmental legislation. At the time arelated charge is recorded, we calculate our best estimate based upon detailedanalysis. Although significant changes are not expected, actual costs maydiffer from these estimates.

 

For example, we have accrued liabilities of $18.7 million as of June30, 2005 to cover restructuring liabilities for employee severance and facilityclosure costs in connection with the Dynamit Nobel Acquisition.  Although under the rules of purchaseaccounting, this is not charged to operations, in the event that our estimatesof such costs are too low, an additional charge to operations would berequired.

 

*Deferred Taxes.*    Werecord valuation allowances to reduce our deferred tax assets to the amountthat is more likely than not to be realized based on available evidenceweighted toward evidence that is objectively verifiable. While we considerfuture taxable income and ongoing prudent and feasible tax planning strategiesin assessing the need for valuation allowances, if we were to determine that wewould be able to realize deferred tax assets in the future in excess of our netrecorded amount, an adjustment to the net deferred tax asset would increase income(or decrease goodwill for any net deferred tax assets acquired in the DynamitNobel Acquisition) in the period such determination was made. Likewise, shouldwe determine that we would not be able to realize all or part of our recordednet deferred tax assets in the future, an adjustment to the deferred tax assetwould decrease income (or increase goodwill for any net deferred tax assetsacquired in the Dynamit Nobel Acquisition) in the period such determination wasmade.

 

We have cumulative net operating loss carry forwards in the U.S.,Germany, Switzerland, Italy, Mexico, and the UK. We have fully reserved for netoperating loss carry forwards in Switzerland, Italy, Mexico and the UK andcertain states in the U.S. as we have concluded realizability of these netoperating loss carry forwards is not more likely than not. In accordance withCompany policy, the U.S. Federal valuation allowance has been partiallyreversed as a result of positive operating results. We have not recordedvaluation allowances on our German net operating loss carry forwards as we haveconsidered positive evidence such as forecasted future taxable income based onhistorical taxable income adjusted for charges which are not indicative offuture operations and as the carry forward period is indefinite.

 

SFAS 109, *Accounting for IncomeTaxes*, (“SFAS 109”) paragraph 105, “requires considerationof future taxable income and other available evidence when assessing the needfor a valuation allowance.” Various assumptions and strategies (includingelections for tax purposes) are implicit in estimates of forecasted futuretaxable income.

 

We believe that, in situations in which future realization of deferredtax assets is dependent on taxable income from future operations, SFAS 109requires the relative significance of cumulative losses be addressed within theguidance provided in paragraphs 24 and 103. Accordingly, in assessing therealization of U.S. jurisdiction net operating loss carry forwards for theyears ended December 31, 2002, 2003 and 2004 and, considering futuretaxable income, we have identified the key elements of both positive andnegative evidence and evaluated such evidence by applying the guidance providedby paragraphs 24 and 103 of SFAS 109.

 

For 2004, based on our policy and the steady-state analysis, wedetermined during the fourth quarter that a full valuation allowance wasrequired on the deferred tax assets related to the U.S. federal net operatingloss carry forwards of $143.7 million as the analysis resulted in a steady-statetaxable loss. During the fourth quarter, the further weakening of the U.S.dollar resulted in significant foreign exchange losses on our euro-denominateddebt resulting in a three-year steady-state taxable loss.

 

The valuation allowance for US net operating losses established atDecember 31, 2004 has been reduced by $38.9 million in the first six months of2005. Of this reduction, $11.1 million has been recorded as a decrease togoodwill representing the expected utilization

 

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of certain net operating losses acquired in the Dynamit Nobelacquisition. The remaining $27.8 million has been reflected as a reduction inincome tax expense for the first six months ended June 30, 2005.  The determination of the net operating lossesto be utilized is based on a “first-in, first-out” methodology.

 

Tax Planning Strategy—We also identified a tax planning strategy aspart of our evaluation of evidence needed to rebut the presumption that a fullvaluation allowance was required for U.S. NOL carry forwards atDecember 31, 2002 and 2003. Specifically, we identified the sale of anappreciated non-core business. While the existence of a qualifying strategyoften provides more objectively determinable evidence of realization and may begiven more weight than a forecast of future taxable income, in our analysis wedid not rely entirely on the potential sale because we had other sources oftaxable income which were sufficient for us to conclude that no valuationallowance was required at December 31, 2002 and 2003.

 

We are committed to buying and selling businesses within our portfolioof businesses as opportunities arise to enhance our overall results. We arecommitted to selling assets which are non-core and which would generate ataxable gain in the event of expiring U.S. Federal NOL’s.

 

*Pensions, Postemployment andPostretirement Costs.*    In connectionwith the KKR, Dynamit Nobel, and pigments and dispersion acquisitions as wellas the Novasep combination, Rockwood assumed responsibility for the pension andpostretirement benefits for substantially all of the employees of thebusinesses acquired that were active as of the date of the acquisition. For theKKR and pigments and dispersion acquisitions, obligations related to retiredand terminated vested employees as of such date remained the responsibility ofthe seller, and accordingly, these obligations are not reflected in ourfinancial statements. Defined benefit costs and liabilities have beendetermined in accordance with SFAS 87, *Employers’Accounting for Pensions*. Postretirement benefit costs andliabilities have been determined in accordance with SFAS 106, *Employers’ Accounting for Postretirement BenefitsOther Than Pensions*. Postemployment benefit costs and liabilitieshave been determined in accordance with SFAS 112, *Employers’ Accounting for Postemployment Benefits*.

 

The measurement of our pension obligations, costs and liabilities isdependent on a variety of assumptions used by our actuaries.  These assumptions include estimates of thepresent value of projected future pension payments to all plan participants,with consideration to the likelihood of potential future events such as salaryincreases (due to marketplace conditions and/or inflation) and demographic experience(such as retirement and mortality rates). These assumptions may have an effect on the amount and timing of futurecontributions or benefit payments.  Forfunded plans, the plan trustee obtains an independent valuation of the fairvalue of pension plan assets and prepares estimates of expected returns basedon target asset allocations multiplied by current marketplace rates of returnfor comparable assets.  We base thediscount rate assumption on investment yields available at year-end on AA-ratedcorporate long-term bonds.  The effectsof actual results differing from our assumptions are accumulated and amortizedover future periods and therefore are likely to affect our recognized expensein those periods. We cannot predict these bond yields or investment returns andtherefore cannot reasonably estimate whether adjustments to our stockholders’equity for minimum pension liability in subsequent years will be significant.

 

**Effects of Recently Issued AccountingStandards**

 

We plan to implement the financial accounting standards listed below onJanuary 1, 2006. We are still in the process of evaluating SFAS 123Ras to its potential impact, if any but we do not expect any significant impacton our financial position, results of operations, or cash flows from theimplementation of these standards.

 
| SFAS 151  |   | Inventory Costs                          |
|-----------|--------|------------------------------------------|
| SFAS 153  |   | Exchanges of Nonmonetary Assets          |
| SFAS 154  |   | Accounting Changes and Error Corrections |
| SFAS 123R |   | Share Based Payment                      |

 

 SFAS 151 clarifies the accounting for abnormal amounts ofidle facility expense, freight, handling costs, and wasted material (spoilage),requiring that such items be recognized as current-period charges.  This statement eliminates a narrow differencebetween the Financial Accounting Standards Board (“FASB”) and InternationalAccounting Standards Board (IASB) accounting standards to improve thecomparability of cross-border financial reporting.

 

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

 

 SFAS 154 replaces APB OpinionNo. 20, *Accounting Changes*, andSFAS Statement No. 3, *Reporting AccountingChanges in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a change in accountingprinciple.  SFAS 154 requiresretrospective application to prior periods’ financial statement of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change.  SFAS 154 also requires that (1) a change in depreciation,amortization, or depletion method for long-lived, non-financial assets be accountedfor as a change in 

 

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accounting estimate effected by a change in accounting principle and(2) correction of errors in previously issued financial statements should betermed a “restatement.”  This statementeliminates a narrow difference between the FASB and IASB accounting standardsto improve the comparability of cross-border financial reporting.

 

SFAS 123R revises SFAS 123, *Accountingfor Stock-Based Compensation,* and supersedes APB OpinionNo. 25, *Accounting for Stock Issued toEmployees*, and its related implementation guidance. SFAS 123Rrequires entities to measure the cost of employee services received in exchangefor an award of equity instruments based on the grant-date fair value of theaward. That cost will be recognized over the period during which the employeeis required to provide services in exchange for the award. This standardeliminates the alternative to use the intrinsic value method of accounting forshare-based payments as previously provided in APB 25. As our ultimate parent,the issuer of these equity-based awards, is not yet a publicly traded equitycompany, we will apply SFAS 123R on a prospective basis. As such, newawards, modifications to existing awards, repurchases or cancellationssubsequent to February 11, 2005 (the date on which our ultimate parentHoldings filed its Form S-1) will be accounted for in accordance with SFAS 123Ron the modified prospective basis.

 

FASB Interpretation (“FIN”) 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS 143, *Accounting for Asset Retirement Obligations*, refers to alegal obligation to perform an asset retirement activity in which the timingand (or) method of settlement are conditional on a future event that may or maynot be within the control of the entity. FIN 47 will be effective December 31, 2005 for the Company.  The adoption of FIN 47 is not expected tohave a material impact on the Company.

 

In May 2004, the FASB issued FASB Staff Position (“FSP”) 106-2, *Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003*clarifying the accounting and disclosure requirements for employers withpostretirement benefit plans that have been or will be affected by the passageof the Medicare Prescription Drug Improvement and Modernization Act of 2003(the “Act”). The Act introduced two new features to Medicare that an employerneeds to consider in measuring its obligation and net periodic postretirementbenefit costs. FSP 106-2 was effective July 1, 2004. The adoption of FSP 106-2did not have a material impact on the Company.

 

**Forward-Looking Statements**

 

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

 

•     our businessstrategies;

 

•     changes in demand forour products;

 

•     fluctuations ininterest rates, exchange rates and currency values;

 

•     availability andpricing of raw materials;

 

•     fluctuations inenergy prices;

 

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

 

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

 

•     technological changesaffecting production of our materials;

 

•     our high level ofindebtedness;

 

•     governmental andenvironmental regulations and changes in those regulations;

 

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•     hazards associatedwith chemicals manufacturing;

 

•     risks associated withnegotiating, consummating and integrating acquisitions, especially relating tothe Dynamit Nobel acquisition;

 

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

 

•     risks associated withinternational sales and operations.

 

You should keep in mind that any forward-lookingstatements made by us in this document or elsewhere speak only as of the dateon which we make it. New risks and uncertainties come up from time to time, andit is impossible for us to predict these events or how they may affect us. Wedisclaim any obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

We are exposed to market risk from changes in interest rates, foreigncurrency exchange rates and commodity prices. We manage our exposure to thesemarket risks through regular operating and financing activities and through theuse of derivatives. When used, derivatives are employed as risk managementtools and not for trading purposes.

 

A discussion and analysis of the Company’s market risk is included inthe Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the yearended December 31, 2004.  There have beenno significant changes to these market risks as of June 30, 2005.

 

 

** Item 4.  Controls and Procedures**

 

 Our management, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the designand operation of our disclosure controls and procedures as of June 30, 2005.There was no change in our internal control over financial reporting thatoccurred during the quarter ended June 30, 2005 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

Our disclosure controls and procedures are designed to ensure that(a) information required to be disclosed in our reports under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and(b) such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, to allowtimely decisions regarding required disclosures.

 

Any controls and procedures, no matter how well designed and operated,can provide only reasonable assurance of achieving the desired controlobjectives.

 

As a result of this evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures werenot effective as of June 30, 2005. We have identified a material weakness ininternal controls within the financial reporting process with respect to thetimely analyses and reporting of income tax provisions and pensions and otherpost-retirement benefits related to our newly acquired businesses mainly due toour dependence on external resources for data accumulation and analysis, andwithin the design and operation of our purchase accounting review procedures.

 

The material weakness regarding the timely analyses and reporting ofincome tax provisions and pensions and other post-retirement benefits relatedto our newly acquired businesses and resulted in our inability to timely fileour Annual Report on Form 10-K. Our ultimate parent company, RockwoodHoldings, Inc., had filed a registration statement on Form S-1 with the SEC inFebruary 2005 and we decided to incorporate into our Annual Report onForm 10-K all relevant information obtained as a result of thatregistration process. Additionally, we entered into several significanttransactions during 2004, most notably the acquisition of the Dynamit Nobelbusinesses, along with the acquisition of the pigments and dispersions businessof Johnson Matthey plc and the Groupe Novasep combination. These transactionssubstantially expanded the scope of our business operations, which in turnsignificantly increased the complexity of our financial reporting obligations.As a result of this significantly increased complexity, we were unable toincorporate into our Annual Report on Form 10-K in a timely manner certaininformation, principally related to our newly acquired businesses, andinformation that we obtained as a result of Rockwood Holdings’ registrationprocess.

 

The material weakness within the design and operation of our purchaseaccounting review procedures resulted in certain purchase accounting errors inconnection with the Dynamit Nobel Acquisition and the Groupe Novasepcombination that required adjustment. These errors consisted of a mathematicalerror in the determination of the minority interest attributable to the Groupe Novasep

 

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combination and an error in the determination of the Groupe Novasep SASpurchase price, certain mathematical errors contained in the valuation reportprepared by our independent valuation specialists in conjunction with theDynamit Nobel Acquisition and an error in the determination of the fair valueof deferred income and restructuring reserves related to the former corporateoffices of Dynamit Nobel.

 

As a result of these errors, we restated our consolidated balance sheetas of December 31, 2004 and consolidated statement of changes instockholders’ equity for the year then ended in our Annual Report onForm 10-K and our consolidated balance sheet as of March 31, 2005 inour quarterly report on Form 10-Q.

 

The errors related to the Groupe Novasep combination involved isolatedmanual calculations performed outside of our electronic consolidation system.As a result of these errors, we are in the process of implementing additionaldetailed review procedures of these calculations, including additional levelsof review by our existing corporate accounting staff, as part of our quarter-and year-end close process beginning in the second quarter. We also recentlyhired an assistant controller responsible solely for external financialreporting and technical accounting matters and plan to hire an additionalemployee with technical accounting and external financial reporting expertiseto further strengthen our corporate accounting staff.

 

The Dynamit Nobel purchase accounting errors, specifically related tothe appraisal calculations, also occurred outside of our electronicconsolidation system and involved calculations outside the normal year-endclosing process. As a result of these errors, we are in the process ofimplementing similar additional review procedures related to Dynamit Nobelpurchase accounting activity as part of our quarter- and year-end close processbeginning in the second quarter, and are utilizing the additional financialreporting resources identified above to strengthen our review process ofsignificant and complex financial reporting areas, including purchaseaccounting.

 

We are also in the process of creating and staffing a global taxdepartment at our corporate headquarters to, among other matters, strengthenthe income tax accounting function. Towards that end, we have hired a new headof the global tax department to manage this function internally.  We expect this department to be in place in thethird quarter of 2005. We have also engaged a global coordinating actuary toenhance the internal controls over the accounting for pensions. Furthermore, wehave engaged external consultants to review our closing process and systems andmake recommendations which we plan to begin implementing during the fourthquarter of 2005.

 

Given that the remediation process has not been fully completed, thematerial weakness still exists. However, we believe that the procedures andadditional staff discussed above are likely to improve significantly ourinternal controls over financial reporting.

 

We are currently performing the system and process evaluation of ourinternal controls over financial reporting in order to allow management toreport on, and our independent auditors to attest to, our internal controlsover financial reporting, as required by Section 404 of the Sarbanes-OxleyAct of 2002, which we refer to as Section 404. The requirements ofSection 404 will initially apply to us in connection with our annualreport on Form 10-K for the year ended December 31, 2006. Inconnection with our preliminary evaluation, we have identified other areas ofinternal controls that may need improvement, such as internal controls relatedto the segregation of duties at certain smaller locations, system access anduser security profiles, operating policies and procedures and in each case particularlywith respect to newly acquired businesses. We plan to begin in late 2005 thetesting necessary to permit the management certification and auditorattestation required to comply with Section 404. As we complete theevaluation and testing required by Section 404, we may identify conditionsthat may be categorized as significant deficiencies or material weaknesses inthe future.

 

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**PART II –OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

We are involved in various legal proceedings, including commercial,product liability, intellectual property and environmental matters of a natureconsidered normal to our business. However, we do not believe that there is anyindividual legal proceeding that is likely to have a material adverse effect onour business or financial condition. We cannot predict the outcome of anylitigation or the potential for future litigation.

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.  Other Information.**

 

None.

 

**Item 6.  Exhibits.**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                            |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | 2005 Amended and Restated Stock Purchase and Option Plan  for Rockwood Holdings, Inc. and Subsidiaries*                                               |
|            |       |                                                                                                                                                  |
| 10.2            |       | Short-Term Incentive Plan for Rockwood Holdings,  Inc. and Subsidiaries*                                                                              |
|            |       |                                                                                                                                                  |
| 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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*      Incorporated by referenceto the Company’s Current Report on Form 8-K filed on August 4, 2005.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|--------|---------------------------------------|
|   |                                  |
|   |                                  |
|   | By:                                   | /s/ SEIFI GHASEMI |   |
|   |                                  | Seifi Ghasemi  Chairman of the Board and Chief Executive Officer  Date: August 12, 2005 |
|   |                                  |   |
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|   |                                  |   |
|   |                                  |   |
|   | By:                                   | /s/ ROBERT J. ZATTA |   |
|   |                                  | Robert J. Zatta  Senior Vice President and Chief Financial Officer  Date: August 12, 2005 |
|        |                                       |  |  |  |

 

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