**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM10-Q**
| x                                                 | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                        | ** ** | ** **                                                                                    |
| **For the  quarterly period ended June 30, 2006** |
| ** **                                        | ** ** | ** **                                                                                    |
| **Or**                                            |
| ** **                                        | ** ** | ** **                                                                                    |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number   333-109686**

**RockwoodSpecialties Group, Inc.**(Exact name of Registrant 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 of principal executive offices) (Zip Code)

**(609)514-0300**(Registrant’s telephone number, including area code)

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     x Yes     o No

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

Large accelerated filer o      Accelerated filer o      Non-acceleratedfiler x

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

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

As of August 10, 2006,there were 382,000 outstanding shares of common stock, par value $0.01 pershare, of the Registrant.

 

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**TABLEOF CONTENTSFORM 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, 2006 and 2005 |
|    |   | Condensed  Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                            |
|    |   | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2006  and 2005           |
|    |   | Notes  to Condensed Consolidated Financial Statements                                                       |
| Item 2  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |
| Item 3  |   | Quantitative  and Qualitative Disclosures about Market Risk                                                 |
| Item 4  |   | Controls and  Procedures                                                                                    |
|    |   |                                                                                                        |
|    |   | PART II- OTHER  INFORMATION                                                                                 |
| Item 1  |   | Legal Proceedings                                                                                           |
| Item 1A |   | Risk  Factors                                                                                               |
| Item 2  |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                |
| Item 3  |   | Defaults Upon  Senior Securities                                                                            |
| Item 4  |   | Submission of  Matters to a Vote of Security Holders                                                        |
| Item 5  |   | Other Information                                                                                           |
| Item 6  |   | Exhibits                                                                                                    |
|    |   |                                                                                                        |
|    |   | Signatures                                                                                                  |

 

2

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**PART I – FINANCIAL INFORMATION**

**Item1. Financial Statements (Unaudited).**

**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in millions)(Unaudited)**
| ** **                                    | ** ** | **Three months ended**         | ** ** | **Six months ended**           | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                        | ** ** | **June 30,**                        | ** ** |
| ** **                                    | ** ** | **2006**                                 | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| NET SALES                                |       | **$     855.8** | ** ** | **$     817.4** | ** ** | **$  1,668.4** | ** ** | **$  1,587.1** |   |
| COST OF PRODUCTS SOLD          |       | **586.9**                                | ** ** | **554.4**                                | ** ** | **1,149.8** | ** ** | **1,098.5** |   |
| GROSS PROFIT                                  |       | 268.9                                    |       | 263.0                                    |       | 518.6 |   | 488.6 |   |
| SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES |       | 162.3                                    |       | 157.5                                    |       | 319.3 |   | 307.7 |   |
| RESTRUCTURING CHARGES,  net                   |       | 1.0                                      |       | 2.9                                      |       | 2.2 |   | 5.8 |   |
| OPERATING INCOME                              |       | 105.6                                    |       | 102.6                                    |       | 197.1 |   | 175.1 |   |
| OTHER INCOME  (EXPENSES):                     |       |                                     |       |                                     |       |   |   |   |   |
| Interest expense, net                         |       | (47.8                                    | )          | (55.7                                    | )          | (86.9 | ) | (103.9 | ) |
| Foreign exchange gain,  net                   |       | 5.5                                      |       | 58.6                                     |       | 2.9 |   | 100.5 |   |
| Loss on sale of  business                     |       | —                                   |       | —                                   |       | (12.1 | ) | — |   |
| Other, net                                    |       | 0.2                                      |       | —                                   |       | 2.4 |   | — |   |
| Net                                           |       | (42.1                                    | )          | 2.9                                      |       | (93.7 | ) | (3.4 | ) |
| INCOME BEFORE TAXES AND  MINORITY INTEREST    |       | 63.5                                     |       | 105.5                                    |       | 103.4 |   | 171.7 |   |
| INCOME TAX PROVISION                          |       | 25.2                                     |       | 16.8                                     |       | 22.1 |   | 41.7 |   |
| NET INCOME  BEFORE MINORITY INTEREST          |       | 38.3                                     |       | 88.7                                     |       | 81.3 |   | 130.0 |   |
| MINORITY INTEREST                             |       | (1.2                                     | )          | 0.9                                      |       | (4.2 | ) | 1.7 |   |
| NET INCOME                                    |       | $                                        | 37.1       |                                     | $          | 89.6 |   | $ | 77.1 |   | $ | 131.7 |   |
|                                               |            |                                          |            |                                          |            |  |  |  |  |  |  |  |  |

 

See accompanying notes to condensed consolidatedfinancial statements.

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**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Dollars in millions, except per share amounts)(Unaudited)**
| ** **                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                     |       |              |       |                  |       |
| Cash and cash  equivalents                                                                          |       | $                 | 32.4       |                  | $          | 98.1 |   |
| Accounts receivable,  net                                                                           |       | 552.9             |       | 484.2                 |       |
| Inventories                                                                                         |       | 483.7             |       | 458.2                 |       |
| Deferred income taxes                                                                               |       | 16.1              |       | 17.7                  |       |
| Prepaid expenses and  other current assets                                                          |       | 60.6              |       | 68.1                  |       |
| Total current  assets                                                                               |       | 1,145.7           |       | 1,126.3               |       |
| PROPERTY, PLANT AND  EQUIPMENT, net                                                                 |       | 1,500.9           |       | 1,406.5               |       |
| GOODWILL                                                                                            |       | 1,690.4           |       | 1,599.2               |       |
| OTHER INTANGIBLE  ASSETS, net                                                                       |       | 598.8             |       | 578.9                 |       |
| DEFERRED DEBT ISSUANCE  COSTS, net of accumulated amortization of $19.1 and $13.5, respectively     |       | 55.2              |       | 56.6                  |       |
| OTHER ASSETS                                                                                        |       | 56.8              |       | 44.0                  |       |
| TOTAL ASSETS                                                                                        |       | $                 | 5,047.8    |                  | $          | 4,811.5 |   |
| **LIABILITIES AND STOCKHOLDER'S  EQUITY**                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                    |       | $                 | 273.5      |                  | $          | 295.7 |   |
| Income taxes payable                                                                                |       | 32.8              |       | 18.9                  |       |
| Accrued compensation                                                                                |       | 88.1              |       | 92.0                  |       |
| Restructuring liability                                                                             |       | 10.0              |       | 13.6                  |       |
| Accrued expenses and  other current liabilities                                                     |       | 211.4             |       | 188.8                 |       |
| Senior secured  revolving credit facility                                                           |       | 25.6              |       | 30.0                  |       |
| Long-term debt, current  portion                                                                    |       | 97.1              |       | 83.1                  |       |
| Total current  liabilities                                                                          |       | 738.5             |       | 722.1                 |       |
| LONG-TERM DEBT                                                                                      |       | 2,753.7           |       | 2,730.7               |       |
| PENSION AND RELATED  LIABILITIES                                                                    |       | 378.0             |       | 361.6                 |       |
| DEFERRED INCOME TAXES                                                                               |       | 28.6              |       | 32.7                  |       |
| OTHER LIABILITIES                                                                                   |       | 99.9              |       | 106.3                 |       |
| Total  liabilities                                                                                  |       | 3,998.7           |       | 3,953.4               |       |
| MINORITY INTEREST                                                                                   |       | 31.7              |       | 25.2                  |       |
|                                                                                                |       |              |       |                  |       |
| STOCKHOLDER'S EQUITY:                                                                               |       |              |       |                  |       |
| Common stock ($0.01 par  value, 1,000,000 shares authorized; 382,000 shares issued and outstanding) |       | —            |       | —                |       |
| Paid-in capital                                                                                     |       | 1,003.9           |       | 1,003.4               |       |
| Accumulated other  comprehensive income                                                             |       | 162.9             |       | 56.0                  |       |
| Accumulated deficit                                                                                 |       | (149.4            | )          | (226.5                | )          |
| Total  stockholder's equity                                                                         |       | 1,017.4           |       | 832.9                 |       |
| TOTAL  LIABILITIES AND STOCKHOLDER'S EQUITY                                                         |       | $                 | 5,047.8    |                  | $          | 4,811.5 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in millions)(Unaudited)**
| ** **                                                                                               | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                               | ** ** | ** **                                        | ** ** | **As restated** | ** ** |
| ** **                                                                                               | ** ** | ** **                                        | ** ** | **See Note 16** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                               | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                                               |       | $                                                 | 77.1       |   | $ | 131.7 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                       |       |                                              |       |   |   |
| Depreciation and  amortization                                                                           |       | 109.1                                             |       | 105.2 |   |
| Deferred  financing costs amortization                                                                   |       | 4.7                                               |       | 4.7 |   |
| Foreign exchange  gain, net                                                                              |       | (2.9                                              | )          | (100.5 | ) |
| Loss on sale of  business                                                                                |       | 11.3                                              |       | — |   |
| Gains related to  asset sales                                                                            |       | (0.6                                              | )          | — |   |
| Fair value  adjustment of derivatives                                                                    |       | (15.5                                             | )          | (6.2 | ) |
| Bad debt  provision                                                                                      |       | 0.2                                               |       | 0.8 |   |
| Deferred income  taxes                                                                                   |       | (4.7                                              | )          | 21.0 |   |
| Minority  interest                                                                                       |       | 4.2                                               |       | (1.7 | ) |
| Changes in assets and  liabilities, net of the effect of foreign currency translation and  acquisitions: |       |                                              |       |   |   |
| Accounts  receivable                                                                                     |       | (49.0                                             | )          | (28.8 | ) |
| Inventories,  including inventory write-up reversal                                                      |       | (15.1                                             | )          | (24.3 | ) |
| Prepaid expenses  and other assets                                                                       |       | 6.9                                               |       | (13.3 | ) |
| Accounts payable                                                                                         |       | (24.5                                             | )          | 43.2 |   |
| Income taxes  payable                                                                                    |       | 19.7                                              |       | 3.1 |   |
| Accrued expenses  and other liabilities                                                                  |       | (15.5                                             | )          | (56.2 | ) |
| **Net  cash provided by operating activities**                                                           |       | 105.4                                             |       | 78.7 |   |
| ** **                                                                                               |       |                                              |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                               | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Acquisitions, net of  cash acquired                                                                      |       | (13.4                                             | )          | — |   |
| Capital expenditures,  excluding capital leases                                                          |       | (90.1                                             | )          | (92.4 | ) |
| Proceeds on sale of  property, plant and equipment                                                       |       | 2.5                                               |       | 0.2 |   |
| **Net  cash used in investing activities**                                                               |       | (101.0                                            | )          | (92.2 | ) |
| ** **                                                                                               |       |                                              |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                               | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Proceeds from senior  secured credit facilities                                                          |       | 103.1                                             |       | 302.0 |   |
| Repayment of senior  secured credit facilities                                                           |       | (129.2                                            | )          | (302.0 | ) |
| Payments on other  long-term debt                                                                        |       | (40.6                                             | )          | (15.6 | ) |
| **Net  cash used in financing activities**                                                               |       | (66.7                                             | )          | (15.6 | ) |
| ** **                                                                                               |       |                                              |       |   |   |
| EFFECT OF EXCHANGE RATE  CHANGES ON CASH                                                                 |       | (3.4                                              | )          | (0.3 | ) |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                               |       | (65.7                                             | )          | (29.4 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 98.1                                              |       | 111.4 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                |       | $                                                 | 32.4       |   | $ | 82.0 |   |
|                                                                                                     |       |                                              |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                                      |       |                                              |       |   |   |
| Interest paid                                                                                            |       | $                                                 | 86.5       |   | $ | 97.9 |   |
| Income taxes paid, net  of refunds                                                                       |       | $                                                 | 6.4        |   | $ | 18.1 |   |
| NON-CASH INVESTING  ACTIVITIES:                                                                          |       |                                              |       |   |   |
| Acquisition of  equipment under capital leases                                                           |       | $                                                 | 1.5        |   | $ | 4.8 |   |
| Decrease in liabilities for property, plant and equipment                                                |       | $                                                 | (15.5      | ) | $ | (15.6 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

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

**1.             DESCRIPTION OF BUSINESS AND SUMMARY OFSIGNIFICANT 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”), anentity controlled by affiliates of Kohlberg Kravis Roberts & Co. L.P.(“KKR”) and was formed in connection with an acquisition of certain assets,stock and businesses from Laporte plc (“Laporte”) on November 20, 2000(the “KKR Acquisition”).

On July 31, 2004, theCompany completed the acquisition of four businesses of Dynamit Nobel from mgtechnologies ag and MG North America Holdings, Inc. (the “Dynamit Nobel Acquisition”).The businesses acquired are focused on highly specialized markets and consistof: white pigments, surface treatment and lithium chemicals; ceramics; andpharmaceutical intermediates.

On August 22, 2005,Holdings, our ultimate parent company, completed an initial public offering (“IPO”)of 23,469,387 shares of its common stock, which included 3,061,224 sharesissued and sold as a result of the underwriters’ exercise of the over-allotmentoption.

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

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

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

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

***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-addedspecialty chemicals and advanced materials. The Company operates in variousbusiness lines within its seven reportable segments consisting of:(1) Specialty Chemicals, which includes lithium compounds and chemicals,metal surface treatment chemicals, and synthetic metal sulfides,(2) Performance Additives, which includes color pigments and services,timber treatment chemicals, clay-based additives, and water treatmentchemicals, (3) Titanium Dioxide Pigments, which consists of titaniumdioxide pigments, and zinc- and barium-based compounds, (4) AdvancedCeramics, which includes ceramic-on-ceramic ball head and liner components usedin hip-joint prostheses systems, ceramic cutting tools and a range of otherceramic components, (5) Groupe Novasep (formerly known as CustomSynthesis), which includes sensitive chemistry, highly potent activeingredients and chiral technologies for the synthesis of pharmaceuticalcompounds and purification and separation process equipment, systems andstudies, (6) Specialty Compounds, which consists of plastic compounds, and(7) Electronics, which consists of electronic chemicals, wafer reclaim andphotomasks.

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

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

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

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***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***—In theordinary course of business, Rockwood has engaged in transactions with certainrelated parties including KKR and DLJ Merchant Banking Partners III, L.P. (“DLJMB”)and affiliates of each.  KKR and DLJMBhad provided the Company with consulting and management advisory services foran annual fee of $2.1 million, increasing 5% annually. In connection with theIPO, the parties agreed to terminate the management services agreement for anaggregate consideration of $10.0 million.

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

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

***Derivatives***—The Company accounts forderivatives based on Statement of Financial Accounting Standards (“SFAS”) 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended and interpreted. SFAS 133 requires that allderivatives be recognized as either assets or liabilities at fair value. Changesin the fair value of derivatives not designated as hedging instruments arerecognized currently in earnings while changes in the fair value of derivativesthat are designated as hedging instruments are recognized as a component ofother comprehensive income. The Company uses derivative instruments to manageits exposure to market risks associated with fluctuations in interest rates andforeign currency exchange rates. See “Comprehensive Income” section of Note 1for the impact of the Company’s net investment hedges. 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*. See Note 11, “Employee Benefit Plans,” forfurther detail.

***Income Taxes***—Income taxes aredetermined in accordance with SFAS 109,*Accounting for Income Taxes*. Deferred tax assets and liabilities arerecognized for future tax consequences attributable to differences between thefinancial statement carrying amounts and the corresponding tax carrying amountsof assets and liabilities. Deferred tax assets are also recognized for tax lossand tax credit carryforwards. A valuation allowance is recorded to reducedeferred tax assets when it is more likely than not that a tax benefit will notbe realized based on available evidence weighted toward evidence that isobjectively verifiable. Deferred taxes are not provided on the undistributedearnings of subsidiaries as such amounts are considered to be permanentlyinvested or could be distributed to the parent company in a tax free manner.

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature aswell as minimum pension liability adjustments that are recorded directly into aseparate section of stockholders’ equity in the balance sheets. Also includedare the net investment hedges discussed below. Foreign currency translationamounts are not adjusted for income taxes since they relate to indefinitelength investments in non-U.S. subsidiaries and certain intercompany debt.

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Comprehensiveincome is summarized as follows:
|                                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                       | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                          |       | $                                | 37.1       |                           | $          | 89.6 |   | $ | 77.1 |   | $ | 131.7 |   |
| Foreign currency  translation                       |       | 93.6                             |       | (79.1                          | )          | 119.0 |   | (119.6 | ) |
| Intercompany  foreign currency transactions         |       | 34.9                             |       | (96.7                          | )          | 66.5 |   | (161.8 | ) |
| Net investment  hedge, net of tax                   |       | (57.9                            | )          | 25.0                           |       | (83.2 | ) | 31.2 |   |
| Reduction of  minimum pension liability, net of tax |       | —                           |       | —                         |       | 4.6 |   | — |   |
| Total comprehensive income (loss)                   |       | $                                | 107.7      |                           | $          | (61.2 | ) | $ | 184.0 |   | $ | (118.5 | ) |

 

In November 2004,the Company completed the sale of €375.0 million aggregate principalamount of 7.625% senior subordinated notes and $200.0 million aggregateprincipal amount of 7.500% senior subordinated notes, both due in 2014 (“2014Notes”). In connection with the 2014 Notes, the Company entered into a cross-currencyswap with a five-year term and a notional amount of €155.6 million thateffectively converted the U.S. dollar fixed-rate debt in respect of the dollarnotes sold into euro fixed-rate debt. The Company has designated this contractas a hedge of the foreign currency exposure of its net investment in itseuro-denominated operations. There was no ineffective portion of the netinvestment hedge as of June 30, 2006 and December 31, 2005. The Companydoes not expect any of the loss on the net investment hedge residing in othercomprehensive income at June 30, 2006 to be reclassified into earnings duringthe subsequent twelve months.

In addition, wedesignated the remaining portion of our euro-denominated debt that is recordedon our U.S. books as a net investment hedge of our euro-denominated investmentsas of October 1, 2005 (euro-denominated debt of €684.3 million or $875.0million based on the June 30, 2006 exchange rate of €1.00 = $1.2787). As aresult, effective October 1, 2005, any foreign currency gains and lossesresulting from the euro-denominated debt discussed above is accounted for as acomponent of accumulated other comprehensive income. There was no ineffectiveportion of the net investment hedge as of June 30, 2006. The Company does not expectany of the loss on the net investment hedge residing in other comprehensiveincome at June 30, 2006 to be reclassified into earnings during the subsequenttwelve months.

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

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

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

 

8

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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 the use ofthe intrinsic value method of accounting for share-based payments as previouslyprovided in APB 25. The Company is applying SFAS 123R on a modifiedprospective basis. In accordance with SFAS 123R, beginning in the first quarterof 2006, the Company recorded compensation cost for the unvested portion ofawards issued after February 2005, which is the date Holdings filed itsregistration statement with the Securities and Exchange Commission (“SEC”), andfor any awards modified, repurchased or cancelled after this date. See Note 2, “NewAccounting Standard – Share-Based Payment (“SFAS No. 123R”),” and Note 3, “Stock-BasedCompensation,” for further details of the impact of adopting this standard.

SFAS 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. 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 153 eliminatesthe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance. This statement eliminates a narrow differencebetween the FASB and IASB accounting standards to improve the comparability ofcross-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 and reporting of a change in accountingprinciple. SFAS 154 requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 also requires that (1) a change indepreciation, amortization, or depletion method for long-lived, non-financialassets be accounted for as a change in accounting estimate effected by a changein accounting principle and (2) correction of errors in previously issuedfinancial statements should be termed a “restatement.” This statementeliminates a narrow difference between the FASB and IASB accounting standardsto improve the comparability of cross-border financial reporting.

The Company will adoptthe following in the first quarter of 2007:

In June 2006, a finalconsensus was reached on Emerging Issues Task Force (“EITF”) Issue No. 06-3, *How Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross VersusNet Presentation)*.  The scopeof this Issue includes any tax assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer and may include, but are not limited to, sales, use, value added, andsome excise taxes.  This Issue affirmsthat the presentation of taxes in the income statement should be on either agross (included in revenues and costs) or a net (excluded from revenues) basisand that this is an accounting policy decision that should be disclosedpursuant to APB Opinion No. 22.  Inaddition, if such taxes are significant and reported on a gross basis, theamounts of those taxes should be disclosed in interim and annual financialstatements.  The Company will adopt thisEITF in the first quarter of 2007 and is currently evaluating the impact itwill have on its financial statements.

In July 2006, FASBInterpretation (“FIN”) No. 48, *Accounting for Uncertaintyin Income Taxes – An Interpretation of FASB Statement No. 109*, wasissued.  FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109. FIN 48 also prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The provisions of FIN 48 are effective for fiscal years beginningafter December 15, 2006. The Company will adopt this interpretation in thefirst quarter of 2007 and is currently evaluating the impact it will have onits financial statements.

**2.    NEWACCOUNTING STANDARD – SHARE-BASED PAYMENT (SFAS NO. 123R):**

Effective January 1,2006, the Company adopted SFAS No. 123R,*Share-Based Payment*, and related interpretations and began expensingthe grant-date fair value of stock options. Prior to January 1, 2006, theCompany applied the recognition and measurement principles of APB Opinion 25,*Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, no compensation expense wasrecognized in net income for employee stock options, as the options granted hadan exercise price equal to the market value of the underlying common stock onthe date of grant. The estimated impact of adopting SFAS No. 123R in 2006is expected to reduce net income for the year by approximately $0.2 millionbefore taxes.

As noted above under “RecentAccounting Pronouncements,” the Company adopted SFAS No. 123R using themodified prospective approach and therefore has not restated prior periods. Asa result, the Company is recording compensation cost for the unvested

9

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portion of awards issuedafter February 2005 and for any awards modified, repurchased or cancelledafter this date. In the three and six months ended June 30, 2006, the adoptionof SFAS No. 123R resulted in incremental stock-based compensation expenseof less than $0.1 million and $0.1 million, respectively. The incrementalstock-based compensation expense caused income before taxes and minorityinterest to decrease by less than $0.1 million and net income to decrease byless than $0.1 million for the three months ended June 30, 2006. For the sixmonths ended June 30, 2006, the incremental stock-based compensation expensecaused income before taxes and minority interest to decrease by $0.1 millionand net income to decrease by $0.1 million.

SFAS No. 123Rmodified the disclosure requirements related to share-based compensation.Accordingly, the disclosures prescribed by SFAS No. 123R are included inNote 3, “Stock-Based Compensation.”

For stock options grantedprior to the adoption of SFAS No. 123R, the Company applied APB Opinion 25to account for its stock-based awards. If compensation cost for the Company’sstock option plans had been determined based on the fair value at grant dateconsistent with the provisions of SFAS No. 123 as amended by SFASNo. 148,*Accounting for Stock-BasedCompensation-Transition and Disclosure*, the Company’s net earningsand earnings per share would have been as follows:
|                                                                                                        | ** ** | **Three months**       | ** ** | **Six months**         | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                             | ** ** | **ended**                   | ** ** | **ended**                   | ** ** |
| **($ in millions)**                                                                          | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| Net income, as  reported                                                                               |       | $                           | 89.6       |                        | $          | 131.7 |   |
| Less:  Stock-based employee compensation expense determined under fair value based  method, net of tax |       | (0.2                        | )          | (0.4                        | )          |
| Pro forma net  income applicable to common shareholders                                                |       | $                           | 89.4       |                        | $          | 131.3 |   |

 

**3.    STOCK-BASED COMPENSATION:**

**Rockwood Plan**

Holdings has in place the2005 Amended and Restated Stock Purchase and Option Plan of RockwoodHoldings, Inc. and Subsidiaries (the “Plan”). Under the Plan, Holdings maygrant stock options, restricted stock and other stock-based awards to theCompany’s employees and directors and allow employees and directors to purchaseshares of Holdings’ common stock. There are 10,000,000 authorized sharesavailable for grant under the Plan.

***Restricted Stock***—Restricted stock ofHoldings can be granted with or without payment of consideration withrestrictions on the recipient’s right to transfer or sell the stock.

***Stock Purchase***—Eligible employees anddirectors can purchase shares of Holdings’ common stock at prices as determinedby Holdings’ board of directors.

***Board of Directors Stock Options***—Stockoptions granted to directors under this Plan shall have an exercise price atleast equal to the fair market value of Holdings’ common stock on the date ofgrant. Options available for grant under this Plan are time options which havea life of ten years from the date of grant and vest in three equal annualinstallments on each of the first three anniversaries of the grant date.

***Stock Options***—Stock options grantedunder the Plan shall have an exercise price at least equal to the fair marketvalue of the Company’s common stock on the date of grant. There are two typesof options available for grant under the Plan. Time options have a life of tenyears from the date of grant and vest as follows: time options granted prior to2004 vest 10% in year one, 10% year two, 25% year three, 25% year four and 30%year five; time options granted in 2004 and after vest in installments of 20%on each of the first five anniversaries of the grant date. Performance optionshave a life of ten years and become exercisable with respect to 20% of thetotal performance options granted upon the achievement of certain performancetargets. Performance options become exercisable on the eighth anniversary ofthe grant date to the extent that the options have not become otherwiseexercisable or have not been terminated. In October 2004, the performancetargets were modified as a result of the Dynamit Nobel Acquisition. Certainoption holders have “company-wide performance targets,” for which targets arebased on the achievement by Holdings of certain implied equity values. Otheroption holders have “divisional performance targets,” for which targets arebased on a particular division’s achievement of annual or cumulative EBITDA.

The Company recorded nocompensation cost in the historical statements of operations related to thePlan prior to 2006. The measurement date for determining compensation expensefor each option has been the option issuance date and at that time the marketprice of the stock was equal to the exercise price in each case. The timeoptions have been accounted for as a fixed plan. The performance options havebeen treated similar to fixed stock option plans as the Company concluded thepredefined (non-accelerated) 

10

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vesting schedule issubstantive as it is deemed to be more likely than not that the applicableindividuals will remain employed with the Company through that vesting date,particularly if the performance trigger has not occurred. As such, themeasurement date for these options is the option grant date in accordance withAPB Opinion 25. The change to the applicable performance targets as a result ofthe Dynamit Nobel Acquisition was a permitted change per the applicable stockoption agreements; as such no modification occurred requiring a new measurementdate calculation.

The compensation costcharged against income under the Plan in the three and six months ended June30, 2006 for share-based compensation programs was less than $0.1 million and$0.1 million, respectively, before taxes.

The fair value of optionsgranted in the first six months of 2006 is estimated on the date of grant usingthe Black-Scholes option pricing model that used the assumptions noted in thefollowing table:
| Expected term (in years) |   | 6.0 |   |
|--------------------------|--------|-----|--------|
| Expected  volatility     |   | 35  | %      |
| Risk-free rate           |   | 4.7 | %      |
| Expected dividends       |   | N/A |   |

 

The expected termrepresents the period of time that options granted are expected to beoutstanding based on the simplified method for determining expected term of anemployee share option (in accordance with SEC Staff Accounting BulletinNo. 107). As Holdings became a public company in August 2005, thereis not a long period of history of its share price. As a result, Holdings’expected volatility is based on the expected volatilities of comparable peercompanies that are publicly traded. The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant. Expected dividends are notapplicable as Holdings currently does not pay a dividend on its shares.

As of June 30, 2006,there was $0.2 million of unrecognized compensation cost related to nonvestedstock options determined in accordance with SFAS No. 123R, which is expected tobe recognized over a weighted-average period of approximately 2.4 years.

As of January 1,2006 and June 30, 2006, the number of nonvested stock options determined inaccordance with SFAS No. 123R were 53,800 and 35,557, respectively, and theweighted-average grant date fair value of nonvested stock options were $8.68 and$8.75, respectively.

The total intrinsic valueof stock options exercised during the six months ended June 30, 2006 was lessthan $0.1 million. Cash received from option exercises during the first half of2006 was less than $0.1 million. The total tax benefit realized from optionsexercised in the first half of 2006 was less than $0.1 million. The total fairvalue of shares vested during the three and six months ended June 30, 2006 wasless than $0.1 million.

Asummary of the status of Holdings’ options granted pursuant to the Plan at June30, 2006 and changes during the period ended on that date is presented below:
|                                                                   | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **               | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|--------------------------|------------|
| ** **                                                        | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **               | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**            | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**            | ** ** |
| ** **                                                        | ** ** | **Shares**      | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**                | ** ** |
|                                                              | ** ** | **(‘000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **($ in millions)** | ** ** |
| Outstanding at  December 31, 2005                                 |       | 3,863           |       | $            | 14.69      |            |       |                     |       |   |
| Granted                                                           |       | 11              |       | 23.68        |       |            |       |                     |       |
| Exercised                                                         |       | (2              | )          | 14.61        |       |            |       |                     |       |
| Forfeited                                                         |       | (42             | )          | 18.76        |       |            |       |                     |       |
| Outstanding at  June 30, 2006                                     |       | 3,830           |       | $            | 14.67      |            | 6.70       |                     | $          | 32.0 |   |
|                                                              |       |            |       |         |       |            |       |                     |       |
| Options  exercisable at June 30, 2006                             |       | 1,695           |       | $            | 14.61      |            | 6.09       |                     | $          | 14.2 |   |
|                                                              |       |            |       |         |       |            |       |                     |       |
| Weighted-average fair  value of options granted during the period |       | $               | 10.12      |         |       |            |       |                     |       |   |
|                                                                   |            |                 |            |              |            |                 |            |                          |            |  |  |  |

 

11

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**Subsidiary Plan**

***Stock Options***—In September 2005,Groupe Novasep SAS (“Groupe Novasep”), a subsidiary of the Company, approved astock option plan for certain of its employees (the “Subsidiary Plan”). Underthe Subsidiary Plan, there are 24,543 authorized shares of Groupe Novasep stockavailable for grant. There are two types of options available for grant underthe Subsidiary Plan. Time options have a life of 62 months from the date ofgrant and vest as follows: 20% per year at each one year anniversary. Performanceoptions have a maximum life of ten years and become exercisable based onattainment of certain stock price targets on the occasion of certain triggeringevents (IPO or Change of Control).

***Stock Purchase***—Eligible employees andmanagement personnel of Groupe Novasep and its subsidiaries can purchase sharesof common stock at prices as determined by the Supervisory Board of GroupeNovasep. Under the Subsidiary Plan, Groupe Novasep sold 4,013 shares during thequarter ended December 31, 2005 at the fair market value of the stock (€211.00per share) as determined by the Supervisory Board of Groupe Novasep at the dateof purchase for gross proceeds of $1.0 million.

The Company recorded nocompensation cost in the historical statements of operations related to theSubsidiary Plan prior to 2006. The time options qualified as a fixed plan inaccordance with APB Opinion 25 prior to 2006. The performance options do notqualify as a fixed plan and therefore are accounted for as a variable plan. Inaccordance with FASB Interpretation No. 38,*Determining the Measurement Date for Stock Option, Purchase, and AwardPlans Involving Junior Stock—An Interpretation of APB Opinion No. 25*,as the triggering events were not probable, no compensation cost was recordedas of June 30, 2006.

The compensation costcharged against income under the Subsidiary Plan in the three and six monthsended June 30, 2006 for share-based compensation programs was less than $0.1million before taxes.

There were no optionsgranted or exercised in the first six months of 2006 under the Subsidiary Plan.The fair value of options granted in 2005 was estimated on the date of grantusing the Black-Scholes option pricing model.

As of June 30, 2006,there was €0.9 million ($1.2 million using a June 30, 2006 exchange rate of €1.00= $1.2787) of unrecognized compensation cost related to nonvested stock optionsunder the Subsidiary Plan, which is expected to be recognized over aweighted-average period of approximately 3.3 years.

A summary of the statusof the options granted by Groupe Novasep at June 30, 2006 and changes duringthe period ended on that date is presented below:
|                                                                   | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|-------------------|------------|
| ** **                                                        | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **        | ** ** |
| ** **                                                        | ** ** | ** ** | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**     | ** ** |
| ** **                                                        | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**     | ** ** |
| ** **                                                        | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**         | ** ** |
|                                                              | ** ** | **('000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **(in millions)** | ** ** |
| Outstanding at  December 31, 2005                                 |       | 22         |       | €       | 211.00     |            |       |              |       |   |
| Granted                                                           |       | —     |       | —       |       |            |       |              |       |
| Exercised                                                         |       | —     |       | —       |       |            |       |              |       |
| Forfeited                                                         |       | (1         | )          | 211.00       |       |            |       |              |       |
| Outstanding at  June 30, 2006                                     |       | 21         |       | €       | 211.00     |            | 9.33       |              | €     | — |   |
|                                                              |       |       |       |         |       |            |       |              |       |
| Options  exercisable at June 30, 2006                             |       | —     |       | €       | —     |            | —     |              | €     | — |   |
|                                                              |       |       |       |         |       |            |       |              |       |
| Weighted-average  fair value of options granted during the period |       | €     | —     |         |       |            |       |              |       |   |
|                                                                   |            |            |            |              |            |                 |            |                   |            |  |  |  |

 

**4.    SEGMENTINFORMATION:**

Rockwoodoperates in seven reportable segments according to the nature and economiccharacteristics of its products and services as well as the manner in which theinformation is used internally by the Company’s chief operating decision maker,who is the Company’s Chief Executive Officer. The seven segments are:(1) Specialty Chemicals, which consists of the surface treatment and finechemicals business lines; (2) Performance Additives, which consists of thecolor pigments and services, timber treatment chemicals, clay-based additivesand water treatment chemicals business lines; (3) Titanium DioxidePigments; (4) Advanced Ceramics; (5) Groupe Novasep;(6) Specialty Compounds; and (7) Electronics, which consistsof the electronic chemicals, wafer reclaimand photomasks business lines.

12

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Items that cannot bereadily attributed to individual segments have been classified as “Corporate.”Corporate operating loss primarily represents payroll, professional fees andother operating expenses of centralized functions such as treasury, legal,internal auditing and consolidation accounting as well as the cost of operatingour central offices (including some maintained based on legal or taxconsiderations). The primary components of corporate loss, in addition tooperating loss, are interest expense on external debt (including theamortization of deferred financing costs), foreign exchange losses or gains,and mark-to-market gains or losses on derivatives. Major Corporate componentswithin the reconciliation of income before taxes and minority interest(described more fully below) include systems/organization establishmentexpenses such as outside consulting costs for Sarbanes-Oxley initialdocumentation and fees relating to the implementation of a new consolidationsoftware system, tax provision (benefit) resulting from corporate income(losses), interest expense on external debt, foreign exchange losses or gains,refinancing expenses related to external debt and initial public offeringrelated expenses. Corporate identifiable assets primarily represent deferredfinancing costs that have been capitalized in connection with corporateexternal debt financing, deferred income tax assets and cash balances maintainedin accordance with centralized cash management techniques. The corporateclassification also includes the results of operations, assets (primarily realestate) and liabilities (including pension and environmental) of legacybusinesses formerly belonging to Dynamit Nobel. These operations aresubstantially unrelated by nature to businesses currently within the Company’soperating segments.

Summarized financialinformation for each of the reportable segments is provided in the followingtable:
|                                                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**                   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three months ended  June 30, 2006** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                       |       | $             | 232.0      |            | $          | 212.8        |       | $            | 111.0      |        | $          | 98.0          |       | $               | 84.3       |          | $          | 66.1             |       | $ | 51.6 |   | $ | — |   | $ | 855.8 |   |
| Adjusted EBITDA                                 |       | 50.7          |       | 42.8            |       | 21.8         |       | 25.6         |       | 19.8        |       | 8.6           |       | 9.7             |       | (12.8         | )          | 166.2            |       |
| **Three  months ended  June 30, 2005**          | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                       |       | $             | 219.7      |            | $          | 190.1        |       | $            | 109.2      |        | $          | 96.4          |       | $               | 95.0       |          | $          | 62.1             |       | $ | 44.9 |   | $ | — |   | $ | 817.4 |   |
| Adjusted EBITDA                                 |       | 49.4          |       | 47.2            |       | 22.1         |       | 24.1         |       | 12.8        |       | 7.4           |       | 7.0             |       | (9.5          | )          | 160.5            |       |
| **Six  months ended  June 30, 2006**            | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                       |       | $             | 460.1      |            | $          | 395.3        |       | $            | 219.2      |        | $          | 190.7         |       | $               | 172.8      |          | $          | 129.3            |       | $ | 101.0 |   | $ | — |   | $ | 1,668.4 |   |
| Adjusted EBITDA                                 |       | 102.1         |       | 76.1            |       | 42.7         |       | 49.2         |       | 35.7        |       | 15.9          |       | 18.3            |       | (25.1         | )          | 314.9            |       |
| **Six  months ended  June 30, 2005**            | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                       |       | $             | 439.7      |            | $          | 349.6        |       | $            | 213.7      |        | $          | 188.3         |       | $               | 187.9      |          | $          | 120.2            |       | $ | 87.7 |   | $ | — |   | $ | 1,587.1 |   |
| Adjusted EBITDA                                 |       | 92.4          |       | 81.4            |       | 43.0         |       | 45.5         |       | 23.0        |       | 14.7          |       | 12.8            |       | (19.1         | )          | 293.7            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate (a)** | ** ** | **Eliminations (b)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |        |       |          |       |            |       |                   |       |                      |       |             |       |
| June 30, 2006               |       | $             | 1,773.0    |            | $          | 1,053.6      |       | $            | 687.9      |        | $          | 723.3         |       | $               | 362.1      |                   | $          | 235.1                     |       | $                | 340.0      |   | $ | 249.5 |   | $ | (376.7 | ) | $ | 5,047.8 |   |
| December 31, 2005           |       | 1,501.6       |       | 1,011.5         |       | 644.8        |       | 653.3        |       | 396.7       |       | 221.9         |       | 323.6           |       | 259.5                  |       | (201.4                    | )          | 4,811.5          |       |
|                             |            |               |            |                 |            |              |            |              |            |             |            |               |            |                 |            |                        |            |                           |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

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(a)     This includes $42.7 million and $39.7million of assets from the legacy businesses formerly belonging to DynamitNobel at June 30, 2006 and December 31, 2005, respectively.

(b)     Amounts contained in the “Eliminations”column represent the individual subsidiaries’ retained interest in theircumulative net cash balance (deposits less withdrawals) included in thecorporate centralized cash system and within the identifiable assets of therespective segment. These amounts are eliminated as the corporate centralizedcash system is included in the Corporate segment’s identifiable assets.

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 3, “Segment Information,” in the Company’s 2005 Form 10-K.

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

*Itemsexcluded from Adjusted EBITDA*

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe acquisition of the specialty chemicals and advanced materials businesses ofDynamit Nobel and Holdings’ initial public offering, resulted in a number ofcharges that have affected Rockwood’s historical results. These charges, alongwith certain other items, are added to or subtracted from income before taxesand minority interest to derive Adjusted EBITDA, as defined below. The moresignificant of these items include the following:

13

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·                  *Systems/organization establishment expenses*.  For the three and six months ended June 30,2006, expenses of $2.2 million and $4.1 million, respectively, were recordedrelated to professional fees incurred regarding systems and internal controldocumentation in connection with the Sarbanes-Oxley Act of 2002 and feesrelating to the implementation of a new consolidation software system. Forthe three and six months ended June 30, 2005, expenses of $0.7 million and $1.9million, respectively, were recorded related to the integration of the businessacquired in the Dynamit Nobel Acquisition, as well as professional feesincurred regarding systems and internal control documentation in connectionwith the Sarbanes-Oxley Act of 2002. These expenses are reflected in the “Corporate”column when the Company’s results are presented on a segment basis. We estimatenon-recurring costs of approximately $1.2 million are remaining to completeinitial Sarbanes-Oxley compliance.

·                  *Restructuring and related charges*.  Restructuring charges of $1.0 million and$3.4 million were recorded in the three months ended June 30, 2006 and 2005,respectively, and $2.2 million and $6.3 million (which includes $0.5 million ofcharges recorded in the second quarter of 2005 in cost of products sold in thecondensed consolidated statements of operations) in the six months ended June30, 2006 and 2005, respectively, for miscellaneous restructuring activities,including headcount reductions and facility closures (see Note 13, “RestructuringLiability,” for further details).

·                  *Loss on sale of business*.  In connection with the sale of Rohner AG inMarch 2006, the Company recorded a pre-tax loss of $12.1 million for thesix months ended June 30, 2006 (see Note 12, “Sale of Rohner AG,” for furtherdetail).

·                  *Inventory write-up reversal*.  Under SFAS 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withthe Groupe Novasep combination in 2004, the acquisition of the Süd-Chemiebusinesses in 2005 and an acquisition in the Advanced Ceramics segment in 2006,the Company allocated a portion of the total purchase price to inventory toreflect manufacturing profit in inventory at the date of the acquisition. Thisresulted in a consequential reduction in gross profit, including currencyeffects, of $0.1 million and $0.3 million for the three months endedJune 30, 2006 and 2005, respectively, and $0.9 million and $3.1 millionfor the six months ended June 30, 2006 and 2005, respectively, as the inventorywas sold in the normal course of business

·                  *Chromated copper arsenate* (*CCA)litigation defense costs*. Costs of $0.2 million and $1.1 million were recorded in the three monthsended June 30, 2006 and 2005, respectively, and $0.5 million and $1.5 millionwere recorded in the six months ended June 30, 2006 and 2005, respectively, inconnection with litigation defense costs related to the Company’s TimberTreatment Chemicals business line of the Performance Additives segment.

·                  *Cancelled acquisition and disposal costs*.  For the three months ended June 30, 2006 and2005, costs of $0.3 million and $0.4 million, respectively, and for the sixmonths ended June 30, 2006 and 2005, costs of $0.9 million and $0.6 million,respectively, were recorded in connection with non-consummated acquisitions anddispositions.

·                  *Foreign exchange gain (loss), net*.  During the periods presented, the Companyrecorded foreign exchange gains and (losses) related to our long-term debt andother non-operating transactions. These amounts primarily reflect the non-cashtranslation impact on our euro-denominated debt resulting from thestrengthening or weakening of the euro against the U.S. dollar and/or theBritish pound.  For the three monthsended June 30, 2006 and 2005, gains of $5.5 million and $58.6 million,respectively, were recorded.  For the sixmonths ended June 30, 2006 and 2005, gains of $2.9 million and $100.5 million,respectively, were recorded.  Thedecrease in 2006 was primarily due to the designation of the majority of theCompany’s euro-denominated debt as a net investment hedge in October 2005whereby foreign exchange gains and losses are now recorded in accumulated othercomprehensive income within stockholders’ equity for the portion of the hedgethat remains effective.

·                  *Gains related to asset sales and other*.  In the six month period ended June 30, 2006,we recorded $2.3 million of income primarily related to the correction of animmaterial error reported in the first quarter of 2006 related to a previouslyunrecorded asset in the Titanium Dioxide segment of $1.6 million.

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 directly correlatewith the adjustments to net income in calculating Adjusted EBITDA on aconsolidated 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.

14

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The Company uses AdjustedEBITDA on a segment basis to assess its operating performance. Because theCompany views Adjusted EBITDA on a segment basis as an operating performancemeasure, the Company uses income before taxes and minority interest as the mostcomparable GAAP measure. The following table presents a reconciliation ofincome before taxes and minority interest to Adjusted EBITDA on a segment GAAPbasis:
| ** **                                       | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                       | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**                    | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three months  ended June 30, 2006**            | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest |       | $             | 25.1       |            | $          | 25.8         |       | $            | 5.3        |        | $          | 8.8           |       | $               | 8.9        |          | $          | 6.3              |       | $ | 5.3 |   | $ | (22.0 | ) | $ | 63.5 |   |
| Interest expense, net (a)                        |       | 13.2          |       | 3.6             |       | 7.2          |       | 8.1          |       | 3.8         |       | —        |       | —          |       | 11.9          |       | 47.8             |       |
| Depreciation and amortization                    |       | 11.7          |       | 12.2            |       | 9.3          |       | 8.2          |       | 7.7         |       | 2.3           |       | 4.4             |       | 1.2           |       | 57.0             |       |
| Restructuring and related charges                |       | 0.3           |       | 0.6             |       | —       |       | —       |       | —      |       | —        |       | 0.1             |       | —        |       | 1.0              |       |
| CCA litigation defense costs                     |       | —        |       | 0.2             |       | —       |       | —       |       | —      |       | —        |       | —          |       | —        |       | 0.2              |       |
| Systems/organization establishment expenses      |       | 0.1           |       | 0.4             |       | —       |       | 0.3          |       | —      |       | —        |       | —          |       | 1.4           |       | 2.2              |       |
| Cancelled acquisition and disposal costs         |       | 0.3           |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | —        |       | 0.3              |       |
| Inventory write-up reversal                      |       | —        |       | —          |       | —       |       | 0.1          |       | —      |       | —        |       | —          |       | —        |       | 0.1              |       |
| Gains related to asset sales                     |       | —        |       | —          |       | —       |       | 0.1          |       | (0.2        | )          | —        |       | —          |       | —        |       | (0.1             | )          |
| Foreign exchange loss (gain), net                |       | 0.3           |       | —          |       | —       |       | —       |       | (0.4        | )          | —        |       | (0.1            | )          | (5.3          | )          | (5.5             | )          |
| Other                                            |       | (0.3          | )          | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | —        |       | (0.3             | )          |
| Total Adjusted EBITDA                            |       | $             | 50.7       |            | $          | 42.8         |       | $            | 21.8       |        | $          | 25.6          |       | $               | 19.8       |          | $          | 8.6              |       | $ | 9.7 |   | $ | (12.8 | ) | $ | 166.2 |   |
| **Three  months ended June 30, 2005**            | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest |       | $             | 27.0       |            | $          | 29.9         |       | $            | 4.8        |        | $          | 8.0           |       | $               | (0.4       | )             | $          | 5.9              |       | $ | 0.7 |   | $ | 29.6 |   | $ | 105.5 |   |
| Interest expense, net (a)                        |       | 9.7           |       | 7.1             |       | 7.8          |       | 8.7          |       | 3.3         |       | —        |       | 1.2             |       | 17.9          |       | 55.7             |       |
| Depreciation and amortization                    |       | 12.3          |       | 8.2             |       | 9.5          |       | 7.3          |       | 9.1         |       | 1.5           |       | 3.2             |       | 0.9           |       | 52.0             |       |
| Restructuring and related charges (b)            |       | 0.6           |       | 0.8             |       | —       |       | —       |       | —      |       | —        |       | 2.0             |       | —        |       | 3.4              |       |
| 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, net                |       | (0.3          | )          | 0.1             |       | —       |       | 0.1          |       | 0.3         |       | —        |       | (0.1            | )          | (58.7         | )          | (58.6            | )          |
| Other                                            |       | 0.1           |       | (0.1            | )          | —       |       | —       |       | 0.2         |       | —        |       | —          |       | (0.2          | )          | —           |       |
| Total Adjusted EBITDA                            |       | $             | 49.4       |            | $          | 47.2         |       | $            | 22.1       |        | $          | 24.1          |       | $               | 12.8       |          | $          | 7.4              |       | $ | 7.0 |   | $ | (9.5 | ) | $ | 160.5 |   |
| **Six  months ended June 30, 2006**              | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest |       | $             | 55.2       |            | $          | 45.8         |       | $            | 11.8       |        | $          | 16.4          |       | $               | 1.4        |          | $          | 11.7             |       | $ | 7.7 |   | $ | (46.6 | ) | $ | 103.4 |   |
| Interest expense, net (a)                        |       | 22.4          |       | 7.6             |       | 14.2         |       | 15.5         |       | 7.1         |       | (0.1          | )          | 0.8             |       | 19.4          |       | 86.9             |       |
| Depreciation and amortization                    |       | 23.1          |       | 20.3            |       | 18.3         |       | 16.4         |       | 16.1        |       | 4.3           |       | 8.6             |       | 2.0           |       | 109.1            |       |
| Restructuring and related charges                |       | 0.5           |       | 0.8             |       | —       |       | —       |       | —      |       | —        |       | 0.9             |       | —        |       | 2.2              |       |
| CCA litigation defense costs                     |       | —        |       | 0.5             |       | —       |       | —       |       | —      |       | —        |       | —          |       | —        |       | 0.5              |       |
| Systems/organization establishment expenses      |       | 0.1           |       | 0.4             |       | —       |       | 0.3          |       | —      |       | —        |       | —          |       | 3.3           |       | 4.1              |       |
| Cancelled acquisition and disposal costs         |       | 0.9           |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | —        |       | 0.9              |       |
| Inventory write-up reversal                      |       | —        |       | 0.8             |       | —       |       | 0.1          |       | —      |       | —        |       | —          |       | —        |       | 0.9              |       |
| Gains related to asset sales                     |       | —        |       | (0.1            | )          | —       |       | 0.1          |       | (0.3        | )          | —        |       | —          |       | (0.4          | )          | (0.7             | )          |
| Loss on sale of business                         |       | —        |       | —          |       | —       |       | —       |       | 12.1        |       | —        |       | —          |       | —        |       | 12.1             |       |
| Foreign exchange loss (gain), net                |       | 0.2           |       | 0.1             |       | —       |       | —       |       | (0.7        | )          | —        |       | 0.3             |       | (2.8          | )          | (2.9             | )          |
| Other                                            |       | (0.3          | )          | (0.1            | )          | (1.6         | )          | 0.4          |       | —      |       | —        |       | —          |       | —        |       | (1.6             | )          |
| Total Adjusted EBITDA                            |       | $             | 102.1      |            | $          | 76.1         |       | $            | 42.7       |        | $          | 49.2          |       | $               | 35.7       |          | $          | 15.9             |       | $ | 18.3 |   | $ | (25.1 | ) | $ | 314.9 |   |
| **Six  months ended June 30, 2005**              | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest |       | $             | 44.0       |            | $          | 47.1         |       | $            | 8.0        |        | $          | 12.5          |       | $               | (6.2       | )             | $          | 11.9             |       | $ | 1.5 |   | $ | 52.9 |   | $ | 171.7 |   |
| Interest expense, net (a)                        |       | 21.8          |       | 13.7            |       | 16.3         |       | 18.1         |       | 7.8         |       | (0.1          | )          | 2.5             |       | 23.8          |       | 103.9            |       |
| Depreciation and amortization                    |       | 24.0          |       | 16.7            |       | 18.7         |       | 14.8         |       | 18.0        |       | 2.9           |       | 8.3             |       | 1.8           |       | 105.2            |       |
| Restructuring and related charges (b)            |       | 1.1           |       | 3.2             |       | —       |       | —       |       | —      |       | —        |       | 2.0             |       | —        |       | 6.3              |       |
| 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 loss (gain), net                |       | 1.5           |       | (0.8            | )          | —       |       | 0.1          |       | 0.3         |       | —        |       | (1.5            | )          | (100.1        | )          | (100.5           | )          |
| Total Adjusted  EBITDA                           |       | $             | 92.4       |            | $          | 81.4         |       | $            | 43.0       |        | $          | 45.5          |       | $               | 23.0       |          | $          | 14.7             |       | $ | 12.8 |   | $ | (19.1 | ) | $ | 293.7 |   |

 

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(a)     Includes a gain of $4.6 million and aloss of $1.4 million for the three months ended June 30, 2006 and 2005,respectively, and gains of $15.5 million and $6.2 million for the six monthsended June 30, 2006 and 2005, respectively, representing the movement in themark-to-market valuation of the Company’s interest rate and cross-currencyhedging instruments.

(b)     Includes inventory writedowns of $0.5million recorded in cost of products sold.

**5.    ACQUISITIONS:**

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

15

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InDecember 2005, we completed an acquisition of the rheological additivesand carbonless developers businesses of Süd-Chemie AG, Munich, Germany. Bothbusinesses have been incorporated into Rockwood’s Clay-based Additives businessunit, which is part of the Performance Additives segment. We accounted for theacquisition of these businesses using the purchase method of accounting andhave allocated the total estimated purchase price to the assets acquired andliabilities assumed. The allocation of the purchase price to the identifiableassets acquired is expected to be completed in the third quarter of 2006.  The excess of the total purchase price overthe estimated fair value of the net assets acquired at closing has beenallocated to goodwill. Goodwill in the transaction totaled $9.5 million as ofJune 30, 2006.

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

**6.    INVENTORIES:**

Inventories are comprisedof the following:
|                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Raw materials                 |       | $                 | 145.1      |                  | $          | 141.6 |   |
| Work-in-process               |       | 66.0              |       | 75.0                  |       |
| Finished goods                |       | 259.4             |       | 227.9                 |       |
| Packaging  materials          |       | 13.2              |       | 13.7                  |       |
|                          |       | $                 | 483.7      |                  | $          | 458.2 |   |

 

**7.     GOODWILL:**

Below are goodwillbalances and activity by segment:
| ** **                                                | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                                | ** ** | **Performance** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Specialty** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | ** ** | ** ** |
| **($ in millions)**                             | ** ** | **Additives**   | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Chemicals** | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Total**  | ** ** |
| Balance, December  31, 2005                               |       | $               | 459.5      |          | $          | 109.2           |       | $             | 119.3      |         | $          | 538.8        |       | $           | 151.7      |       | $          | 187.5 |   | $ | 33.2 |   | $ | 1,599.2 |   |
| Acquisitions                                              |       | —          |       | —        |       | —          |       | —        |       | —       |       | 4.5          |       | —      |       | 4.5        |       |
| Other tax  adjustments                                    |       | —          |       | —        |       | —          |       | (1.9          | )          | —       |       | —       |       | —      |       | (1.9       | )          |
| Post-closing  consideration and other related adjustments |       | (1.0            | )          | —        |       | —          |       | —        |       | —       |       | —       |       | —      |       | (1.0       | )          |
| Foreign exchange  and other (a)                      |       | 13.7            |       | 4.9           |       | 3.6             |       | 43.9          |       | 12.7         |       | 16.4         |       | (5.6        | )          | 89.6       |       |
| Balance, June 30,  2006                                   |       | $               | 472.2      |          | $          | 114.1           |       | $             | 122.9      |         | $          | 580.8        |       | $           | 164.4      |       | $          | 208.4 |   | $ | 27.6 |   | $ | 1,690.4 |   |

 

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(a)   Foreign exchange and other is primarilycomprised of foreign currency changes.

The adjustmentsrecorded during the first quarter of 2006 as disclosed in Note 5, “Acquisitions,”are recorded in “foreign exchange and other,” as reductions to goodwill withinSpecialty Chemicals ($4.0 million) and Groupe Novasep ($7.7 million).

**8.    OTHER INTANGIBLE ASSETS:**

Other intangible assets, net consist of:

 
| ** **                               | ** ** | **As of June 30, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount (a)**                         | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                           | 355.9      |                                            | $          | (77.0 | ) | $ | 278.9 |   | $ | 340.1 |   | $ | (64.3 | ) | $ | 275.8 |   |
| Trade names and  trademarks              |       | 125.1                                       |       | (12.2                                           | )          | 112.9 |   | 114.3 |   | (7.4 | ) | 106.9 |   |
| Customer  relationships                  |       | 210.2                                       |       | (30.7                                           | )          | 179.5 |   | 190.6 |   | (20.9 | ) | 169.7 |   |
| Other                                    |       | 39.9                                        |       | (12.4                                           | )          | 27.5 |   | 32.0 |   | (5.5 | ) | 26.5 |   |
| Total                                    |       | $                                           | 731.1      |                                            | $          | (132.3 | ) | $ | 598.8 |   | $ | 677.0 |   | $ | (98.1 | ) | $ | 578.9 |   |

 

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(a)   Increase from December 31, 2005 primarily dueto foreign currency changes.

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Amortization of otherintangible assets was $16.1 million and $12.6 million for the three monthsended June 30, 2006 and 2005, respectively, and $29.1 million and $26.7 millionfor the six months ended June 30, 2006 and 2005, respectively. As of June30, 2006, the estimated aggregate amortization expense for each of the fivesucceeding years is as follows:
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|-------------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2006                          |       | $                | 59.7       |   |
| 2007                          |       | 60.6             |       |
| 2008                          |       | 59.6             |       |
| 2009                          |       | 52.6             |       |
| 2010                          |       | 51.7             |       |
|                               |            |                  |            |  |

 

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

Long-term debt and loanspayable are summarized as follows:
|                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                    | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Senior secured credit facilities:**                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| Tranche A-1 term loans (€37.2 and €39.1,  respectively)                     |       | $                 | 47.5       |                  | $          | 46.1 |   |
| Tranche A-2 term loans (€161.9 and €170.4,  respectively)                   |       | 207.0             |       | 201.0                 |       |
| Tranche E term loans                                                                  |       | 1,133.6           |       | 1,139.3               |       |
| Tranche F term loans (€272.1 and €273.4,  respectively)                     |       | 347.9             |       | 322.5                 |       |
| Revolving short-term loans (€20.0 and $30.0,  respectively)                      |       | 25.6              |       | 30.0                  |       |
| 2011 Notes                                                                            |       | 273.4             |       | 273.4                 |       |
| 2014 Notes  (€375.0 and $200.0 as of June 30, 2006 and December 31, 2005)        |       | 679.5             |       | 642.4                 |       |
| Other term loan  facilities                                                           |       | 60.0              |       | 92.7                  |       |
| Capitalized  lease obligations (€50.0 and €51.0, respectively)              |       | 63.7              |       | 61.2                  |       |
| Preferred stock  of subsidiary (£12.0 as of June 30, 2006 and December 31, 2005) |       | 22.2              |       | 20.6                  |       |
| Other (€12.5 and  €12.2, respectively)                                      |       | 16.0              |       | 14.6                  |       |
|                                                                                  |       | 2,876.4           |       | 2,843.8               |       |
| Less current  maturities                                                              |       | (122.7            | )          | (113.1                | )          |
|                                                                                  |       | $                 | 2,753.7    |                  | $          | 2,730.7 |   |

 

Inthe normal course of business, the Company incurs obligations which includeguarantees related to contract completion, regulatory compliance and productperformance. Under certain circumstances, these obligations are supportedthrough the issuance of letters of credit and other bank guarantees. As of June30, 2006, the Company had approximately $57.1 million of letters of credit andother bank guarantees, of which $39.8 million will expire in less than oneyear, $13.9 million will expire in 2-3 years, $0.1 million will expire in 4-5years and $3.3 million will expire after five years. This amount includesoutstanding letters of credit of $25.3 million that reduced our availabilityunder the senior secured credit facility. In the opinion of management, suchobligations will not significantly affect the Company’s financial position,results of operations or cash flows as the Company anticipates fulfilling itsperformance obligations.

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**10.    TAXESON INCOME:**

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the first six months of 2006 and 2005 was 21.4% and24.3%, respectively.  The 2006 rateincluded a tax benefit of $21.8 million related to the favorable treatment onthe sale of Rohner AG and a tax benefit of $0.1 million related to changes intax laws in Canada and Texas.  The 2005rate was favorably impacted by the reversal of $28.3 million of valuationallowances related to federal income generated. The effective tax rate for the second quarter of 2006 is 39.7%, whichincludes tax benefits associated with a Canadian tax law change and its impacton deferred tax liabilities and a newly enacted Texas margin tax. The globaleffective tax rate associated with second quarter of 2006 ordinary operatingresults was 39.8% (which excluded the changes in tax law), which is a functionof foreign and domestic earnings and their impact on the effective tax rate.The effective tax rate for the second quarter of 2005 was 15.9%.  This rate was favorably impacted by thereversal of $23.4 million of valuation allowances related to U.S. federalincome generated.

In the six months endedJune 30, 2006, the Company reduced its worldwide valuation allowances by $19.4million. As a majority of the reduction in the valuation allowance was theresult of a decrease in the net deferred tax assets of Rohner AG, the change inthe valuation allowance did not have a significant impact on the effective taxrate during the second quarter of 2006. The following table reflects theactivity in the valuation allowance for worldwide net operating losses andother deferred income tax assets:
|                                                | ** ** | **Valuation** | ** ** |
|------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                  | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2005               |       | $             | 41.1       |   |
| Reduction in  deferred tax assets of Rohner AG |       | (26.4         | )          |
| Increase in  income tax expense                |       | 0.9           |       |
| Increase in  other comprehensive income        |       | 6.4           |       |
| Expired net  operating loss                    |       | (0.3          | )          |
| Balance as of June 30, 2006                    |       | $             | 21.7       |   |

 

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

**11.    EMPLOYEEBENEFIT PLANS:**

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 132R, *Employers’ Disclosures aboutPensions and Other Postretirement Benefits – An Amendment of FASB StatementsNo. 87, 88 and 106*:
|                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| **($ in millions)**             | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                         |       | $                      | 2.4        |                 | $          | 2.7 |   | $ | 5.3 |   | $ | 5.5 |   |
| Interest cost                        |       | 5.6                    |       | 5.8                  |       | 11.4 |   | 12.8 |   |
| Expected return on assets            |       | (2.0                   | )          | (2.5                 | )          | (4.6 | ) | (5.4 | ) |
| Net amortization of actuarial losses |       | 0.7                    |       | 0.2                  |       | 1.4 |   | 0.4 |   |
| Total pension cost                   |       | $                      | 6.7        |                 | $          | 6.2 |   | $ | 13.5 |   | $ | 13.3 |   |

 

**12.    SALEOF ROHNER AG:**

In late 2005, Rockwoodhad decided to substantially downsize the operations of Rohner AG (“Rohner”).This decision was driven by a number of factors, including, in particular,continued capacity utilization issues as a result of the loss of a key customerin 2003 and the inability to replace this lost volume with comparableprofitable volume. The downsizing included a review of Rockwood’s strategicoptions for this business including potential sale or closure. The Company hadrecorded a full impairment charge at the end of 2005 with respect to Rohner’slong-term assets, primarily property, plant and equipment, totaling $44.7million due to these actions. On March 9, 2006, after exploring severalalternatives, the Company sold all of the capital stock of Rohner for a nominalprice. Until that time, Rohner, located in Pratteln, Switzerland, had been asubsidiary in the Company’s Groupe Novasep segment. Rohner produced chemicalson a custom-synthesis and toll manufacturing basis for the pharmaceutical andagrochemical industries, specializing in transition metal catalysis.

The Company recorded anet pre-tax loss of $12.1 million on the sale of Rohner in the first quarter of2006, representing consideration given less the remaining net liabilities ofRohner, which have been transferred to the purchaser. The sale agreementcontains a potential favorable purchase price adjustment of up to €5.0 millionupon the achievement of certain operating targets of Rohner through 2008. Thesale agreement also contains a potential unfavorable purchase price adjustmentof €1.0 million. The Company has not included these potential purchase priceadjustments in its determination of its net loss on the sale of Rohner as theseadjustments were not probable at June 30, 2006.

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

**13.    RESTRUCTURINGLIABILITY:**

The Company recorded $1.0million and $2.9 million of restructuring charges for the three months endedJune 30, 2006 and 2005, respectively, and $2.2 million and $5.8 million ofrestructuring charges for the six months ended June 30, 2006 and 2005,respectively. In addition, inventory writedowns of $0.5 million were recordedin cost of products sold in the second quarter of 2005 related to therestructuring of the Wafer Reclaim business in the Electronics segment. TheCompany records restructuring liabilities from time to time that representcharges incurred in connection with consolidations and cessations of certain ofits operations, including operations from acquisitions, as well as headcountreduction programs. These charges consist primarily of write-offs of assets andseverance costs. Severance charges are based on various factors including theemployee’s length of service, contract provisions, salary levels and 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.

**2006Restructuring Activities:**

During the six monthsended June 30, 2006, the Company expensed $2.2 million of restructuring chargesfor miscellaneous restructuring actions, including $0.9 million for theannounced restructuring of the Wafer Reclaim business in the Electronicssegment. The Company recorded severance and related costs for employees inconnection with the closure of two Wafer Reclaim facilities. The Company closeda Wafer Reclaim facility in the U.K. in January 2006 and a facility in theU.S. in March 2006. In addition, $0.8 million was recorded in thePerformance Additives segment and $0.5 million was recorded in the SpecialtyChemicals segment for miscellaneous headcount reductions and the announcedclosure of the Baulking, United Kingdom facility for our Clay-based Additives businessin the Performance Additives segment.

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

The Company began toassess and formulate specific plans to involuntarily terminate or relocatecertain employees and/or exit certain activities of the Dynamit Nobelbusinesses as of the Dynamit Nobel Acquisition date. This assessment led tocertain restructuring 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 thisbuilding and the relocation costs for the remaining 27 employees who wererelocated to the Company’s new Frankfurt, Germany location. Also in 2004, aspart of the acquisition of the Pigments and Dispersions business of JohnsonMatthey, the Company enacted a restructuring program and 40 positions wereeliminated. All of these employees were selling, general and administrativepersonnel.

For the 2006restructuring actions, the Company recorded a restructuring charge of $0.3million. This charge was utilized in the first six months of 2006.

Selected information forthe 2005 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| **2005**                              |       |          |       |         |       |       |       |
| Liability  balance, December 31, 2005 |       | $             | 1.5        |         | $          | —     |       | $ | 1.5 |   |
| Restructuring  charge in 2006         |       | 0.1           |       | 0.9          |       | 1.0        |       |
| Utilized in 2006                      |       | (1.4          | )          | (1.3         | )          | (2.7       | )          |
| Foreign exchange  and other           |       | 1.2           |       | 0.6          |       | 1.8        |       |
| Liability balance, June  30, 2006     |       | $             | 1.4        |         | $          | 0.2        |       | $ | 1.6 |   |

 

Selected information for the 2004 restructuring actions follows:

 
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2004**                              |       |          |       |         |       |           |       |       |       |
| Liability  balance, December 31, 2005 |       | $             | 10.6       |         | $          | 1.1            |       | $          | 0.4        |   | $ | 12.1 |   |
| Restructuring  charge in 2006         |       | 0.8           |       | 0.1          |       | —         |       | 0.9        |       |
| Utilized in 2006                      |       | (3.9          | )          | (0.2         | )          | —         |       | (4.1       | )          |
| Foreign exchange  and other           |       | (0.6          | )          | 0.1          |       | —         |       | (0.5       | )          |
| Liability balance, June  30, 2006     |       | $             | 6.9        |         | $          | 1.1            |       | $          | 0.4        |   | $ | 8.4 |   |

 

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**14.    COMMITMENTSAND 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. Reserves in connection with suchproduct liability matters do not individually exceed $350,000 and in the aggregate$2.0 million. The Company’s reserve estimates are based on availablefacts, including damage claims and input from its internal and external legalcounsel, past experience, and, in some instances where defense costs are beingpaid by its insurer’s insurance coverage, known insurance recoveries. TheCompany is unable to estimate the amount or range of any potential incrementalcharges should facts and circumstances change and may in the future revise itsestimates based on new information becoming available. In addition, the Companydoes not believe that there is any other individual legal proceeding that islikely to have a material adverse effect on its business or financialcondition. However, the Company cannot predict the outcome of any litigation orthe potential for future litigation.

***Indemnity Matters***—Under the terms ofthe Business and Share Sale and Purchase Agreement, the Deed of Tax Covenantand the Environmental Deed entered into in connection with the KKR Acquisition,Degussa U.K. 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 the Saleand Purchase Agreement with mg technologies ag (now known as GEA GroupAktiengesellschaft) and its subsidiary MG North America Holdings, Inc.(now known as GEA North America, Inc.), GEA Group is obligated to indemnify theCompany for certain legal, tax and environmental liabilities and obligationsthat relate to the period prior to the closing, subject to certain limits andexclusions. Pursuant to these agreements, the Company has various claims forindemnification with Degussa and GEA Group. In addition, the Company may besubject to indemnity claims relating to properties or businesses it divested.In the opinion of management, and based upon information currently available,the ultimate resolution of any indemnification obligations owed to the Companyor by the Company will not have a material effect on the Company’s financialcondition, results of operations or cash flows.

**Safety,Health and Environmental Matters**

***General***

The Company is subject toextensive environmental, health and safety laws in the United States, the EuropeanUnion (“EU”) 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. Environmentallaws are subject to change and have tended to become stricter over time. Suchchanges in environmental laws, or the enactment of new environmental laws,could result in materially increased capital, operating and compliance costs.

***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 their operations, enhance compliance with suchrequirements, ensure the safety of the

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Company’s employees,contractors, community neighbors and customers and minimize the production andemission of wastes and other pollutants. Although SHE legal requirements areconstantly changing, these SHE management systems are designed to assist theCompany in meeting its compliance goals and minimizing overall risk.

***SHE Capital Expenditures***

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2005, the capital expenditures for SHEmatters totaled approximately $32.8 million, excluding costs to maintainand repair pollution control equipment. For 2006 and 2007, 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 EU framework for chemicalsknown as the Registration, Evaluation and Authorization of Chemicals, or REACHwhich will significantly expand the EU’s regulation of chemicals. As currentlyproposed, REACH would include requirements that certain manufacturers andimporters of chemicals register those chemicals, perform health andenvironmental risk analyses of those chemicals, and in certain instances,obtain authorizations for the use of the chemicals. As a specialty chemicalscompany, it is possible that the Company is the only manufacturer of one ormore substances to be regulated under REACH and thus could potentially bear thefull cost of compliance with REACH for some or all of the Company’s products.The Company estimates it has over 400 products that might be subject to REACH,which is scheduled to become an EU directive in early 2007; compliance withREACH will be required starting in 2008.

Under the European UnionIntegrated Pollution Prevention and Control Directive (“IPPC”), EU membergovernments are to adopt rules and implement a cross-media (air, water andwaste) environmental permitting program for individual facilities. IPPCrequires a consistent application of Best Available Techniques, or BAT,throughout the EU. Generally, by 2007, facilities located within the EU must beoperating consistent with BAT. While the EU countries are at varying stages intheir respective implementation of the IPPC permit program, the Company hassubmitted all necessary IPPC permit applications required to date, and in somecases received completed permits from the applicable government agency. TheCompany expects to submit all other IPPC applications and related documents ona timely basis as the various countries implement the IPPC permit program.Although it is not known with certainty what each IPPC permit will require, theCompany believes, based upon its experience with the permits received to date,that the costs of compliance with the IPPC permit program will not be materialto its results of operations, financial position or liquidity.

The Kyoto Protocol is anamendment to an international treaty on global warming. The Protocolestablishes significant emission reduction targets for six gases considered tohave global warming potential, referred to as greenhouse gases. The Protocolwas adopted in 1997 and became effective in February 2005 in over 140countries that have ratified it. The EU, including Germany and other countrieswhere the Company has interests, ratified the Kyoto Protocol in 2002 and, indoing so, have enacted regulations that reduce the emission of greenhouse gasesand have established a trading system covering carbon dioxide emissions. Such atrading system became effective at the start of 2005. The new regulationdirectly affects our power plants at the Duisburg and Langelsheim sites inGermany, as well as the power plant being operated by a third party on one ofour sites. Rockwood and such third party may be required to purchase carbondioxide credits, which could result in increased operating costs, or may berequired to develop additional cost-effective methods to reduce carbon dioxideemissions, which could result in increased capital expenditures. The newregulation indirectly affects our other operations in the EU, which mayexperience higher energy costs from third party providers. The Companycontinues to evaluate options in order to comply with the Protocol. However, wedo not expect this to have a material impact on our cash flow or results ofoperations.

***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, Sudbury and Barrow, U.K.; Boksburg East, South Africaand in the United States, in Valdosta, Georgia, Beltsville, Maryland,Louisville, Kentucky, New

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Johnsonville, Tennessee,Harrisburg, North Carolina, Laurens, South Carolina, Silver Peak, Nevada and LaMirada, California. Soil contamination is also known to exist at the Company’sfacilities at Freeport, Texas, Chasse-sur-Rhone, France, Sudbury, U.K. andSumperk in Czech Republic; however, no further regulatory remedial actions arecurrently required for these facilities and any liabilities arising from suchcontamination is covered by indemnity obligations or the previous owners ofthese facilities with the exception of Freeport. The Company is currentlyoperating groundwater remediation systems at its Hainhaussen, Stadeln,Valdosta, and Silver Peak facilities. The Company also operates groundwaterremediation and/or monitoring systems at its Schlebusch, Plochingen,Marktredwitz, Stadeln, Troisdorf, New Johnsonville, Tennessee and Laurensfacilities, for which prior owners or insurers have assumed responsibility. TheCompany also continues to monitor groundwater at the Beltsville and St. Cheronfacilities, which were 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 and Louisville facilities due to a landfillclosure. The Company is also required to monitor groundwater quality at itsfacility at Mourenx, France. The Company believes that additional environmentalstudies, and possibly environmental remediations, will be required at theHarrisburg facility. The Company is also in the process of determiningappropriate remedial actions with the regulatory authorities at the followinglocations: Duisburg, Langelsheim, Troisdorf, Turin and La Mirada.Furthermore, as a result of facility closings, divestitures and offsitedisposal activities, the Company is responsible for the following othermatters: contamination beneath divested portions of the manufacturing facilityin Troisdorf; a former disposal site in Laurel, Maryland; contamination at aclosed Specialty Chemicals facility in Houston, Texas; contamination at aformer Specialty Chemicals facility in Sunbright, Virginia; groundwaterremediation at Stadeln; and former sites operated by Dynamit Nobel’s previouslydivested explosives business. The Company 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 the Company and its predecessor disposedwastes could expose the Company to cleanup obligations and other damages in thefuture.

**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 a 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. MSD’snew National Pollution Discharge Elimination System (“NPDES”) permit willrequire the Company to reduce the facility’s ammonia discharge by an average of50% by December 31, 2008. The Company is evaluating various options toreduce the amount of ammonia discharge. Although the Company will be requiredto make capital expenditures in connection with this matter, it does notbelieve that this issue will have a material adverse effect on its business orfinancial 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, whichexpired in September 2005, for claims related to the contamination of theCompany’s properties or its subsidiaries’ properties (inclusive ofcontamination which leaks or escapes from the Company’s properties or itssubsidiaries’ properties). These indemnity obligations are subject to a minimumper matter loss of $0.2 million and are further subject to a$5.0 million deductible for the indemnity to be available. In addition,the environmental deed provides that Degussa will indemnify Rockwood and itssubsidiaries for claims relating to properties that were formerly owned,occupied or used as of November 20, 2000, as well as properties owned bythird parties (inclusive of disposal of waste and certain other identifiedissues prior to November 20, 2000). The environmental deed provides thatin this instance, Degussa will be responsible for reasonable costs and expensesincurred.

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition, mg technologies ag (now known as GEA GroupAktiengesellschaft) and its subsidiary, MG North America Holdings, Inc.(now known as GEA North America, Inc.), are required to indemnify Rockwood andits subsidiaries for 50% of the excess amount of losses over the amount of therelated reserves (in the case of known claims) and 50% of claims (in the caseof unknown claims) related to the contamination of the Company or itssubsidiaries’ properties, if notified within ten years. If GEA Group’s and GEANorth America’s responsibility for contamination matters cannot be proven, asliding scale reduces the percentage further for each year during the five-yearperiod from year six to ten. GEA Group and GEA North America 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 the Dynamit NobelAcquisition, if notified within ten years. In addition, GEA Group and GEA NorthAmerica are obligated to indemnify the Company for 50% of the excess amount oflosses over the amount of the related 

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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 ($127,870 and $959,025 using the June 30, 2006exchange rate of €1.00 = $1.2787) depending on the type of claim. The indemnityobligations are further subject to certain deductibles, exclusions andlimitations. Furthermore, GEA Group and GEA North America are obligated toindemnify the Company for certain environmental risks arising from certain “sharedsite” structures for a duration of ten years. This indemnity obligation is notsubject to the percentages,*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 GEA Group, GEA North America, Degussa or any other partywho may have obligations to indemnify the Company will adhere to theirobligations and the Company may have to resort to legal action to enforce itsrights under the indemnities. In addition, the Company may be required to makeindemnity payments in connection with certain environmental matters. However,the Company does not believe that resolution of the known environmental matterssubject to indemnification obligations owed to it or by it will have a materialadverse effect on the Company’s business or financial condition, but may have amaterial adverse effect on the results of operations or cash flow in any givenquarterly or annual reporting period.

***Environmental Reserves***

The Company hasestablished reserves relating to anticipated environmental cleanup obligations,site reclamation and remediation and closure costs. Liabilities are recordedwhen potential liabilities are either known or believed to be probable and canbe reasonably estimated. The Company’s liability estimates are based uponavailable facts, existing technology, past experience and, in some instancesinsurance recoveries where the remediation costs are being paid directly by theCompany’s insurers, and are generated by several means, includingState-mandated schedules, environmental consultants and internal experts,depending on the circumstances. On a consolidated basis, the Company accruedapproximately $35.9 million and $44.8 million for known environmentalliabilities as of June 30, 2006 and December 31, 2005, respectively, allof which are classified as other non-current liabilities on the Company’sconsolidated balance sheets for such periods. Included in the $35.9 million and$44.8 million as of June 30, 2006 and December 31, 2005, respectively, is €6.5million ($8.3 million using the June 30, 2006 exchange rate of €1.00 = $1.2787)that is discounted using a 5.0% discount rate (undiscounted amount equals $12.7million), and €1.9 million ($2.4 million) that is discounted using a 5.5%discount rate (undiscounted amount equals $3.1 million). In certain cases, theCompany’s remediation liabilities are payable over periods of up to30 years. At December 31, 2005, the environmental reserve related tothe Rohner facility within our Groupe Novasep segment was $10.5 million. Asdiscussed, Rohner AG was sold in March 2006 (see Note 12, “Sale of RohnerAG,” for further detail).

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. Inaddition, in the event that manufacturing operations are discontinued at any ofour other facilities with known contamination, regulatory authorities mayimpose more stringent requirements on us including soil remediation. 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 notaccrued for any environmental related costs to remediate soil at thesefacilities.

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.

**15.          CONSOLIDATING FINANCIAL INFORMATION:**

As described in Note 9, “Long-termDebt,” the Company issued the 2011 Notes in July 2003 and the 2014 Notes inNovember 2004. The following consolidating financial statements present theresults of operations, financial condition and cash flows, in separate columns,of the parent company (Rockwood Specialties Group, Inc.), which is the issuerof the 2011 Notes and the 2014 Notes, guarantor subsidiaries, non-guarantorsubsidiaries, elimination adjustments, and consolidated totals.

23

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

**CONSOLIDATING STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2006**

** (Dollars inmillions)**
| ** **                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| NET SALES                                         |       | $           | —     |             | $          | 262.5             |       | $                | 593.3      |   | $ | 855.8 |   |
| COST OF PRODUCTS SOLD                             |       | —      |       | 190.4            |       | 396.5             |       | 586.9            |       |
| GROSS PROFIT                                      |       | —      |       | 72.1             |       | 196.8             |       | 268.9            |       |
| SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES     |       | 0.1         |       | 47.6             |       | 114.6             |       | 162.3            |       |
| RESTRUCTURING CHARGES,  net                       |       | —      |       | —           |       | 1.0               |       | 1.0              |       |
| OPERATING INCOME                                  |       | (0.1        | )          | 24.5             |       | 81.2              |       | 105.6            |       |
| OTHER INCOME  (EXPENSES):                         |       |        |       |             |       |              |       |             |       |
| Intergroup interest,  net                         |       | 28.5        |       | (5.9             | )          | (22.6             | )          | —           |       |
| Interest expense, net                             |       | (39.1       | )          | (0.7             | )          | (8.0              | )          | (47.8            | )          |
| Intergroup other, net                             |       | 17.5        |       | (18.0            | )          | 0.5               |       | —           |       |
| Foreign exchange gain  (loss), net                |       | 2.1         |       | (0.1             | )          | 3.5               |       | 5.5              |       |
| Other, net                                        |       | —      |       | —           |       | 0.2               |       | 0.2              |       |
| Net                                               |       | 9.0         |       | (24.7            | )          | (26.4             | )          | (42.1            | )          |
| INCOME (LOSS) BEFORE  TAXES AND MINORITY INTEREST |       | 8.9         |       | (0.2             | )          | 54.8              |       | 63.5             |       |
| INCOME TAX PROVISION                              |       | 4.6         |       | 1.8              |       | 18.8              |       | 25.2             |       |
| NET INCOME  (LOSS) BEFORE MINORITY INTEREST       |       | 4.3         |       | (2.0             | )          | 36.0              |       | 38.3             |       |
| MINORITY INTEREST                                 |       | —      |       | —           |       | (1.2              | )          | (1.2             | )          |
| NET INCOME (LOSS)                                 |       | $           | 4.3        |             | $          | (2.0              | )          | $                | 34.8       |   | $ | 37.1 |   |

 

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

**CONSOLIDATING STATEMENT OF OPERATIONS**

**THREE 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 CHARGES,  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 expense, 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 (BENEFIT)  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 |   |

 

24

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

**CONSOLIDATING STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED JUNE 30, 2006**

**(Dollars in millions)**
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| NET SALES                                     |       | $           | —     |             | $          | 501.2             |       | $                | 1,167.2    |   | $ | 1,668.4 |   |
| COST OF PRODUCTS  SOLD                        |       | —      |       | 363.8            |       | 786.0             |       | 1,149.8          |       |
| GROSS PROFIT                                  |       | —      |       | 137.4            |       | 381.2             |       | 518.6            |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES |       | 0.1         |       | 94.0             |       | 225.2             |       | 319.3            |       |
| RESTRUCTURING  CHARGES, net                   |       | —      |       | 0.1              |       | 2.1               |       | 2.2              |       |
| OPERATING INCOME                              |       | (0.1        | )          | 43.3             |       | 153.9             |       | 197.1            |       |
| OTHER INCOME (EXPENSES):                      |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                     |       | 54.8        |       | (13.4            | )          | (41.4             | )          | —           |       |
| Interest  expense, net                        |       | (72.7       | )          | (0.9             | )          | (13.3             | )          | (86.9            | )          |
| Intergroup  other, net                        |       | 17.5        |       | (18.7            | )          | 1.2               |       | —           |       |
| Foreign exchange  gain, net                   |       | 2.5         |       | —           |       | 0.4               |       | 2.9              |       |
| Loss on sale of  business                     |       | —      |       | —           |       | (12.1             | )          | (12.1            | )          |
| Other, net                                    |       | —      |       | —           |       | 2.4               |       | 2.4              |       |
| Net                                           |       | 2.1         |       | (33.0            | )          | (62.8             | )          | (93.7            | )          |
| INCOME BEFORE  TAXES AND MINORITY INTEREST    |       | 2.0         |       | 10.3             |       | 91.1              |       | 103.4            |       |
| INCOME TAX  PROVISION                         |       | 4.6         |       | 4.4              |       | 13.1              |       | 22.1             |       |
| NET (LOSS) INCOME BEFORE MINORITY INTEREST    |       | (2.6        | )          | 5.9              |       | 78.0              |       | 81.3             |       |
| MINORITY  INTEREST                            |       | —      |       | —           |       | (4.2              | )          | (4.2             | )          |
| NET (LOSS)  INCOME                            |       | $           | (2.6       | )                | $          | 5.9               |       | $                | 73.8       |   | $ | 77.1 |   |

 

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

**CONSOLIDATING STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED JUNE 30, 2005**

** (Dollars inmillions)**
| ** **                                    | ** ** | **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  CHARGES, 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  expense, 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  (BENEFIT) PROVISION               |       | (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 |   |

 

25

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

**CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2006**

**(Dollars in millions)**
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| CURRENT ASSETS:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 204.9      |             | $          | (148.9            | )          | $                | (23.6      | )                | $          | — |   | $ | 32.4 |   |
| Accounts  receivable, net                        |       | —      |       | 141.6            |       | 411.3             |       | —           |       | 552.9            |       |
| Inventories                                      |       | —      |       | 105.7            |       | 378.0             |       | —           |       | 483.7            |       |
| Deferred income  taxes                           |       | (7.9        | )          | 20.4             |       | 3.6               |       | —           |       | 16.1             |       |
| Prepaid expenses  and other current assets       |       | —      |       | 5.1              |       | 55.5              |       | —           |       | 60.6             |       |
| Total current assets                             |       | 197.0       |       | 123.9            |       | 824.8             |       | —           |       | 1,145.7          |       |
| PROPERTY, PLANT  AND EQUIPMENT, net              |       | —      |       | 231.2            |       | 1,269.7           |       | —           |       | 1,500.9          |       |
| INVESTMENT IN  SUBSIDIARIES                      |       | 1,653.5     |       | 90.1             |       | —            |       | (1,743.6         | )          | —           |       |
| GOODWILL                                         |       | —      |       | 352.6            |       | 1,337.8           |       | —           |       | 1,690.4          |       |
| INTERGROUP  RECEIVABLE                           |       | 1,686.8     |       | 723.6            |       | 4,162.7           |       | (6,573.1         | )          | —           |       |
| OTHER INTANGIBLE  ASSETS, net                    |       | —      |       | 58.7             |       | 540.1             |       | —           |       | 598.8            |       |
| DEFERRED DEBT  ISSUANCE COSTS, net               |       | 3.8         |       | 9.9              |       | 41.5              |       | —           |       | 55.2             |       |
| OTHER ASSETS                                     |       | 24.2        |       | 3.6              |       | 29.0              |       | —           |       | 56.8             |       |
| TOTAL ASSETS                                     |       | $           | 3,565.3    |             | $          | 1,593.6           |       | $                | 8,205.6    |             | $          | (8,316.7 | ) | $ | 5,047.8 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| CURRENT  LIABILITIES:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 82.5              |       | $                | 191.0      |             | $          | — |   | $ | 273.5 |   |
| Income taxes  payable                            |       | (4.8        | )          | 5.5              |       | 32.1              |       | —           |       | 32.8             |       |
| Accrued  compensation                            |       | —      |       | 14.8             |       | 73.3              |       | —           |       | 88.1             |       |
| Restructuring  liability                         |       | —      |       | 0.3              |       | 9.7               |       | —           |       | 10.0             |       |
| Accrued expenses  and other current liabilities  |       | 37.1        |       | 32.9             |       | 141.4             |       | —           |       | 211.4            |       |
| Senior secured  revolving credit facility        |       | —      |       | —           |       | 25.6              |       | —           |       | 25.6             |       |
| Long-term debt,  current portion                 |       | 21.2        |       | —           |       | 75.9              |       | —           |       | 97.1             |       |
| Total current liabilities                        |       | 53.5        |       | 136.0            |       | 549.0             |       | —           |       | 738.5            |       |
| LONG-TERM DEBT                                   |       | 2,460.6     |       | —           |       | 293.1             |       | —           |       | 2,753.7          |       |
| PENSION AND  RELATED LIABILITIES                 |       | —      |       | 11.5             |       | 366.5             |       | —           |       | 378.0            |       |
| INTERGROUP  PAYABLE                              |       | 0.9         |       | 1,086.1          |       | 5,486.1           |       | (6,573.1         | )          | —           |       |
| DEFERRED INCOME  TAXES                           |       | (17.7       | )          | 33.8             |       | 12.5              |       | —           |       | 28.6             |       |
| OTHER  LIABILITIES                               |       | 9.8         |       | 19.3             |       | 70.8              |       | —           |       | 99.9             |       |
| Total liabilities                                |       | 2,507.1     |       | 1,286.7          |       | 6,778.0           |       | (6,573.1         | )          | 3,998.7          |       |
| MINORITY  INTEREST                               |       | —      |       | —           |       | 31.7              |       | —           |       | 31.7             |       |
|                                             |       |        |       |             |       |              |       |             |       |             |       |
| STOCKHOLDER’S  EQUITY:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.8            |       | 164.5             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,005.4     |       | 296.9            |       | 1,089.9           |       | (1,388.3         | )          | 1,003.9          |       |
| Accumulated  other comprehensive income          |       | 38.8        |       | (4.7             | )          | 128.8             |       | —           |       | 162.9            |       |
| Accumulated  deficit                             |       | 14.0        |       | (176.1           | )          | 12.7              |       | —           |       | (149.4           | )          |
| Total stockholder’s equity                  |       | 1,058.2     |       | 306.9            |       | 1,395.9           |       | (1,743.6         | )          | 1,017.4          |       |
| TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY |       | $           | 3,565.3    |             | $          | 1,593.6           |       | $                | 8,205.6    |             | $          | (8,316.7 | ) | $ | 5,047.8 |   |

 

26

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

**CONSOLIDATING BALANCE SHEET**

**DECEMBER 31, 2005**

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

 

27

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

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**SIX MONTHS ENDED JUNE 30, 2006**

**(Dollars inmillions)**
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net (loss) income                                                                                        |       | $           | (2.6       | )                | $          | 5.9               |       | $                | 73.8       |   | $ | 77.1 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Depreciation and amortization                                                                            |       | —      |       | 17.9             |       | 91.2              |       | 109.1            |       |
| Deferred financing costs amortization                                                                    |       | 0.3         |       | 1.0              |       | 3.4               |       | 4.7              |       |
| Foreign exchange gain                                                                                    |       | (1.1        | )          | —           |       | (1.8              | )          | (2.9             | )          |
| Loss on sale of business, net of cash                                                                    |       | —      |       | —           |       | 11.3              |       | 11.3             |       |
| Gain on assets disposals                                                                                 |       | —      |       | —           |       | (0.6              | )          | (0.6             | )          |
| Fair value adjustment of derivatives                                                                     |       | (14.0       | )          | —           |       | (1.5              | )          | (15.5            | )          |
| Bad debt provision                                                                                       |       | —      |       | 0.3              |       | (0.1              | )          | 0.2              |       |
| Deferred income taxes                                                                                    |       | 9.4         |       | (1.6             | )          | (12.5             | )          | (4.7             | )          |
| Minority interest                                                                                        |       | —      |       | —           |       | 4.2               |       | 4.2              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                      |       | —      |       | (17.2            | )          | (31.8             | )          | (49.0            | )          |
| Inventories, including inventory write-up reversal                                                       |       | —      |       | (3.4             | )          | (11.7             | )          | (15.1            | )          |
| Prepaid expenses and other assets                                                                        |       | (1.5        | )          | 1.5              |       | 6.9               |       | 6.9              |       |
| Accounts payable                                                                                         |       | (4.8        | )          | 6.0              |       | (25.7             | )          | (24.5            | )          |
| Income taxes payable                                                                                     |       | —      |       | 5.0              |       | 14.7              |       | 19.7             |       |
| Accrued expenses and other liabilities                                                                   |       | 12.9        |       | 0.4              |       | (28.8             | )          | (15.5            | )          |
| Other operating activities, net                                                                          |       | 134.5       |       | (123.1           | )          | (11.4             | )          | —           |       |
| **Net cash provided by (used in) operating  activities**                                                 |       | 133.1       |       | (107.3           | )          | 79.6              |       | 105.4            |       |
| ** **                                                                                               |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  net of cash acquired                                                                      |       | —      |       | —           |       | (13.4             | )          | (13.4            | )          |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (15.1            | )          | (75.0             | )          | (90.1            | )          |
| Proceeds on sale  of property, plant and equipment                                                       |       | —      |       | —           |       | 2.5               |       | 2.5              |       |
| **Net cash used in investing activities**                                                                |       | —      |       | (15.1            | )          | (85.9             | )          | (101.0           | )          |
| ** **                                                                                               |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Proceeds from  senior secured credit facilities                                                          |       | 28.0        |       | —           |       | 75.1              |       | 103.1            |       |
| Repayment of  senior secured credit facilities                                                           |       | (67.7       | )          | —           |       | (61.5             | )          | (129.2           | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (40.6             | )          | (40.6            | )          |
| **Net cash used in financing activities**                                                                |       | (39.7       | )          | —           |       | (27.0             | )          | (66.7            | )          |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                                 |       | 2.1         |       | —           |       | (5.5              | )          | (3.4             | )          |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                    |       | 95.5        |       | (122.4           | )          | (38.8             | )          | (65.7            | )          |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                          |       | 109.4       |       | (26.5            | )          | 15.2              |       | 98.1             |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                 |       | $           | 204.9      |             | $          | (148.9            | )          | $                | (23.6      | ) | $ | 32.4 |   |

 

28

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

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**SIX MONTHS ENDED JUNE 30, 2005**

**(Dollars inmillions)**
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **                | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|---------------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated**          | ** ** |
| ** **                                                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | **As restated**      | ** ** |
| ** **                                                                                               | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | **See Note 16** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |                      |       |
| Net income                                                                                               |       | $           | 77.9       |             | $          | 17.4              |       | $                         | 36.4       |   | $ | 131.7 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities:             |       |        |       |             |       |              |       |                      |       |
| Depreciation and amortization                                                                            |       | —      |       | 14.7             |       | 90.5              |       | 105.2                     |       |
| Deferred financing costs amortization                                                                    |       | 0.3         |       | 1.1              |       | 3.3               |       | 4.7                       |       |
| Foreign exchange gain                                                                                    |       | (93.1       | )          | —           |       | (7.4              | )          | (100.5                    | )          |
| Fair value adjustment 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                      |       |
| Minority interest                                                                                        |       | —      |       | —           |       | (1.7              | )          | (1.7                      | )          |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |                      |       |
| Accounts receivable                                                                                      |       | —      |       | (6.3             | )          | (22.5             | )          | (28.8                     | )          |
| Inventories, including inventory write-up reversal                                                       |       | —      |       | (9.7             | )          | (14.6             | )          | (24.3                     | )          |
| Prepaid expenses and other assets                                                                        |       | 0.1         |       | (3.0             | )          | (10.4             | )          | (13.3                     | )          |
| Accounts payable                                                                                         |       | —      |       | 14.2             |       | 29.0              |       | 43.2                      |       |
| Income taxes payable                                                                                     |       | —      |       | (0.7             | )          | 3.8               |       | 3.1                       |       |
| Accrued expenses and other liabilities                                                                   |       | 1.2         |       | (110.8           | )          | 53.4              |       | (56.2                     | )          |
| **Net cash (used in) provided by operating  activities**                                                 |       | (17.2       | )          | (72.0            | )          | 167.9             |       | 78.7                      |       |
| ** **                                                                                               |       |        |       |             |       |              |       |                      |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |                      |       |
| Capital expenditures,  excluding capital leases                                                          |       | —      |       | (10.1            | )          | (82.3             | )          | (92.4                     | )          |
| Proceeds on sale  of property, plant and equipment                                                       |       | —      |       | —           |       | 0.2               |       | 0.2                       |       |
| **Net cash used in investing activities**                                                                |       | —      |       | (10.1            | )          | (82.1             | )          | (92.2                     | )          |
| ** **                                                                                               |       |        |       |             |       |              |       |                      |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |                      |       |
| Capital  contribution                                                                                    |       | (0.5        | )          | —           |       | 0.5               |       | —                    |       |
| Proceeds from  senior secured credit facilities                                                          |       | 302.0       |       | —           |       | —            |       | 302.0                     |       |
| Repayment of  senior secured credit facilities                                                           |       | (302.0      | )          | —           |       | —            |       | (302.0                    | )          |
| Payments on  other 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 YEAR                                                            |       | 79.1        |       | 48.2             |       | (15.9             | )          | 111.4                     |       |
| CASH AND CASH  EQUIVALENTS, END OF YEAR                                                                  |       | $           | 55.1       |             | $          | (33.9             | )          | $                         | 60.8       |   | $ | 82.0 |   |

 

29

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**16.  RESTATEMENT:**

The condensedconsolidated statements of cash flows as reported for the six months ended June30, 2005, contained a classification error in the treatment of costs ofproperty, plant and equipment included in accounts payable and accrued expensesand other liabilities. In accordance with SFAS No. 95,*Statement of Cash Flows,* these costsshould be reported within cash flows from investing activities when paid. TheCompany was reporting capital expenditures in its condensed consolidatedstatements of cash flows on an accrual basis rather than on a cash basis, andas a result, was reporting capital expenditures in the period in which the Companyacquired legal title to the related property, plant and equipment rather thanwhen the Company actually paid for such property, plant and equipment. Further,the unpaid portion of the transaction should be disclosed as a non-cashinvesting activity in the supplemental disclosure of cash flow information. Asa result, the Company restated the condensed consolidated statement of cashflows for the six months ended June 30, 2005. The restatement does not changethe Company’s condensed consolidated statements of operations, the condensedconsolidated balance sheets or cash and cash equivalents reported at the end ofthe period in the condensed consolidated statements of cash flows for any ofthe periods presented.

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

 

The Company also revisedthe reconciliation of net cash provided by operating activities to AdjustedEBITDA and the disclosures in the Liquidity and Capital Resources section ofItem 2, “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” related to cash flows from operating and investingactivities for the six months ended June 30, 2005.

**Item2.****          Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

The following discussioncontains forward-looking statements that involve numerous risks anduncertainties. Our actual results could differ materially from those discussedin the forward-looking statements as a result of these risks and uncertainties,including those set forth in “Forward-Looking Statements” at the end of thisManagement Discussion and Analysis section and the risk factors section of theCompany’s 2005 Form 10-K. You should read the following discussion andanalysis together with our condensed consolidated financial statements and thenotes to those statements that appear elsewhere in this Quarterly Report.Amounts may not recalculate due to rounding differences. The followingmanagement’s discussion and analysis of financial condition and results ofoperations gives effect to the restatement as described in Note 16, “Restatement.”

**General**

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

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

Our cost of products soldconsists of variable and fixed components. Our variable costs are proportionalto volume and consist principally of raw materials, packaging and relatedsupplies, certain energy costs, and certain distribution costs includinginbound, outbound, and internal shipping and transfer costs. Our fixed costsare not significantly impacted by production volume and consist principally ofcertain fixed manufacturing costs and other distribution network costs,including warehousing. Fixed manufacturing

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costs compriseheadcount-related costs and overhead, including depreciation, periodicmaintenance costs, purchasing and receiving costs, inspection costs and certainenergy 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 are focused on growth,productivity, cost reduction, margin expansion and debt reduction. Inconnection with this focus, among other things:

·      Wehave cut costs, reduced overhead and eliminated 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 closed the New Lebanon, New Yorkmanufacturing facility of our Advanced Ceramics segment. In addition, weeliminated 40 positions in connection with the acquisition of the pigments anddispersions business.  In the WaferReclaim business in our Electronics segment, we closed a facility in the U.K.in January 2006 and closed a facility in the U.S. in March 2006. Inour Groupe Novasep segment, we sold our Rohner AG operation located inPratteln, Switzerland in March 2006. We also implemented other restructuringmeasures in our other segments;

·      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 tofocus on working capital management; and

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

**Factors Which Affect Our Results ofOperations**

**Our Markets**

Because the businesses 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:

***SpecialtyChemicals***

·      Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aerospace industries. In 2005, we benefited from agrowth in demand for most of the markets and regions we serve, especially inthe aerospace and automotive industry which has continued in 2006. Despite theless favorable automotive conditions in the U.S., we have been able to sustainsales growth in our global automotive business due to market penetration as ourbusiness primarily focuses on the European automobile industry market. Growthin the Surface Treatment business occurred in the first half of 2006 and isexpected to continue throughout 2006 in most markets as price and volumeincreases and productivity improvements are expected to offset raw materialcost increases.

·      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, glass ceramics, cement and thegeneral demand in China. Sales of lithium products specifically used in life scienceapplications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. Market conditions forlithium products in the industries served provided increasing price trends forlithium salts in 2005. Growth in the Fine Chemicals business has occurred in2006 and is expected to continue this year in most market segments, especiallydriven by lithium salt applications through price increases. Tight supplies inthe global market and unfavorable weather conditions at our lithium ponds inChile early this year have lead to shortages in lithium salts as a raw materialand customer demand for lithium carbonate will not be completely satisfied.During 2005, we experienced price increases related to key raw materials usedin producing metal sulfides.  In thefirst half of 2006, prices for some raw materials have increased further.  Raw material prices are expected to bevolatile throughout the remainder of the year.

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

·      Althoughthe growth in demand in certain North American end-use markets, such asconstruction, has slowed, sales in our Color Pigments and Services business inNorth America have increased on higher construction volumes and selling prices.In 

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particular, a continuingtrend towards the increased use of colored concrete products in the NorthAmerican construction market has had a positive effect on our Color Pigmentsand Services business line. The Timber Treatment Chemicals business alsobenefited from high levels of activity in home improvement areas; however,demand for treated wood has been negatively impacted in 2006 by the increasinguse of wood substitutes and a slowdown in the construction market.

·      Demandin certain European end-use markets over the last few years has slowed. Thisaffected sales of Color Pigments and Services in the construction market,particularly in Germany. We experienced a decrease in European constructionvolumes in our Color Pigments and Services business in 2005, and this hascontinued in the first half of 2006. However, European construction sales in our Color Pigments and Servicesbusiness increased slightly in 2006 versus the same period in the prior year onhigher selling prices necessary to recover raw material and energy costincreases.

·      The changein the market to environmentally advanced wood treatment chemical products,such as ACQ, and the phase out of chromated copper arsenate, or CCA, forresidential use had a positive impact on our Timber Treatment Chemicalsbusiness in 2005, which is a leading supplier of these higher margin products.In the Timber Treatment Chemicals business, our ACQ market position is expectedto be negatively impacted by market share losses to competition, competitivepricing pressure and the expiration of the ACQ patent in 2007.

·      OurClay-based Additives business supplies specialty rheology modifiers andadditives, both clay-based and synthetic, to a variety of end-use markets.  For 2006, the major drivers of expectedgrowth in the Clay-based Additives business will be the acquisition ofSüd-Chemie’s Rheological Additives and carbonless clay businesses, which closedon December 30, 2005, continued strength in oilfield sales and growth inadditives for water-based coatings.

·      Rawmaterial costs increased in general in the Performance Additives segment in2005 and continue to trend upward, particularly in the Color Pigments andServices business, the Timber Treatment Chemicals business and the Clay-basedAdditives business. In the Color Pigments and Services business, selling priceincreases were initiated in 2005 to partially offset the increases in rawmaterial and energy costs; however, this business was not able to pass on allsuch cost increases to its customers and raw material costs are expected tocontinue to increase in 2006. In the Timber Treatment Chemicals business,increased raw material costs for copper, which were at record highs in thesecond quarter of 2006, and mono-ethanolamine, primary components in the ACQproduction process, are expected to continue to increase in the nearfuture.  In the Clay-based Additivesbusiness, price increases were implemented in 2005 in selective product linesand continued in 2006 in a majority of product lines to partially offset raw materialand energy cost increases.  Our abilityto pass on some or all of these increases is uncertain in all businesses.

***TitaniumDioxide Pigments***

·      Demandfor our titanium dioxide products in anatase grade is driven mainly by demandin the synthetic fiber industry, while demand for titanium dioxide products inrutile grade and our functional additives is driven by demand in the coatings,paper and plastics industries. We experienced an unexpected decrease in volumeof our titanium dioxide products in anatase grade in 2005 due, in part, to the lowercost of cotton, which negatively affected demand for synthetic fibers and inturn our products. However, volumes in the fiber anatase business haveincreased in the first half of 2006 and are expected to continue to increase.

·      Throughout2005, we experienced pricing pressure from global suppliers in Asia,specifically Chinese suppliers related to titanium dioxide products in anatasegrade. We also experienced pricing pressures on our titanium products in rutilegrade. Sales of titanium dioxide products in rutile grade increased in 2006 onhigher volumes and selling prices and are expected to continue to increase in2006 due to general price increases.

***AdvancedCeramics***

·      Demandfor our ceramic medical devices is mainly tied to the aging population in Europeand the United States. As a result of this demographic as well as our marketshare penetration, the volume of our products used in medical deviceapplications sold has experienced double-digit growth each year since 2001.However, some customers in the U.S. recently reduced their demand due to highinventory levels and delayed approvals. As a result, we expect this demand to stabilize in the near term.

·      Salesof ceramic products for use in cutting tool products and mechanical systemswere negatively impacted by pricing pressure from Asian competitors in 2005,which occurred in 2006 and is expected to continue.  In addition, selling prices in our electronicproducts business as well as for some Piezo applications were lower in thefirst half of 2006 and are expected to continue to be lower this year.

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***Groupe Novasep***

·      Demandfor our custom synthesis and proprietary product chemistries and processesdepend on the pipeline and lifecycles of pharmaceuticals.  While slowdown of new drug approval in the U.S.is affecting our market, the number of drugs that are becoming generic iscontributing to growth.  Healthcare costcontainment policies put pressure on prices and this adversely affects theprices of our products.  However, thisalso creates opportunities for innovative synthesis routes and purification andseparation processes.

·      Chinaand India are emerging countries in this market and represent competition forour custom synthesis chemistries.  This competitionis also contributing to sales growth in our process business for equipment,processes and systems in these countries. In addition, the growing worldwide population and the aging populationin the U.S., Europe and Japan have increased demand for pharmaceuticals.

·      Thedemand for green industrial processes that release less solvents/effluentscreates continuous and profitable growth opportunities for our industrialbiotech business as oil derivative products are being replaced by others comingfrom agriculture such as biofuels.  Theincreasing price of crude oil also has a positive impact in the industrialbiotech market.

***SpecialtyCompounds***

·      Ourlargest product line in the Specialty Compounds segment is wire and cablecompounds. Sales within this product line are dependent upon the telecommunicationsmarket and related sectors, specifically demand for high-end voice and datacommunication wire and cable, for which our Specialty Compounds segment is asignificant provider of sheathing materials. In 2005, we experienced increaseddemand for these products.  Volumes forthese wire and cable products were down slightly in the first half of 2006, butare expected to increase in the second half of the year.  Newly developed non-halogen products for wireand cable data communication, military and other applications have expandedbusiness in North America and created opportunities in Europe.

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

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

***Electronics***

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

·      Theprice of certain of our products is insulated to some degree from the effect ofchanges in the price of semiconductors and printed circuit boards due to thefact that the cost of these products is generally a small component of the costof the end product. Despite this, in 2005 and continuing into 2006, there hasbeen pricing pressure in certain businesses, particularly photomasks due tovery aggressive competition. We expect that this pricing pressure will continueduring the rest of 2006 for the photomasks businesses.

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##### **GlobalExposure**

We operate ageographically diverse business. Of our 2005 net sales, 51% were shipments toEurope, 33% to North America (predominantly the United States) and 16% to therest of the world. For a geographic description of the origin of our net salesand location of our long-lived assets, see Note 3, “Segment Information,”in our 2005 Form 10-K.

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with over 100 manufacturing facilitiesin 25 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. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe six month period ended June 30, 2006, the average exchange rate of the euroagainst the U.S. dollar was lower compared to the same period in 2005 andnegatively impacted our net sales, gross profit and operating income.  For the three months ended June 30, 2006, theaverage exchange rate of the euro against the U.S. dollar was slightly lowercompared to the same period in 2005 and did not have a material impact onresults.  The euro was stronger at June30, 2006 compared to December 31, 2005, which in turn had a positiveimpact on the “foreign exchange gain” component of “other income (expenses)” asa result of accounting for euro-denominated non-operating transactions.  Historically, however, our operating marginshave not been significantly impacted by currency fluctuations because, ingeneral, 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 49% of our 2005 cost of products sold. We have a broad rawmaterial base, with the cost of no single raw material representing more than2% of our cost of products sold in 2005. Nonetheless, the significant pricefluctuations our raw materials have experienced in the past during periods ofhigh demand have had an adverse impact on our results of operations.  In particular, record high prices for copperused in the Timber Treatment Chemicals business of our Performance Additivessegment have had a negative impact on results. We cannot accurately predict theimpact of any future price increases for raw materials or any raw materialshortages on our business as a whole or in specific geographic regions. Inaddition, we may not be able to pass on raw material price increases to ourcustomers.

**EnergyCosts**

In 2005, energy purchasesrepresented approximately 5% of our cost of products sold. However, withincertain business lines, such as our Titanium Dioxide Pigments segment and theColor Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments andServices and Clay-based Additives, increases when the price of natural gas inNorth America rises. Natural gas prices in North America increased in 2005, duein part to political conditions and extreme weather conditions, includingHurricanes Katrina and Rita. Natural gas prices have been relatively stablethus far in 2006. In contrast, natural gas prices in Europe, where our TitaniumDioxide Pigments segment is located, have historically been relatively stable,although prices rose in the first half of 2006.

**IncomeTaxes**

The effective tax ratefor the second quarter of 2006 was 39.7% with a benefit recorded for the changein the Canadian Corporate tax rate and its impact on reversing deferred taxliabilities associated with tax years 2008 and beyond.  Additionally, there was a benefit recordedfor the Texas margin tax which was enacted in the second quarter of 2006.  The effective tax rate associated with secondquarter 2006 ordinary operating results was 39.8%.  In the second quarter of 2006, the worldwidevaluation allowance increased by $5.0 million. As a majority of the increase in the valuation allowance was a result ofthe deferred tax assets associated with other comprehensive income, the changein the valuation allowance did not have a significant impact on the effectivetax rate during the second quarter of 2006.

**SpecialCharges and Credits**

During the periodspresented, we incurred certain special charges, along with certain other items,substantially in connection with the establishment of the post-acquisitioncorporate entity that incorporates the four business segments acquired in theDynamit Nobel Acquisition as well as in connection with the IPO. These itemsinclude systems/organization establishment expenses, restructuring and relatedcharges, foreign exchange gains and losses and inventory write-up reversals.See “Items excluded from Adjusted EBITDA” section in Note 4, “SegmentInformation,” for a discussion of special charges and credits recorded in the threeand six months ended June 30, 2006 and 2005.

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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.

**Definition of Adjusted EBITDA**

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

·      interest expense;

·      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 under the security documents (as suchterm is defined in the senior secured credit agreement), the indenturegoverning the 2014 Notes and the offering of the 2014 Notes and any otherrelated transactions;

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

·      anyfees and expenses related to permitted acquisitions;

·      anydeduction for minority interest expense; and

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

less:

·      extraordinarygains and non-recurring gains;

·      non-cashgains; and

·      gainson asset sales,

inall cases, subject to certain exclusions.

With respect toentities acquired, we include Adjusted EBITDA for such entities in calculatingour pro forma Adjusted EBITDA. The adjustments made to the income fromcontinuing 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.

**Management’s Uses**

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 EBITDAhave been deemed by management to have little or no bearing on our day-to-dayoperating performance. It is also the most significant criterion in ourcalculation of performance-based cash bonuses and our determination of whethercertain performance-based stock options vest, both of which are tied toAdjusted EBITDA targets.

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated 

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

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 cashflows to calculate Adjusted EBITDA, and using this non-GAAP financial measureas compared to the most directly comparable U.S. GAAP financial measures,include:

·      the cash portion of interest expense, net,income tax provision (benefit), and restructuring as well as non-recurringcharges related to securities issuance, acquisition activities, andsystems/organization establishment, generally represent charges (gains) whichmay significantly affect funds available to use in our operating, investing andfinancing activities;

·      non-operating foreign exchange gains(losses), although not immediately affecting cash used in investing activities,may affect the amount of funds needed to service our debt if those currencyimpacts remain in place as we meet our future principal repayment obligations;and

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

An investor or 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 income (loss) or income (loss) before taxes and minority interestor operating income or cash flows from operating activities as calculated andpresented in accordance with U.S. GAAP. You should not rely on Adjusted EBITDAas a substitute for any such U.S. GAAP financial measures. We strongly urge youto review the reconciliations of Adjusted EBITDA to GAAP financial measures andother financial information, in each case included elsewhere in this report. Wealso strongly urge you not to rely on any single financial measure to evaluateour business.

**Resultsof Operations**

**ActualResults of Operations**

Thefollowing table presents the major components of our operations on an actualbasis and Adjusted EBITDA (the reconciliation to net income is set forthin—Reconciliation of Net Income to Adjusted EBITDA for the three and six monthsended June 30, 2006 and 2005), including as a percentage of net sales, for theperiods presented. See Note 4, “Segment Information,” for segmentinformation and a reconciliation to net income on a consolidated basis and areconciliation to income before taxes and minority interest on a segment basis.

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| ** **                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **($ in millions)**                  | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statement of operations data:**              | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales:**                                 | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty Chemicals                            |       | $                                                   | 232.0      |                                              | $          | 219.7 |   | $ | 460.1 |   | $ | 439.7 |   |
| Performance Additives                          |       | 212.8                                               |       | 190.1                                             |       | 395.3 |   | 349.6 |   |
| Titanium Dioxide  Pigments                     |       | 111.0                                               |       | 109.2                                             |       | 219.2 |   | 213.7 |   |
| Advanced Ceramics                              |       | 98.0                                                |       | 96.4                                              |       | 190.7 |   | 188.3 |   |
| Groupe Novasep                                 |       | 84.3                                                |       | 95.0                                              |       | 172.8 |   | 187.9 |   |
| Specialty Compounds                            |       | 66.1                                                |       | 62.1                                              |       | 129.3 |   | 120.2 |   |
| Electronics                                    |       | 51.6                                                |       | 44.9                                              |       | 101.0 |   | 87.7 |   |
| Total net sales                                |       | 855.8                                               |       | 817.4                                             |       | 1,668.4 |   | 1,587.1 |   |
| Gross profit                                   |       | 268.9                                               |       | 263.0                                             |       | 518.6 |   | 488.6 |   |
|                                           |       | 31.4                                                | %          | 32.2                                              | %          | 31.1 | % | 30.8 | % |
| Selling, general and  administrative expenses  |       | 162.3                                               |       | 157.5                                             |       | 319.3 |   | 307.7 |   |
|                                           |       | 19.0                                                | %          | 19.3                                              | %          | 19.1 | % | 19.4 | % |
| Restructuring charges,  net                    |       | 1.0                                                 |       | 2.9                                               |       | 2.2 |   | 5.8 |   |
| **Operating income (loss):**                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty Chemicals                            |       | 38.7                                                |       | 36.5                                              |       | 77.9 |   | 67.3 |   |
|                                           |       | 16.7                                                | %          | 16.6                                              | %          | 16.9 | % | 15.3 | % |
| Performance Additives                          |       | 29.5                                                |       | 37.0                                              |       | 53.5 |   | 60.0 |   |
|                                           |       | 13.9                                                | %          | 19.5                                              | %          | 13.5 | % | 17.2 | % |
| Titanium Dioxide  Pigments                     |       | 12.5                                                |       | 12.6                                              |       | 24.4 |   | 24.3 |   |
|                                           |       | 11.3                                                | %          | 11.5                                              | %          | 11.1 | % | 11.4 | % |
| Advanced Ceramics                              |       | 16.8                                                |       | 16.8                                              |       | 31.9 |   | 30.7 |   |
|                                           |       | 17.1                                                | %          | 17.4                                              | %          | 16.7 | % | 16.3 | % |
| Groupe Novasep                                 |       | 12.0                                                |       | 3.4                                               |       | 19.5 |   | 1.9 |   |
|                                           |       | 14.2                                                | %          | 3.6                                               | %          | 11.3 | % | 1.0 | % |
| Specialty Compounds                            |       | 6.3                                                 |       | 5.9                                               |       | 11.6 |   | 11.8 |   |
|                                           |       | 9.5                                                 | %          | 9.5                                               | %          | 9.0 | % | 9.8 | % |
| Electronics                                    |       | 5.3                                                 |       | 1.8                                               |       | 8.8 |   | 2.5 |   |
|                                           |       | 10.3                                                | %          | 4.0                                               | %          | 8.7 | % | 2.9 | % |
| Corporate costs                                |       | (15.5                                               | )          | (11.4                                             | )          | (30.5 | ) | (23.4 | ) |
| Total operating income                         |       | 105.6                                               |       | 102.6                                             |       | 197.1 |   | 175.1 |   |
| **Other income (expenses):**                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense, net                          |       | (47.8                                               | )          | (55.7                                             | )          | (86.9 | ) | (103.9 | ) |
| Foreign exchange gain,  net                    |       | 5.5                                                 |       | 58.6                                              |       | 2.9 |   | 100.5 |   |
| Loss on sale of  business                      |       | —                                              |       | —                                            |       | (12.1 | ) | — |   |
| Other, net                                     |       | 0.2                                                 |       | —                                            |       | 2.4 |   | — |   |
| **Income before taxes and  minority interest** |       | 63.5                                                |       | 105.5                                             |       | 103.4 |   | 171.7 |   |
| Income tax provision                           |       | 25.2                                                |       | 16.8                                              |       | 22.1 |   | 41.7 |   |
| Income before minority  interest               |       | 38.3                                                |       | 88.7                                              |       | 81.3 |   | 130.0 |   |
| Minority interest                              |       | (1.2                                                | )          | 0.9                                               |       | (4.2 | ) | 1.7 |   |
| Net income                                     |       | $                                                   | 37.1       |                                              | $          | 89.6 |   | $ | 77.1 |   | $ | 131.7 |   |
| **Adjusted EBITDA:**                           | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty Chemicals                            |       | 50.7                                                |       | 49.4                                              |       | 102.1 |   | 92.4 |   |
|                                           |       | 21.9                                                | %          | 22.5                                              | %          | 22.2 | % | 21.0 | % |
| Performance Additives                          |       | 42.8                                                |       | 47.2                                              |       | 76.1 |   | 81.4 |   |
|                                           |       | 20.1                                                | %          | 24.8                                              | %          | 19.3 | % | 23.3 | % |
| Titanium Dioxide  Pigments                     |       | 21.8                                                |       | 22.1                                              |       | 42.7 |   | 43.0 |   |
|                                           |       | 19.6                                                | %          | 20.2                                              | %          | 19.5 | % | 20.1 | % |
| Advanced Ceramics                              |       | 25.6                                                |       | 24.1                                              |       | 49.2 |   | 45.5 |   |
|                                           |       | 26.1                                                | %          | 25.0                                              | %          | 25.8 | % | 24.2 | % |
| Groupe Novasep                                 |       | 19.8                                                |       | 12.8                                              |       | 35.7 |   | 23.0 |   |
|                                           |       | 23.5                                                | %          | 13.5                                              | %          | 20.7 | % | 12.2 | % |
| Specialty Compounds                            |       | 8.6                                                 |       | 7.4                                               |       | 15.9 |   | 14.7 |   |
|                                           |       | 13.0                                                | %          | 11.9                                              | %          | 12.3 | % | 12.2 | % |
| Electronics                                    |       | 9.7                                                 |       | 7.0                                               |       | 18.3 |   | 12.8 |   |
|                                           |       | 18.8                                                | %          | 15.6                                              | %          | 18.1 | % | 14.6 | % |
| Corporate costs                                |       | (12.8                                               | )          | (9.5                                              | )          | (25.1 | ) | (19.1 | ) |
| Total Adjusted EBITDA                          |       | $                                                   | 166.2      |                                              | $          | 160.5 |   | $ | 314.9 |   | $ | 293.7 |   |

 

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The following tablepresents the changes in the major components of our operations on a historicalbasis in dollars and percentages:
| ** **                                    | ** ** | **  Change: Three months ended June 30, 2006 versus 2005  ** | ** ** | **Change: Six months ended June 30, 2006 versus 2005** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                                                                                               | ** ** | **%**                                                                                          | ** ** | **FX** | ** ** | ** ** | ** ** | ** ** | ** ** | **%** | ** ** | **FX** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Total**                                                                                                                | ** ** | **Change**                                                                                     | ** ** | **Effect (a)** | ** ** | **Organic (b)** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Organic (b)** | ** ** |
| **Statement  of operations data:**            |       |                                                                                                                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                |       |                                                                                                                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                          |       | $                                                                                                                        | 12.3       |                                                                                           | 5.6        | % | $ | (0.2 | ) | $ | 12.5 |   | $ | 20.4 |   | 4.6 | % | $ | (14.2 | ) | $ | 34.6 |   |
| Performance  Additives                        |       | 22.7                                                                                                                     |       | 11.9                                                                                           |       | (0.3 | ) | 23.0 |   | 45.7 |   | 13.1 |   | (4.4 | ) | 50.1 |   |
| Titanium Dioxide  Pigments                    |       | 1.8                                                                                                                      |       | 1.6                                                                                            |       | (0.2 | ) | 2.0 |   | 5.5 |   | 2.6 |   | (10.4 | ) | 15.9 |   |
| Advanced Ceramics                             |       | 1.6                                                                                                                      |       | 1.7                                                                                            |       | 0.2 |   | 1.4 |   | 2.4 |   | 1.3 |   | (7.2 | ) | 9.6 |   |
| Groupe Novasep                                |       | (10.7                                                                                                                    | )          | (11.3                                                                                          | )          | (0.1 | ) | (10.6 | ) | (15.1 | ) | (8.0 | ) | (8.5 | ) | (6.6 | ) |
| Specialty  Compounds                          |       | 4.0                                                                                                                      |       | 6.4                                                                                            |       | 0.3 |   | 3.7 |   | 9.1 |   | 7.6 |   | (0.7 | ) | 9.8 |   |
| Electronics                                   |       | 6.7                                                                                                                      |       | 14.9                                                                                           |       | (0.2 | ) | 6.9 |   | 13.3 |   | 15.2 |   | (2.0 | ) | 15.3 |   |
| Total net sales                               |       | 38.4                                                                                                                     |       | 4.7                                                                                            |       | (0.5 | ) | 38.9 |   | 81.3 |   | 5.1 |   | (47.4 | ) | 128.7 |   |
| Gross profit                                  |       | 5.9                                                                                                                      |       | 2.2                                                                                            |       | (0.1 | ) | 6.0 |   | 30.0 |   | 6.1 |   | (14.7 | ) | 44.7 |   |
| Selling, general  and administrative expenses |       | 4.8                                                                                                                      |       | 3.0                                                                                            |       | (0.4 | ) | 5.2 |   | 11.6 |   | 3.8 |   | (9.3 | ) | 20.9 |   |
| Restructuring  charges                        |       | (1.9                                                                                                                     | )          |                                                                                           |       |   |   | (1.9 | ) | (3.6 | ) |   |   |   |   | (3.6 | ) |
| Total operating  expenses                     |       | 2.9                                                                                                                      |       | 1.8                                                                                            |       | (0.4 | ) | 3.3 |   | 8.0 |   | 2.6 |   | (9.3 | ) | 17.3 |   |
| **Operating  income (loss):**                 |       |                                                                                                                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                          |       | 2.2                                                                                                                      |       | 6.0                                                                                            |       | 0.2 |   | 2.0 |   | 10.6 |   | 15.8 |   | (2.2 | ) | 12.8 |   |
| Performance  Additives                        |       | (7.5                                                                                                                     | )          | (20.3                                                                                          | )          | — |   | (7.5 | ) | (6.5 | ) | (10.8 | ) | (0.3 | ) | (6.2 | ) |
| Titanium Dioxide  Pigments                    |       | (0.1                                                                                                                     | )          | (0.8                                                                                           | )          | — |   | (0.1 | ) | 0.1 |   | 0.4 |   | (1.1 | ) | 1.2 |   |
| Advanced Ceramics                             |       | —                                                                                                                   |       | —                                                                                         |       | (0.1 | ) | 0.1 |   | 1.2 |   | 3.9 |   | (1.4 | ) | 2.6 |   |
| Groupe Novasep                                |       | 8.6                                                                                                                      |       | 252.9                                                                                          |       | 0.1 |   | 8.5 |   | 17.6 |   | 926.3 |   | (0.7 | ) | 18.3 |   |
| Specialty Compounds                           |       | 0.4                                                                                                                      |       | 6.8                                                                                            |       | — |   | 0.4 |   | (0.2 | ) | (1.7 | ) | — |   | (0.2 | ) |
| Electronics                                   |       | 3.5                                                                                                                      |       | 194.4                                                                                          |       | 0.1 |   | 3.4 |   | 6.3 |   | 252.0 |   | — |   | 6.3 |   |
| Corporate costs                               |       | (4.1                                                                                                                     | )          | (36.0                                                                                          | )          | — |   | (4.1 | ) | (7.1 | ) | (30.3 | ) | 0.3 |   | (7.4 | ) |
| Total                                         |       | 3.0                                                                                                                      |       | 2.9                                                                                            |       | 0.3 |   | 2.7 |   | 22.0 |   | 12.6 |   | (5.4 | ) | 27.4 |   |
| **Other  income (expenses):**                 |       |                                                                                                                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense,  net                        |       | 7.9                                                                                                                      |       | (14.2                                                                                          | )          | 0.2 |   | 7.7 |   | 17.0 |   | (16.4 | ) | 2.4 |   | 14.6 |   |
| Foreign exchange  gain, net                   |       | (53.1                                                                                                                    | )          |                                                                                           |       |   |   |   |   | (97.6 | ) |   |   |   |   |   |   |
| Loss on sale of  business                     |       | —                                                                                                                   |       |                                                                                           |       |   |   |   |   | (12.1 | ) |   |   |   |   |   |   |
| Other                                         |       | 0.2                                                                                                                      |       |                                                                                           |       |   |   |   |   | 2.4 |   |   |   |   |   |   |   |
| **Income  before taxes and minority**         |       |                                                                                                                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **interest:**                                 |       |                                                                                                                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                          |       | (1.9                                                                                                                     | )          |                                                                                           |       |   |   |   |   | 11.2 |   |   |   |   |   |   |   |
| Performance  Additives                        |       | (4.1                                                                                                                     | )          |                                                                                           |       |   |   |   |   | (1.3 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                    |       | 0.5                                                                                                                      |       |                                                                                           |       |   |   |   |   | 3.8 |   |   |   |   |   |   |   |
| Advanced Ceramics                             |       | 0.8                                                                                                                      |       |                                                                                           |       |   |   |   |   | 3.9 |   |   |   |   |   |   |   |
| Groupe Novasep                                |       | 9.3                                                                                                                      |       |                                                                                           |       |   |   |   |   | 7.6 |   |   |   |   |   |   |   |
| Specialty  Compounds                          |       | 0.4                                                                                                                      |       |                                                                                           |       |   |   |   |   | (0.2 | ) |   |   |   |   |   |   |
| Electronics                                   |       | 4.6                                                                                                                      |       |                                                                                           |       |   |   |   |   | 6.2 |   |   |   |   |   |   |   |
| Corporate costs                               |       | (51.6                                                                                                                    | )          |                                                                                           |       |   |   |   |   | (99.5 | ) |   |   |   |   |   |   |
| Total                                         |       | (42.0                                                                                                                    | )          |                                                                                           |       |   |   |   |   | (68.3 | ) |   |   |   |   |   |   |
| Income tax  provision                         |       | 8.4                                                                                                                      |       |                                                                                           |       |   |   |   |   | (19.6 | ) |   |   |   |   |   |   |
| Net income before  minority interest          |       | (50.4                                                                                                                    | )          |                                                                                           |       |   |   |   |   | (48.7 | ) |   |   |   |   |   |   |
| Minority interest                             |       | (2.1                                                                                                                     | )          |                                                                                           |       |   |   |   |   | (5.9 | ) |   |   |   |   |   |   |
| Net income                                    |       | (52.5                                                                                                                    | )          |                                                                                           |       |   |   |   |   | (54.6 | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                         |       |                                                                                                                     |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                          |       | $                                                                                                                        | 1.3        |                                                                                           | 2.6        | % | $ | 0.1 |   | $ | 1.2 |   | 9.7 |   | 10.5 | % | $ | (3.0 | ) | $ | 12.7 |   |
| Performance Additives                         |       | (4.4                                                                                                                     | )          | (9.3                                                                                           | )          | (0.3 | ) | (4.1 | ) | (5.3 | ) | (6.5 | ) | (0.9 | ) | (4.4 | ) |
| Titanium Dioxide  Pigments                    |       | (0.3                                                                                                                     | )          | (1.4                                                                                           | )          | (0.1 | ) | (0.2 | ) | (0.3 | ) | (0.7 | ) | (2.0 | ) | 1.7 |   |
| Advanced Ceramics                             |       | 1.5                                                                                                                      |       | 6.2                                                                                            |       | 0.1 |   | 1.4 |   | 3.7 |   | 8.1 |   | (2.0 | ) | 5.7 |   |
| Groupe Novasep                                |       | 7.0                                                                                                                      |       | 54.7                                                                                           |       | (0.1 | ) | 7.1 |   | 12.7 |   | 55.2 |   | (1.5 | ) | 14.2 |   |
| Specialty  Compounds                          |       | 1.2                                                                                                                      |       | 16.2                                                                                           |       | — |   | 1.2 |   | 1.2 |   | 8.2 |   | (0.1 | ) | 1.3 |   |
| Electronics                                   |       | 2.7                                                                                                                      |       | 38.6                                                                                           |       | — |   | 2.7 |   | 5.5 |   | 43.0 |   | (0.3 | ) | 5.8 |   |
| Corporate costs  and eliminations             |       | (3.3                                                                                                                     | )          | (34.7                                                                                          | )          | 0.1 |   | (3.4 | ) | (6.0 | ) | (31.4 | ) | 0.3 |   | (6.3 | ) |
| Total Adjusted EBITDA                         |       | $                                                                                                                        | 5.7        |                                                                                           | 3.6        | % | $ | (0.2 | ) | $ | 5.9 |   | $ | 21.2 |   | 7.2 | % | $ | (9.5 | ) | $ | 30.7 |   |

 

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(a)     The foreign exchange effect was calculatedbased on the change in the applicable rate, primarily the euro, to the U.S.dollar exchange rate for the applicable period.

(b)     Includes the impact of acquisitions anddivestitures.

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***Three months ended June 30, 2006 compared to three monthsended June 30, 2005***

##### Overview

Net sales increased $38.4million in the second quarter of 2006 compared with the same period in theprior year as a result of general strong demand and the favorable impact of theacquisition of the Süd-Chemie businesses on December 30, 2005.  See further discussion by segment below.

Operating incomeincreased $3.0 million in the second quarter of 2006 compared with the sameperiod in the prior year primarily in the Specialty Chemicals, Groupe Novasepand Electronics segments. The impact of higher overall sales was partiallyoffset by higher raw material and energy costs and higher depreciation andamortization expense.

Adjusted EBITDA increased$5.7 million in the second quarter of 2006 compared with the same period in theprior year primarily due to the impact of the sales increases noted above,partially offset by higher raw material and energy costs.

Net income decreased$52.5 million in the second quarter of 2006 compared with the same period inthe prior year primarily due to a decrease in foreign currency gains reflectingthe non-cash currency impact on our euro-denominated debt. This was partiallyoffset by  the impact of increased net sales.In October 2005, we designated the majority of our euro-denominated debt as anet investment hedge whereby foreign exchange gains and losses are now recordedin accumulated other comprehensive income within stockholders’ equity for theportion of the hedge that remains effective.

##### **Netsales**

*SpecialtyChemicals*.  Net sales for our Specialty Chemicalssegment increased $12.3 million over the prior year period, primarily on highervolumes and selling prices in the Surface Treatment business and higher pricesin the Fine Chemicals business.  Netsales in the Surface Treatment business were favorably impacted by growth inall markets, particularly in aerospace, general industrial and steelapplications. In the Fine Chemicals business, higher selling prices for lithiumsalts and strong demand for lithium applications, particularly sales ofbutyllithium and specialty products to the pharmaceutical industry, continuedto have a favorable impact on sales in the Fine Chemicals business. Lowervolumes of lithium carbonate resulting from unfavorable weather conditions atour lithium ponds in Chile had a negative impact on net sales.

*PerformanceAdditives*.  Net sales for our Performance Additivessegment increased $22.7 million over the prior year period primarily due tohigher volumes and selling prices. Volumes were up primarily in the Clay-basedAdditives and Water Treatment Chemicals businesses. In the Clay-based Additivesbusiness, volumes were up on increased sales to the carbonless paper andrheological additives markets primarily from the acquisition of the Süd-Chemiebusinesses on December 30, 2005 and increased coatings and inks andoilfield sales. In the Water Treatment Chemicals business, volumes were higheron increased sales of pool and spa chemical products. Higher selling prices of$4.5 million were primarily reported in the Color Pigments and Services andClay-based Additives businesses to offset higher raw material and energy costs.

*TitaniumDioxide Pigments*.  Net sales for our Titanium DioxidePigments segment increased $1.8 million over the prior year period. Theincrease was primarily due to increased volumes of our titanium dioxideproducts in rutile and anatase grade, higher selling prices from titaniumdioxide products in rutile grade, as well as volume and price increases in ourfunctional additives products.

*AdvancedCeramics*.  Net sales for our Advanced Ceramicssegment increased $1.6 million over the prior year period. The increase was dueto increased sales in most businesses, particularly from increased volumes ofmechanical systems, mechanical applications and electronic applications. Thiswas partially offset by selling price declines of $1.5 million primarily inPiezo and electronic applications.

*GroupeNovasep*.  Net sales for our Groupe Novasep segmentdecreased $10.7 million over the prior year. This decline was primarily theresult of the sale of Rohner AG in March 2006 and was partially offset byhigher volumes of Tamiflu applications. As we announced, Rohner AG was sold in March 2006 (see Note 12,“Sale of Rohner AG,” for further detail).

*SpecialtyCompounds*.  Net sales for our Specialty Compoundssegment increased $4.0 million over the prior year period primarily due to theimpact of a favorable product mix and higher selling prices of $3.6 million tooffset higher raw material costs.

*Electronics*. Net sales for our Electronics segment increased $6.7 million over the prioryear period primarily due to higher volumes in our Electronic Chemicals andPhotomasks businesses in all regions on sales to the printed circuit board andsemiconductor markets. This increase was partially offset by lower volumes inthe Wafer Reclaim business primarily due to the closure of our U.K. facility inJanuary 2006 and the closure of our U.S. facility in March 2006.

39

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##### **Grossprofit**

Gross profit increased$5.9 million over the prior year primarily due to the sales increases notedabove. This was partially offset by raw material cost increases, particularlyfrom the impact of record high copper costs in our Timber Treatment Chemicalsbusiness in the Performance Additives segment, higher costs for zinc and slagin the Titanium Dioxide Pigments segment, higher zinc and phosphoric acid costsin the Specialty Chemicals segment and PVC resin and AOM cost increases in theSpecialty Compounds segment. In addition, higher energy and manufacturing costspartially offset the increase in gross profit.

Gross profit as apercentage of net sales was 31.4% in the second quarter of 2006 versus 32.2% inthe second quarter of 2005 due to the raw material, energy and manufacturingcost increases noted above.

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

Selling, general andadministrative expenses, or SG&A, increased $4.8 million primarily due tohigher Corporate costs to meet the requirements of being a public equitycompany including external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation. In addition, higher SG&Acosts in a number of our segments were related to increased sales volumes.SG&A expenses as a percentage of net sales were 19.0% in the second quarterof 2006 as compared to 19.3% for the second quarter of 2005.

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

We recorded $1.0 millionof restructuring charges in the second quarter of 2006 for miscellaneousrestructuring actions in the Performance Additives, Specialty Chemicals andElectronics segments for miscellaneous headcount reductions and facilityclosures. We recorded $2.9 million of restructuring charges in the secondquarter of 2005 for miscellaneous restructuring actions primarily in theElectronics segment relating to the wafer reclaim restructuring (See Note 13,“Restructuring Liability,” for further detail). In addition, inventory writedowns of $0.5 million were recorded in costof products sold in the second quarter of 2005 related to the restructuring ofthe Wafer Reclaim business in our Electronics segment.

##### **Operatingincome**

*SpecialtyChemicals*.  Operating income for our Specialty Chemicalssegment increased $2.2 million primarily due to higher sales in both theSurface Treatment and Fine Chemicals businesses, lower depreciation andamortization costs of $0.6 million and lower restructuring costs of $0.3 million.  This was partially offset by higher selling,general and administrative expenses of $2.9 million related to the increasedsales volumes in the Surface Treatment business and higher raw material costsof $2.8 million primarily related to zinc and phosphoric acid costincreases.  In addition, operatingearnings in the second quarter of 2005 benefited from a receipt of $1.9 millionrelated to a customer contract termination.

*PerformanceAdditives*.  Operating income decreased $7.5 millionover the prior year period primarily from higher raw material costs of $10.5million, particularly copper costs in the Timber Treatment Chemicals businessthat were at record highs in the second quarter of 2006 and higher depreciationand amortization costs of $4.0 million primarily related to the acquisition ofthe Süd-Chemie businesses on December 30, 2005.  The decrease in operating income waspartially offset by increased sales, lower CCA litigation defense costs of $0.8million and decreased restructuring costs of $0.2 million.

*TitaniumDioxide Pigments*.  Operating income for ourTitanium Dioxide Pigments segment decreased $0.1 million versus the prior yearperiod primarily due to higher raw material and energy costs of $4.2 millionrelated to cost increases for zinc and slag as well as for natural gas andelectricity. Higher selling, general and administrative costs of $0.5 millionprimarily related to higher sales volumes and increased R&D expenses alsohad a negative impact on results. This was partially offset by increasedvolumes and selling prices of our titanium dioxide products in rutile andanatase grade, as well as volume and price increases in our functionaladditives products.

*AdvancedCeramics*.  Operating income for our AdvancedCeramics segment was flat from the prior year period.  Productivity improvements and increased salesvolumes in most product lines were offset by selling price declines of $1.5million primarily in Piezo and electronic applications, higher depreciation andamortization costs of $0.9 million and higher energy prices.

*GroupeNovasep*.  Operating income increased $8.6 million overthe prior year period primarily due to losses incurred in the second quarter of2005 related to capacity utilization issues at the Rohner plant, which was soldin March 2006. Higher volumes of Tamiflu applications had a positive impact onoperating income.

*SpecialtyCompounds*.  Operating income increased $0.4 million overthe prior year period primarily due to the impact of higher

 

40

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selling prices of$3.6 million and a favorable product mix, partially offset by higher PVC resinand AOM raw material costs of $2.6 million and higher depreciation andamortization costs of $0.8 million.

*Electronics*. Operating income increased $3.5 million primarily due to increased salesvolumes in our Electronic Chemicals and Photomasks businesses in all regions onsales to the printed circuit board and semiconductor markets.  Lower restructuring costs of $1.9 millionalso had a favorable impact on operating income.  This was partially offset by higherdepreciation and amortization costs of $1.2 million and increased raw materialcosts of $0.5 million.

*Corporate*.  Operating loss at Corporate increased $4.1 million primarily due to higherCorporate costs to meet the requirements of being a public equity companyincluding external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation.

**Otherincome (expenses)**

*Interestexpense, net*.  Interest expense, net, decreased$7.9 million in the second quarter of 2006 compared to the same period in 2005.The second quarter of 2006 and 2005 included a gain of $4.6 million and a lossof $1.4 million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments as wellas $2.4 million and $2.2 million, respectively, of amortization expense relatedto deferred financing costs. The remaining decrease of $2.1 million wasprimarily due to lower interest expense related to debt repaid with IPOproceeds.

*Foreignexchange gain, net*.  In the second quarter of 2006, wehad foreign exchange gains of $5.5 million compared to foreign exchange gainsof $58.6 million recorded in the second quarter of 2005. In the prior yearsecond quarter, foreign exchange gains were recorded reflecting the non-cashcurrency impact on our euro-denominated debt on our U.S. and U.K. subsidiaries’balance sheets due to the weaker euro at June 30, 2005 versus March 31, 2005.On October 1, 2005, we designated the majority of this debt as a net investmenthedge (the euro-denominated debt that is recorded on our U.S. subsidiaries’balance sheet of €684.3 million or $875.0 million using the June 30, 2006exchange rate of €1.00 = $1.2787). As a result, foreign currency gains andlosses resulting from changes in the U.S. dollar to the euro are now recordedin accumulated other comprehensive income within stockholders’ equity and arenot reported in the statement of operations for the portion of the hedge thatremains effective. We also have €161.9 million (or $207.0 million using theJune 30, 2006 exchange rate of €1.00 = $1.2787) of euro-denominated debt on ourU.K. subsidiaries’ balance sheet at June 30, 2006 that is not designated as anet investment hedge.

##### **Provision for income taxes**

The effectiveincome tax rate for the second quarter of 2006 and 2005 was 39.7% and 15.9%,respectively.  The effective tax rate forthe second quarter of 2006 was favorably impacted due to changes in tax law inCanada and Texas.  Absent a reversal ofthe U.S. valuation allowance in accordance with the Company’s policy, we expecta more normalized effective tax rate for the remainder of 2006 comparable tothe second quarter of 2006. The effective tax rate in the second quarter of2005 was favorably impacted by the reversal of $23.4 million of valuationallowances related to U.S. federal income generated.

##### **Minority interest**

Minority interestrepresents the minority interest portion of the Groupe Novasep segment netincome and net loss in the three months ended June 30, 2006 and 2005,respectively.

##### **Net income**

Net income for thesecond quarter of 2006 was $37.1 million as compared to net income of $89.6 millionfor the second quarter of 2005 for the reasons described above.

##### **Adjusted EBITDA**

*SpecialtyChemicals*.   Adjusted EBITDA for our SpecialtyChemicals segment increased $1.3 million over the prior year period primarilydue to higher sales in both the Surface Treatment and Fine Chemicalsbusinesses. This was partially offset by higher selling, general andadministrative expenses of $2.9 million related to the increased sales volumesin the Surface Treatment business and higher raw material costs of $2.8 millionprimarily related to zinc and phosphoric acid cost increases.  In addition, Adjusted EBITDA in the secondquarter of 2005 benefited from a receipt of $1.9 million related to a customercontract termination.

*PerformanceAdditives*.   Adjusted EBITDA for our PerformanceAdditives segment decreased $4.4 million over the prior year period primarilyfrom higher raw material costs of $10.5 million, particularly copper costs inthe Timber Treatment Chemicals business that were at record highs in the secondquarter of 2006.  The decrease inAdjusted EBITDA was partially offset by increased sales.

41

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*TitaniumDioxide Pigments*.   Adjusted EBITDA for ourTitanium Dioxide Pigments segment decreased $0.3 million over the prior yearperiod primarily due to higher raw material and energy costs of $4.2 millionrelated to cost increases for zinc and slag as well as for natural gas andelectricity. Higher selling, general and administrative costs of $0.5 millionprimarily related to higher sales volumes and increased R&D expenses alsohad a negative impact on results. This was partially offset by increasedvolumes of our titanium dioxide products in rutile and anatase grade, higherselling prices for titanium dioxide products in rutile grade, as well as volumeand price increases in our functional additives products.

*AdvancedCeramics*.   Adjusted EBITDA for our AdvancedCeramics segment increased $1.5 million over the prior year period asproductivity improvements and increased sales volumes in most product lineswere offset by selling price declines of $1.5 million primarily in Piezo andelectronic applications and higher energy costs.

*GroupeNovasep*.   Adjusted EBITDA for our Groupe Novasepsegment increased $7.0 million over the prior year period primarily due tolosses incurred in the second quarter of 2005 related to capacity utilizationissues at the Rohner plant, which was sold in March 2006.  Adjusted EBITDA also benefited from increasedTamiflu applications.

*SpecialtyCompounds*.   Adjusted EBITDA for our Specialty Compoundssegment increased $1.2 million over the prior year period primarily due to theimpact of higher selling prices of $3.6 million and a favorable product mix,partially offset by higher PVC resin and AOM raw material costs of $2.6million.

*Electronics*.  Adjusted EBITDA for our Electronics segment increased $2.7 million primarilydue to higher sales volumes in our Electronic Chemicals and Photomasksbusinesses in all regions on sales to the printed circuit board andsemiconductor markets.  This was partiallyoffset by increased raw material costs of $0.5 million.

*Corporate*.  Adjusted EBITDA loss at Corporate increased $3.3 million primarily due tohigher Corporate costs to meet the requirements of being a public equitycompany including external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation.

***Six months ended June 30, 2006 compared to six months endedJune 30, 2005***

##### **Overview**

Net salesincreased $81.3 million in the first six months of 2006 compared with the sameperiod in the prior year as a result of general strong demand and the favorableimpact of the acquisition of the Süd-Chemie businesses on December 30,2005. This increase was partially offset by the impact of currency changes($47.4 million) primarily due to the weakening of the euro against the U.S.dollar for the six month period ended June 30, 2006 compared to the same periodin 2005. See further discussion by segment below.

Operating incomeincreased $22.0 million in the first six months of 2006 compared with the sameperiod in the prior year primarily in the Specialty Chemicals, Groupe Novasepand Electronics segments on higher sales, partially offset by higher raw materialand energy costs.

Adjusted EBITDAincreased $21.2 million in the first six months of 2006 compared with the sameperiod in the prior year primarily due to the impact of the sales increasesnoted above, partially offset by higher raw material and energy costs.

Net incomedecreased $54.6 million in the first six months of 2006 compared with the sameperiod in the prior year primarily due to a decrease in foreign currency gainsreflecting the non-cash currency impact on our euro-denominated debt and higherraw material and energy costs. This was partially offset by increased net salesand the favorable tax treatment on the Rohner AG sale. In October 2005, wedesignated the majority of our euro-denominated debt as a net investment hedgewhereby foreign exchange gains and losses are now recorded in accumulated othercomprehensive income within stockholders’ equity for as long as the hedgeremains effective.

##### **Net sales**

*SpecialtyChemicals*.  Net sales for our Specialty Chemicalssegment increased $20.4 million over the prior year period, primarily on highervolumes and selling prices in the Surface Treatment and Fine Chemicalsbusinesses. Sales in the Surface Treatment business were favorably impacted bygrowth in all markets, particularly in aerospace, automotive, generalindustrial and steel applications.  Inthe Fine Chemicals business, strong demand for lithium applications,particularly sales of butyllithium, specialty products to the pharmaceuticalindustry and lithium battery products, continued to have a favorable impact onsales. Lower volumes of lithium carbonate resulting from unfavorable weatherconditions at our lithium ponds in Chile had a negative impact on sales.  The increase in sales was partially offset bythe impact of currency changes ($14.2 million).

42

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*PerformanceAdditives*.  Net sales for our Performance Additivessegment increased $45.7 million over the prior year period primarily due tohigher volumes and selling prices, partially offset by the impact of currencychanges ($4.4 million). Volumes were up primarily in the Clay-based Additives,Water Treatment Chemicals and Color Pigments and Services businesses. In theClay-based Additives business, volumes were up on increased sales to thecarbonless paper and rheological additives markets primarily from theacquisition of the Süd-Chemie businesses on December 30, 2005 andincreased coatings and inks and oilfield sales. In the Water TreatmentChemicals business, volumes were higher on increased sales of pool and spachemical products and surface water products. Volumes were up in the Color Pigments and Services business primarilyfrom higher demand for our construction products in North America.  Higher selling prices of $8.8 million wereprimarily reported in the Color Pigments and Services and Clay-based Additivesbusinesses to offset higher raw material and energy costs.

*TitaniumDioxide Pigments*.  Net sales for our Titanium DioxidePigments segment increased $5.5 million over the prior year period. Theincrease was primarily due to increased volumes and higher selling prices ofour titanium dioxide products in rutile and anatase grade, as well as volumeand price increases in our functional additives products. The increase in saleswas partially offset by the impact of currency changes ($10.4 million).

*AdvancedCeramics*.  Net sales for our Advanced Ceramicssegment increased $2.4 million over the prior year period. The increase was dueto increased sales in most businesses, particularly from increased volumes ofmechanical systems, mechanical applications and electronic applications. Thiswas partially offset by selling price declines of $2.4 million primarily inPiezo and electronic applications and the impact of currency changes ($7.2million).

*GroupeNovasep*.  Net sales for our Groupe Novasep segmentdecreased $15.1 million over the prior year period primarily due to the sale ofRohner AG in March 2006 and the impact of currency changes ($8.5 million).The decline was partially offset by increased volumes of Tamiflu applications.

*SpecialtyCompounds*.  Net sales for our Specialty Compoundssegment increased $9.1 million over the prior year period primarily due to theimpact of higher selling prices of $8.3 million and a favorable product mix tooffset higher raw material costs, partially offset by lower sales volumes andthe impact of currency changes ($0.7 million). Lower volumes of automotive andfootwear products were partially offset by stronger sales volumes in ourmedical applications business.

*Electronics*. Net sales for our Electronics segment increased $13.3 million over the prioryear period primarily due to higher volumes in our Electronic Chemicals andPhotomasks businesses in all regions on sales to the printed circuit board andsemiconductor markets. This increase was partially offset by lower volumes inthe Wafer Reclaim business primarily due to the closure of our U.K. facility inJanuary 2006 and the closure of our U.S. facility in March 2006 and the impactof currency changes ($2.0 million).

##### **Gross profit**

Gross profitincreased $30.0 million over the prior year period primarily due to the salesincreases noted above. This was partially offset by raw material costincreases, particularly from the impact of record high copper costs in ourTimber Treatment Chemicals business in the Performance Additives segment,higher zinc and slag costs in the Titanium Dioxide segment, PVC resin and AOMcost increases in the Specialty Compounds segment and higher zinc andphosphoric acid costs in the Specialty Chemicals segment. In addition, higher energyand manufacturing costs and the impact of currency changes ($14.7 million)partially offset the increase in gross profit.

Gross profit as apercentage of net sales was 31.1% in the first six months of 2006 versus 30.8%in the first six months of 2005 due to the reasons noted above.

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

Selling, generaland administrative expenses, or SG&A, increased $11.6 million primarily dueto higher Corporate costs to meet the requirements of being a public equitycompany including external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation. In addition, higherSG&A costs in a number of our segments were related to increased salesvolumes. The impact of currency changes decreased SG&A by $9.3 million overthe prior year. SG&A expenses as a percentage of net sales were 19.1% inthe first six months of 2006 as compared to 19.4% for the first six months of2005.

##### **Restructuring charge, net**

We recorded $2.2million of restructuring charges in the first six months of 2006 formiscellaneous restructuring actions in the Electronics, Performance Additivesand Specialty Chemicals segments for miscellaneous headcount reductions andfacility closures. We recorded $5.8 million of restructuring charges in thefirst six months of 2005 for miscellaneous restructuring actions in thePerformance Additives segment for the announced closure of the Baulking, UnitedKingdom facility in the Clay-based Additives

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business, in theSpecialty Chemicals segment for miscellaneous headcount reductions and in theElectronics segment relating to the wafer reclaim restructuring (See Note 13, “RestructuringLiability,” for further detail). In addition, inventory writedowns of $0.5million were recorded in cost of products sold in the second quarter of 2005related to the restructuring of the Wafer Reclaim business in our Electronicssegment.

##### **Operating income**

*SpecialtyChemicals*.  Operating income for our Specialty Chemicalssegment increased $10.6 million primarily due to higher sales in both theSurface Treatment and Fine Chemicals businesses, lower depreciation andamortization costs of $0.9 million and lower restructuring costs of $0.6 million.This was partially offset by higher selling, general and administrativeexpenses of $6.0 million related to the increased sales volumes, higher rawmaterial costs of $2.8 million primarily related to zinc and phosphoric acidand the impact of currency changes ($2.2 million). In addition, operatingearnings in 2005 benefited from a receipt of $1.9 million related to a customercontract termination.

*PerformanceAdditives*.  Operating income decreased $6.5 millionover the prior year period primarily from higher raw material costs of $17.7million, particularly copper costs in the Timber Treatment Chemicals businessthat were at record highs in the second quarter of 2006 and higher energy andraw material costs in the Color Pigments and Services and Clay-based additivesbusinesses. Higher manufacturing costs of $6.9 million and higher depreciationand amortization costs of $3.6 million primarily related to acquisition of theSüd-Chemie businesses on December 30, 2005 also had an unfavorable impacton operating income. The decrease in operating income was partially offset byincreased sales and lower restructuring costs of $2.4 million.

*TitaniumDioxide Pigments*.  Operating income for ourTitanium Dioxide Pigments segment increased $0.1 million over the prior yearperiod as increased sales of our titanium dioxide products in anatase andrutile grade, as well as increased sales of our functional additives products,were partially offset by higher raw material and energy costs of $8.3 millionand the impact of currency changes ($1.1 million).

*AdvancedCeramics*.  Operating income for our AdvancedCeramics segment increased $1.2 million over the prior year period primarilydue to increased sales in most businesses, particularly from higher volumes ofmechanical systems, mechanical applications and electronic applications. Thisincrease was partially offset by selling price declines of $2.4 millionprimarily in Piezo and electronic applications, higher depreciation andamortization costs of $1.6 million and the impact of currency changes ($1.4million).

*GroupeNovasep*.  Operating income increased $17.6 million overthe prior year period primarily due to losses incurred in the first six monthsof 2005 related to capacity utilization issues at the Rohner plant, which wassold in March 2006. Increased volumes of Tamiflu applications and lower depreciationand amortization costs of $1.9 million had a positive impact on operatingincome.

*SpecialtyCompounds*.  Operating income decreased $0.2 millionprimarily due to higher PVC resin and AOM raw material costs of $6.9 million,increased depreciation and amortization costs of $1.4 million and lower salesvolumes. This decrease was partially offset by higher selling prices of $8.3million.

*Electronics*. Operating income increased $6.3 million over the prior year period primarilydue to higher volumes in our Electronic Chemicals and Photomasks businesses inall regions on sales to the printed circuit board and semiconductor markets.Lower restructuring costs of $1.1 million also had a favorable impact onoperating income. This was partially offset by increased selling, general andadministrative expenses of $1.5 million related to increased volumes and highermanufacturing costs of $0.5 million.

*Corporate*.  Operating loss at Corporate increased $7.1 million primarily due to higherCorporate costs to meet the requirements of being a public equity companyincluding external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation.

**Otherincome (expenses)**

*Interestexpense, net*.  Interest expense, net, decreased$17.0 million in the first six months of 2006 compared to the same period in2005. The first six months of 2006 and 2005 included a gain of $15.5 millionand $6.2 million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments as wellas $4.7 million and $4.7 million, respectively, of amortization expense relatedto deferred financing costs. The remaining decrease of $7.7 million wasprimarily due to lower interest expense related to debt repaid with IPOproceeds.

*Foreignexchange gain, net*.  In the first six months of 2006, wehad foreign exchange gains of $2.9 million compared to foreign exchange gainsof $100.5 million recorded in the first six months of 2005. In the six monthsended June 30, 2005, foreign exchange gains were recorded reflecting thenon-cash currency impact on our euro-denominated debt on our U.S. and U.K.

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subsidiariesbalance sheets due to the weaker euro at June 30, 2005 versus December 31,2004. On October 1, 2005, we designated the majority of this debt as a netinvestment hedge (the euro-denominated debt that is recorded on our U.S.subsidiaries’ balance sheet of €684.3 million or $875.0 million using the June30, 2006 exchange rate of €1.00 = $1.2787). As a result, foreign currency gainsand losses resulting from changes in the U.S. dollar to the euro are nowrecorded in accumulated other comprehensive income within stockholders’ equityand are not reported in the statement of operations for as long as the hedgeremains effective. We also have €161.9 million (or $207.0 million using theJune 30, 2006 exchange rate of €1.00 = $1.2787) of euro-denominated debt on ourU.K. subsidiaries’ balance sheet at June 30, 2006 that is not designated as anet investment hedge.

*Losson sale of business*.  In connection with the sale ofRohner AG in March 2006, the Company recorded a pre-tax loss of $12.1million for the six months ended June 30, 2006 (see Note 12, “Sale of RohnerAG,” for further detail).

*Other,net*.  For the six months ended June 30, 2006, werecorded $2.4 million of income primarily related to the correction of animmaterial error related to a previously unrecorded asset in the TitaniumDioxide segment ($1.6 million) and gains related to fixed asset sales ($0.6million).

##### **Provision for income taxes**

The effectiveincome tax rate for the first six months of 2006 and 2005 was 21.4% and 24.3%,respectively. The 2006 rate included a tax benefit of $21.8 million related tothe favorable tax treatment on the sale of Rohner AG and a tax benefit of $0.1million related to changes in tax laws in Canada and Texas.  However, these tax benefits are one-timeitems and will not be reported in subsequent quarters of 2006. Absent areversal of the U.S. valuation allowance in accordance with the Company’spolicy, we expect a more normalized effective tax rate for the remainder of2006 similar to the second quarter of 2006, which will be dependent on the mixof foreign and domestic earnings. The effective tax rate in the first sixmonths of 2005 was favorably impacted by the reversal of $28.3 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.

##### **Minority interest**

Minority interestrepresents the minority interest portion of the Groupe Novasep segment netincome and net loss in the six months ended June 30, 2006 and 2005,respectively.

##### **Net income**

Net income for thefirst six months of 2006 was $77.1 million as compared to net income of $131.7million for the first six months of 2005 for the reasons described above.

##### **Adjusted EBITDA**

*SpecialtyChemicals*.   Adjusted EBITDA for our SpecialtyChemicals segment increased $9.7 million over the prior period primarily due tohigher sales in both the Surface Treatment and Fine Chemicals businesses. This waspartially offset by higher selling, general and administrative expenses of $6.0million related to the increased sales volumes, the impact of currency changes($3.0 million) and higher raw material costs of $2.8 million primarily relatedto zinc and phosphoric acid. In addition, Adjusted EBITDA in the first sixmonths of 2005 benefited from a receipt of $1.9 million related to a customercontract termination.

*PerformanceAdditives*.   Adjusted EBITDA for our PerformanceAdditives segment decreased $5.3 million over the prior year period primarilyfrom higher raw material costs of $17.7 million, particularly copper costs inthe Timber Treatment Chemicals business that were at record highs in the secondquarter of 2006 and higher energy and raw material costs in the Color Pigmentsand Services and Clay-based additives businesses. Higher manufacturing costs of$6.9 million also had an unfavorable impact on operating income.  The decrease in operating income was partiallyoffset by increased sales.

*TitaniumDioxide Pigments*.   Adjusted EBITDA for ourTitanium Dioxide Pigments segment decreased $0.3 million over the prior yearperiod as higher raw material and energy costs of $8.3 million and the impactof currency changes ($2.0 million) were partially offset by increased sales ofour titanium dioxide products in anatase and rutile grade, as well as increasedsales of our functional additives products.

*AdvancedCeramics*.   Adjusted EBITDA for our AdvancedCeramics segment increased $3.7 million over the prior year period primarilydue to increased sales in most businesses, particularly from higher volumes ofmechanical systems, mechanical applications and electronic applications. Thisincrease was partially offset by selling price declines of $2.4 million primarilyin Piezo and electronic applications and the impact of currency changes ($2.0million).

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*GroupeNovasep*.   Adjusted EBITDA for our Groupe Novasepsegment increased $12.7 million over the prior year period primarily due tolosses in the first six months of 2005 related to capacity utilization issuesat the Rohner plant and higher volumes of Tamiflu applications.  This increase was partially offset by theimpact of currency changes ($1.5 million).

*SpecialtyCompounds*.   Adjusted EBITDA for our Specialty Compoundssegment increased $1.2 million as higher selling prices of $8.3 million werepartially offset by higher PVC resin and AOM raw material costs of $6.9million, higher manufacturing costs and lower sales volumes.

*Electronics*.  Adjusted EBITDA for our Electronics segment increased $5.5 million primarilydue to higher volumes in our Electronic Chemicals and Photomasks businesses inall regions on sales to the printed circuit board and semiconductor markets.This was partially offset by increased selling, general and administrativeexpenses of $1.5 million related to increased volumes and higher manufacturingcosts of $0.5 million.

*Corporate*.  Adjusted EBITDA loss at Corporate increased $6.0 million primarily due tohigher Corporate costs to meet the requirements of being a public equitycompany including external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation.

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

Because we viewAdjusted EBITDA on both a consolidated basis and segment basis as an operatingperformance measure, we use net income as the most comparable U.S. GAAP measureon a consolidated basis. The following table, which sets forth the applicablecomponents of Adjusted EBITDA, presents a reconciliation of net income toAdjusted EBITDA on a consolidated basis:
|                                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **($ in millions)**                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                   |       | $                                                   | 37.1       |                                              | $          | 89.6 |   | $ | 77.1 |   | $ | 131.7 |   |
| Income tax  (benefit) provision              |       | 25.2                                                |       | 16.8                                              |       | 22.1 |   | 41.7 |   |
| Minority  interest                           |       | 1.2                                                 |       | (0.9                                              | )          | 4.2 |   | (1.7 | ) |
| Income before  taxes and minority interest   |       | 63.5                                                |       | 105.5                                             |       | 103.4 |   | 171.7 |   |
| Interest  expense, net (a)                   |       | 47.8                                                |       | 55.7                                              |       | 86.9 |   | 103.9 |   |
| Depreciation and  amortization               |       | 57.0                                                |       | 52.0                                              |       | 109.1 |   | 105.2 |   |
| Restructuring  and related charges (b)       |       | 1.0                                                 |       | 3.4                                               |       | 2.2 |   | 6.3 |   |
| CCA litigation  defense costs                |       | 0.2                                                 |       | 1.1                                               |       | 0.5 |   | 1.5 |   |
| Systems/organization  establishment expenses |       | 2.2                                                 |       | 0.7                                               |       | 4.1 |   | 1.9 |   |
| Cancelled  acquisition and disposal costs    |       | 0.3                                                 |       | 0.4                                               |       | 0.9 |   | 0.6 |   |
| Inventory  write-up reversal                 |       | 0.1                                                 |       | 0.3                                               |       | 0.9 |   | 3.1 |   |
| Gains related to  asset sales                |       | (0.1                                                | )          | —                                            |       | (0.7 | ) | — |   |
| Loss on sale of  business                    |       | —                                              |       | —                                            |       | 12.1 |   | — |   |
| Foreign exchange  gain, net                  |       | (5.5                                                | )          | (58.6                                             | )          | (2.9 | ) | (100.5 | ) |
| Other                                        |       | (0.3                                                | )          | —                                            |       | (1.6 | ) | — |   |
| Total Adjusted  EBITDA                       |       | $                                                   | 166.2      |                                              | $          | 160.5 |   | $ | 314.9 |   | $ | 293.7 |   |

 

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(a)    Includesa gain of $4.6 million and a loss of $1.4 million for the three monthsended June 30, 2006 and 2005, respectively, and gains of $15.5 million and $6.2million for the six months ended June 30, 2006 and 2005, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

(b)    Includes inventory writedowns of $0.5 millionrecorded in cost of products sold in the three and six months ended June 30,2005.

**Liquidityand Capital Resources**

**CashFlows**

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at June 30, 2006 exchange rates.*

*OperatingActivities*.   Net cash provided by operatingactivities was $105.4 million and $78.7 million for the six months ended June30, 2006 and 2005, respectively. Net cash from operating activities increasedin 2006 primarily from higher Adjusted EBITDA.

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*InvestingActivities*.   Net cash used in investing activitieswas $101.0 million and $92.2 million for the six months ended June 30,2006 and 2005, respectively. Investing activities for the six months ended June30, 2006 and 2005 primarily was comprised of capital expenditures. Net cashused in investing activities for the six months ended June 30, 2006 was higherprimarily due to an acquisition in the Advanced Ceramics segment in the secondquarter of 2006.

*FinancingActivities*.   Net cash used in financing activitieswas $66.7 million and $15.6 million for the six months ended June 30, 2006 and2005, respectively. Net cash used in financing activities for the six monthsended June 30, 2006 and 2005 primarily represented scheduled payments oflong-term debt.

**Liquidity**

On August 22,2005, Holdings, our ultimate parent company, completed an IPO of 23,469,387shares of its common stock, which included 3,061,224 shares issued and sold asa result of the underwriters’ exercise of the over-allotment option. As aresult, Holdings received net proceeds of approximately $435.7 million (net ofunderwriting discounts and commissions and estimated offering expensesaggregating $33.6 million). For the three and six months ended June 30, 2005,interest expense on the debt paid off with IPO proceeds was $2.8 million and$5.6 million, respectively.

Our primary sourceof liquidity has been and will continue to be cash generated from operations ofour subsidiaries. Our primary liquidity requirements are working capital, debtservice, capital expenditures and acquisitions. Our debt service requirementsand other contractual obligations and commitments over the next several yearsare significant and are substantially higher than historical amounts. Webelieve that our currently available sources of liquidity will be sufficientfor these needs. Furthermore, any future major acquisitions, businesscombinations or similar transactions will likely require additional capitalresources. If our present operating performance and current market conditionscontinue, we believe that such resources will be available to us for certaintransactions. We would need access to alternative sources of liquidity forlarger acquisitions such as through additional borrowings, equity issuances orother sources. We may not have access to these sources of cash for a variety ofreasons. See Item 1A, “Risk Factors,” in our 2005 Form 10-K.

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

As of June 30,2006, we had actual total indebtedness of $2,876.4 million.

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

·                  tranche A-1 termloans in an aggregate principal amount of €37.2 million (or approximately$47.5 million at June 30, 2006) and tranche A-2 term loans in an aggregateprincipal amount of €161.9 million (or approximately $207.0 million at June 30,2006), each maturing on July 30, 2011 and bearing interest at AdjustedEURIBOR plus 2.25%;

·                  tranche E termloans in an aggregate principal amount of $1,133.6 million at June 30, 2006,maturing on July 30, 2012 and bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 2.00% or (ii) ABR plus 0.75%;

·                  tranche F termloans in an aggregate principal amount of €272.1 million (or approximately$347.9 million at June 30, 2006) maturing on July 30, 2012 and bearinginterest of Adjusted LIBOR plus 2.75%; and

·                  a revolvingcredit facility in an aggregate principal amount of $250.0 millionmaturing on July 30, 2010, bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 2.25% or (ii) ABR plus 1.00%. As ofJune 30, 2006, we had €20.0 million ($25.6 million) outstanding under thisfacility and had outstanding letters of credit of $25.3 million that reducedour availability under the credit facility. As of August 10, 2006, we had $6.0 millionand €40.0 million ($51.2 million using the August 10, 2006 exchange rateof €1.00 = $1.2794) outstanding under this facility.

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The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on June 30, 2006 of €1.00=$1.2787. In each case, the interest rates peryear are subject to step-downs determined by reference to a performance test.Adjusted LIBOR is the London inter-bank offered rate adjusted for statutoryreserves. ABR is the alternate base rate, which is the highest of Credit Suisse’sprime rate and the federal funds effective rate plus 0.5%. Tranche A-1 andtranche A-2 term loans are payable in January and July of each yearat escalating percentages of the original principal amount. Tranche E andtranche F term loans are payable in January and July of each year atamounts equal to 0.5% of the original principal amount of the former tranche Cterm loans and tranche D term loans, respectively, with the remainder due atthe final maturity date.

The Company’sborrowings and the borrowings of Rockwood Specialties Limited under the seniorsecured credit facilities are guaranteed and secured by assets and pledges ofcapital stock.

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

*2011Notes and 2014 Notes*.   The Company’s 2011 Noteshad an aggregate principal amount of $273.4 million at June 30, 2006, andmature on May 15, 2011 and the 2014 Notes have an aggregate principalamount of €375.0 million ($479.5 million) in the case of the Euro notes and$200.0 million in the case of the U.S. Dollar notes, and mature onNovember 15, 2014. In connection with the IPO, $101.6 million, or 27%, ofthe 2011 Notes were redeemed. 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 U.S. Dollar notes. Certain of our domestic subsidiaries guarantee the 2011Notes and 2014 Notes on a senior subordinated unsecured basis. The Company mayredeem the 2011 Notes in whole or in part, at a premium, which declinesannually through maturity.

The Company’s 2011Notes and 2014 Notes contain various affirmative and restrictive covenants. Therestrictive covenants limit our ability, and the ability of our restrictedsubsidiaries, to, among other things, incur or guarantee additionalindebtedness (as described below under “Covenant Compliance”); pay dividends ormake other equity distributions or repurchase capital stock (as described belowunder “Covenant Compliance”); make investments or other restricted payments (asdescribed below under “Covenant Compliance”); create liens; transfer or sellassets; restrict dividends or other payments to us; engage in transactions withaffiliates; and merge or consolidate with other companies or sell substantiallyall of our assets.

*Covenantcompliance*.   In addition to the affirmative andrestrictive covenants, the Company’s senior secured credit agreement containsthe following financial covenants that are determined based on our AdjustedEBITDA:

·                  a maximum totalleverage ratio: for the twelve-month period ended June 30, 2006, net debt toAdjusted EBITDA must be less than 6.00 to 1; for such period, our ratio equaled4.70 to 1; and

·                  a minimuminterest coverage ratio: for the twelve-month period ended June 30, 2006,Adjusted EBITDA to cash interest expense (interest expense, net excludingdeferred debt issuance cost amortization and the movements in themark-to-market value of our interest rate and cross-currency interest ratederivatives) must be at least 1.75 to 1; for such period, our ratio equaled3.02 to 1.

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

The indenturesgoverning the 2011 Notes and 2014 Notes prohibit us from incurring additionaldebt, subject to certain permitted incurrences, unless the fixed chargecoverage ratio, which is the ratio of Adjusted EBITDA (as defined thereinexcluding 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 equitydistributions, repurchases of capital stock or restricted investments), subjectto certain permitted payments, unless, among other things, the fixed chargecoverage ratio for the most recently ended four fiscal quarters is at least2.00 to 1. For the four fiscal quarter period ending June 30, 2006, the fixedcharge coverage ratio equaled 3.02 to 1. These covenants are material terms ofthe indentures governing the 2011 Notes and 2014 Notes.

We were incompliance with all of the above covenants as of June 30, 2006 andDecember 31, 2005.

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Givenour use of Adjusted EBITDA (see “Special Note Regarding Non-GAAP FinancialMeasures” for the definition of Adjusted EBITDA and management’s uses of AdjustedEBITDA) as a liquidity measure, the following table presents a reconciliationof net cash provided by operating activities to Adjusted EBITDA:
|                                                                                                                        | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **($ in millions)**                                                                                          | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Net cash  provided by operating activities                                                                             |       | $                                                 | 105.4      |   | $ | 78.7 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 77.5                                              |       | 80.0 |   |
| Current portion  of income tax provision                                                                               |       | 26.8                                              |       | 20.6 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 97.7                                              |       | 105.4 |   |
| Restructuring  and related charges                                                                                     |       | 2.2                                               |       | 5.8 |   |
| CCA litigation  defense costs                                                                                          |       | 0.5                                               |       | 1.5 |   |
| Systems/organization  establishment expenses                                                                           |       | 4.1                                               |       | 1.9 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.9                                               |       | 0.6 |   |
| Bad debt  provision                                                                                                    |       | (0.2                                              | )          | (0.8 | ) |
| Total Adjusted EBITDA                                                                                                  |       | $                                                 | 314.9      |   | $ | 293.7 |   |

 

*Assumeddebt*.   Certain of our subsidiaries acquired in theDynamit Nobel Acquisition are borrowers under nine euro-denominated term loanfacilities that provide aggregate outstanding borrowings of approximately €22.1million ($28.3 million) as of June 30, 2006. These term loans mature between2006 and 2019 and bear annual interest rates ranging between 1.00% and 5.21% orEURIBOR plus 1.45% or LIBOR plus 0.39%. In addition, certain of oursubsidiaries acquired in the Dynamit Nobel Acquisition are borrowers underthree term loan facilities denominated in other foreign currencies, includingTaiwanese Dollars, Chinese Renminbi and Japanese Yen, providing for borrowingsof an aggregate U.S. dollar equivalent amount of approximately $2.9 million asof June 30, 2006 ($33.9 million of these term loans were paid inJanuary 2006). These term loans mature in 2008 and bear annual interestrates ranging between 2.50% and 5.50%. The term loan facilities described abovecontain customary events of default and some of them are secured by mortgagesor accounts receivables.

Additionally,Groupe Novasep (including subsidiaries) has three tranches of bank debttotaling €10.8 million ($13.9 million) and $9.0 million($22.9 million in total), each with a maturity date of 2010 and interestrates of EURIBOR plus 1.75% in the case of two of the tranches, and LIBOR plus1.75% for the remaining tranche. In addition, there is additional indebtednessat the Groupe Novasep subsidiary level totaling €4.7 million($6.0 million) maturing in 2010 and interest rates of EURIBOR plus 1.25%.The remaining amount of assumed debt of €14.0 million ($17.9 million)consists primarily of capital leases with maturity dates ranging from 2006 to2013.

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

***Contractual Obligations***

The Company isobligated to make future payments under various contracts such as debtagreements (including scheduled cash interest payments), operating leaseagreements, and unconditional purchase obligations. A discussion of thesecontractual obligations is included in the Company’s 2005 Form 10-K. Therehave been no significant changes to these contractual obligations as of June30, 2006.

***Capital Expenditures***

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

For the six monthsended June 30, 2006 and 2005, our capital expenditures on a cash basis were$90.1 million and $92.4 million, respectively. Capital expendituresfor each of our reporting segments is provided in the following table:

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| ** **                         | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                         | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**      | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Six months ended June 30, 2006** |       | $             | 19.7       |            | $          | 11.1         |       | $            | 16.7       |        | $          | 12.2          |       | $               | 18.9       |          | $          | 2.8              |       | $ | 3.8 |   | $ | 4.9 |   | $ | 90.1 |   |
| **Six months ended June 30, 2005** |       | 15.7          |       | 11.6            |       | 16.1         |       | 21.4         |       | 19.0        |       | 2.1           |       | 2.4             |       | 4.1           |       | 92.4             |       |
|                                    |            |               |            |                 |            |              |            |              |            |             |            |               |            |                 |            |               |            |                  |            |  |  |  |  |  |  |  |  |  |

 

We may incurfuture costs for capital improvements and general compliance under Safety,Health and Environmental (“SHE”) laws. For the year ended December 31,2005, our capital expenditures for SHE matters totaled approximately $32.8million, excluding costs to maintain and repair pollution control equipment.For 2006, we estimate capital expenditures for compliance with SHE laws to beat similar levels; however, because capital expenditures for these matters aresubject to changes in and new SHE laws, we cannot provide assurance that ourrecent expenditures will be indicative of future amounts required to complywith these laws.

We are applyingour capital discipline and stringent controls to reduce our future capitalexpenditures as compared to historical levels for the acquired businesses of DynamitNobel. Our annual capital expenditures will increase in amount, but we do notbelieve they will change significantly from current levels in proportion to thesize of the combined entity or as a percentage of net sales.

***Foreign currency related transactions***

As of June 30,2006, $1,235.4 million of the debt outstanding is denominated in euros,excluding the impact of the cross-currency swaps that convert U.S. dollarfixed-rate debt into euro fixed-rate debt.

***Management and transaction fees***

KKR and DLJMerchant Banking III, Inc. previously provided us with consulting andmanagement advisory services for an aggregate annual fee of $2.1 million,increasing 5% annually. In connection with the IPO, the parties agreed toterminate the management services agreement with the affiliates of KKR andDLJMB for an aggregate consideration of $10.0 million.

##### **Off-Balance Sheet Arrangements**

None.

**CriticalAccounting Policies and Estimates**

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith U.S. GAAP. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and the related disclosure of contingentassets and liabilities. These estimates include assessing, among other things:

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

·                  theuse and recoverability of inventory;

·                  thevaluation of deferred tax assets;

·                  impairmentof goodwill, property, plant and equipment and other intangible assets; and

·                  theuseful lives of tangible and intangible assets.

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

The significantaccounting policies of the Company are described in Note 1,”Description ofBusiness and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in theCompany’s 2005 Form 10-K. There have been no significant changes to thesecritical accounting policies and estimates as of June 30, 2006.

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

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

##### **Acquisitions**

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

**RecentAccounting Pronouncements**

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

**Forward-Looking Statements**

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

·                  ourbusiness strategy;

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

·                  fluctuationsin interest rates, exchange rates and currency values;

·                  availabilityand pricing of raw materials;

·                  fluctuationsin energy prices;

·                  changesin the end-use markets in which our products are sold;

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

·                  technologicalchanges affecting production of our materials;

·                  ourhigh level of indebtedness;

·                  governmentaland environmental regulations and changes in those regulations;

·                  hazardsassociated with chemicals manufacturing;

·                  risksassociated with negotiating, consummating and integrating acquisitions;

·                  risksassociated with competition and the introduction of new competing products,especially in the Asia-Pacific region; and

·                  risksassociated with international 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 them. New risks and uncertainties come up from time to time,and it is impossible for us to predict these events or how they may affect us.We disclaim any obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

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**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk.**

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

A discussion andanalysis of the Company’s market risk is included in the Company’s 2005 Form10-K. There have been no significant changes to these market risks as of June30, 2006.

**Item 4.  Controls and Procedures**

Our management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as of June 30, 2006.

Our disclosurecontrols and procedures are designed to ensure that (a) informationrequired to be disclosed in our reports under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and (b) such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, to allow timely decisions regardingrequired disclosures.

As a result ofthis evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of June30, 2006.

Subsequent to theissuance of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005 and as part of the preparation of the Quarterly Reporton Form 10-Q for the three months ended March 31, 2006, the Companydetermined that its condensed consolidated statement of cash flows included inits Quarterly Reports on Form 10-Q for the quarterly periods endedMarch 31, 2005, June 30, 2005 and September 30, 2005 should berestated. The restatement, which has been made in this Quarterly Report onForm 10-Q, was due to a classification error in the statement of cashflows regarding the treatment of acquisition costs of property, plant andequipment included in accounts payable and accrued expenses and otherliabilities. In accordance with SFAS No. 95,*Statement of Cash Flows*, these costs should be reportedwithin cash flows from investing activities when paid. The Company wasreporting capital expenditures in its condensed consolidated statements of cashflows on an accrual basis rather than on a cash basis, and as a result, wasreporting capital expenditures in the period in which the Company acquiredlegal title to the related property, plant and equipment rather than when theCompany actually paid for such property, plant and equipment. Further, theunpaid portion of the transaction should be disclosed as a non-cash investingactivity in the supplemental disclosure of cash flow information. We alsorevised the reconciliation of net cash provided by (used in) operatingactivities to Adjusted EBITDA and the disclosures in the “Liquidity and CapitalResources” section of Item 2, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” related to cash flows fromoperating and investing activities for these periods.

This restatementwas a result of a material weakness in internal control over financialreporting as the control over the proper classification of acquisition costs ofproperty, plant and equipment included in accounts payable and accrued expensesand other liabilities did not operate effectively during 2005. Subsequent tothe filing of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005, we enacted additional procedures in the preparation andreview of the consolidated statement of cash flows to properly capture thisinformation. We believe that as of June 30, 2006 we have remediated thisweakness.

There have been noother significant changes in the Company’s internal control over financial reportingduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

The Company’sglobal tax department has been established and staffed at our corporateheadquarters and the tax software system that we implemented has significantlystrengthened the income tax accounting function. However, as these actions wereimplemented late in 2005, some of the planned improvements in internal control inthis area have not been fully implemented. During 2006, we will continue tofully implement and train our accounting personnel worldwide in our new incometax accounting software system. 

Additionally, wehave continued to improve the design, documentation and implementation of ourcontrols to ensure that our employees enhance their understanding and knowledgeof the significant applicable tax matters which affect the Company in an effortto further strengthen the financial reporting process related to income taxes.

We are currentlyperforming the system and process evaluation of our internal controls overfinancial reporting in order to allow management to report on, and ourindependent auditors to attest to, our internal controls over financialreporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002,which we refer to as Section 404. The requirements of Section 404will initially apply to us in connection with our annual report onForm 10-K for the year ended December 31, 2007. In connection withour preliminary

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evaluation, wehave identified other areas of internal controls that may need improvement,such as internal controls related to the segregation of duties at certainsmaller locations, system access and user security profiles, operating policiesand procedures and in each case particularly with respect to newly acquiredbusinesses. We have begun the testing necessary to permit the managementcertification and auditor attestation required to comply with Section 404in 2006. As we complete the evaluation and testing required bySection 404, we may identify conditions that may be categorized assignificant deficiencies or material weaknesses in the future.

**PART II – OTHER INFORMATION**

**Item 1.  Legal Proceedings.**

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

**Item 1A. Risk Factors.**

A discussion ofthe Company’s risk factors is included in the Company’s 2005 Form 10-K.  There have been no significant changes tothese risk factors as of June 30, 2006. 

**Item 2.  Unregistered Sales of Equity Securities and Useof Proceeds.**

None.

**Item 3.  Defaults upon Senior Securities.**

None.

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

None.

**Item 5.  Other Information.**

As discussed inNote 16, “Restatement,” the condensed consolidated statement of cash flows forthe the six months ended June 30, 2005 was restated as a result of aclassification error in the treatment of acquisition costs of property, plantand equipment. As a result, we will also restate the condensed consolidatedstatements of cash flows for the nine month period ended September 30,2005. The restatement for this period will be reported when the Form 10-Qfor the nine months ended September 30, 2006 is filed. The effects of thismatter on the consolidated financial statements as of and for the year endedDecember 31, 2005 are not material.

Theclassification errors will be reported as follows (in millions) in thecondensed consolidated statements of cash flows:

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

 

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**Item6.  Exhibits.**
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                              |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                              |
| 31.1        |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer.                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                    |
| 31.2        |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Financial Officer.                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                    |
| 32.1        |       | Section 1350 Certification of Chief Executive  Officer. This certification accompanies this report pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  filed by the Company for purposes of Section 18 or any other provision of the  Securities Exchange Act of 1934, as amended. |
|        |       |                                                                                                                                                                                                                                                                                                                    |
| 32.2        |       | Section 1350 Certification of Chief Financial  Officer. This certification accompanies this report pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  filed by the Company for purposes of Section 18 or any other provision of the  Securities Exchange Act of 1934, as amended. |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|        | ROCKWOOD SPECIALTIES GROUP, INC. |
|--------|---------------------------------------|
|   |                                  |   |
|   |                                  |   |
|   | By:                                   | /s/ SEIFI GHASEMI |   |   |
|   |                                  | Seifi Ghasemi  Chairman of the Board and Chief Executive Officer  Date: August 14, 2006 |
|   |                                  |   |
|   |                                  |   |
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|   |                                  |
|   |                                  |   |
|   | By:                                   | /s/ ROBERT J. ZATTA |   |   |
|   |                                  | Robert J. Zatta  Senior Vice President and Chief Financial Officer  Date: August 14, 2006 |

 

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