**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**
| **x**                                            | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                       | ** **                                                                                    |
| ** **                                       | ** **                                                                                    |
| **For the  fiscal year ended December 31, 2006** |
| ** **                                       |
| **Or**                                           |
| ** **                                       |
| **o**                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

Commission file number **001-32609**

**Rockwood Holdings, Inc.**

(Exact name of Registrantas specified in its charter)

| **Delaware**                                          | ** ** | **52-2277366**       |
|-------------------------------------------------------|------------|----------------------|
| State or other  jurisdiction of                       |       | (I.R.S. Employer     |
| incorporation or  organization                        |       | Identification  No.) |
|                                                  |       |                 |
| **100  Overlook Center, Princeton, New Jersey 08540** |
| (Address of  principal executive offices) (Zip Code)  |

 

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

Securities registered pursuant to Section 12(b) of theAct:

| Title of each class                      | ** ** | **Name of each exchange on which registered** |
|------------------------------------------|------------|-----------------------------------------------|
| Common Stock,  par value $0.01 per share |       | New York Stock  Exchange                      |

 

Securities registeredpursuant to section 12(g) of the Act:

**None**

(Title of class)

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Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. x  Yes  o No

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. o  Yes  x No

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. x  Yes  o No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, tothe best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

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

 

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

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold asof June 30, 2006 was $826,162,522

As of March 9, 2007,there were 73,786,132 outstanding shares of common stock, par value $0.01 pershare, of the Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporatescertain information by reference to the Proxy Statement for the 2007 AnnualMeeting of Stockholders, which will be filed by April 30, 2007.

 

 

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**TABLE OF CONTENTS**

**FORM 10-K**
|          | ** **                                                                                                         | **Page No.** |
|----------|--------------------------------------------------------------------------------------------------------------------|-------------------|
| PART I   |
| Item 1   | Business                                                                                                           | 3                 |
| Item 1A  | Risk Factors                                                                                                       | 27                |
| Item 1B  | Unresolved Staff Comments                                                                                          | 36                |
| Item 2   | Properties                                                                                                         | 36                |
| Item  3  | Legal  Proceedings                                                                                                 | 40                |
| Item 4   | Submission of Matters to a Vote of Security Holders                                                                | 40                |
| PART II  |
| Item 5   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities | 40                |
| Item 6   | Selected Financial Data                                                                                            | 41                |
| Item 7   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        | 46                |
| Item 7A  | Quantitative and Qualitative Disclosures about Market  Risk                                                        | 82                |
| Item 8   | Financial Statements and Supplementary Data                                                                        | 83                |
| Item 9   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              | 128               |
| Item 9A  | Controls and Procedures                                                                                            | 128               |
| Item  9B | Other  Information                                                                                                 | 130               |
| PART III |
| Item 10  | Directors, Executive Officers and Corporate Governance                                                             | 130               |
| Item 11  | Executive Compensation                                                                                             | 130               |
| Item 12  | Security Ownership of Certain Beneficial Owners and Management  and Related Stockholder Matters                    | 130               |
| Item 13  | Certain Relationships and Related Transactions, and  Director Independence                                         | 130               |
| Item 14  | Principal Accounting Fees and Services                                                                             | 130               |
| PART IV  |
| Item 15  | Exhibits and Financial Statement Schedules                                                                         | 131               |

 

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**PART I**

**Forward-Looking Statements**

This document containsforward-looking statements. Forward-looking statements are not statements ofhistorical fact and may involve a number of risks and uncertainties.Forward-looking statements give our current expectations or forecasts of futureevents and estimates of amounts not yet determinable. We have used the words “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “predict,” “could,”“may” and other words and terms of similar meaning, including references toassumptions, in this report to identify forward-looking statements. Theseforward-looking statements are made based on expectations and beliefsconcerning future events affecting us and are subject to uncertainties andfactors relating to our operations and business environment, all of which aredifficult to predict and many of which are beyond our control, that could causeour actual results to differ materially from those expressed in or implied bythese forward-looking statements. In particular, these factors include, amongother things:

·                  our businessstrategy;

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

·                  fluctuations ininterest rates, exchange rates and currency values;

·                  availability andpricing of raw materials;

·                  fluctuations inenergy prices;

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

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

·                  technologicalchanges affecting production of our materials;

·                  our high levelof indebtedness;

·                  governmental andenvironmental regulations and changes in those regulations;

·                  hazardsassociated with chemicals manufacturing;

•                    risksassociated with negotiating, consummating and integrating acquisitions;

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

·                  risks associatedwith international sales and operations.

You should keep in mind that any forward-looking statements made by usin this Annual Report or elsewhere speak only as of the date on which we makethem. New risks and uncertainties come up from time to time, and it isimpossible for us to predict these events or how they may affect us. Wedisclaim any obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

**Item 1. Business.**

Unless we indicate otherwise or the context otherwise requires, anyreferences to “we,” “our,” “us,” the “Company” or “Rockwood” refer to RockwoodHoldings, Inc. and its consolidated subsidiaries.

**General**

Rockwood is a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-added specialty chemicals and advanced materials used for industrial andcommercial purposes. Rockwood was incorporated in Delaware in September 2000 inconnection with an acquisition of certain specialty chemical businesses fromLaporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) byaffiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). The businessesacquired focused on specialty

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compounds, iron oxidepigments, timber treatment chemicals, clay-based additives, pool and spachemicals, and electronic chemicals used in the semiconductor and printedcircuit board industries.

On July 31, 2004, weacquired the specialty chemicals and advanced materials businesses of DynamitNobel which focused on titanium dioxide pigments, surface treatment and lithiumchemicals, advanced ceramics and custom synthesis. Through this acquisition, wehave created a further diversified portfolio of distinct specialty chemicalsand advanced materials businesses, combining two companies with similarservice-driven cultures focused on high margins; expertise in inorganicchemistry; stable profitability; growth platforms; and proven management teams.In addition, we believe the Dynamit Nobel Acquisition bolstered our leadingcompetitive positions by enhancing our ability to develop innovative productsand solutions for our customers, expanding our technological knowledge andfurther reducing our exposure to any particular raw material or end-use market.

Our products consistprimarily of inorganic chemicals and solutions and engineered materials. Theyare often customized to meet the complex needs of our customers and to enhancethe value of their end products by improving performance, providing essentialproduct attributes, lowering costs or making them more environmentally friendly.We generally compete in niche markets in a wide range of end-use markets,including construction, life sciences (including pharmaceutical and medicalmarkets), electronics and telecommunications, metal treatment and generalindustrial and consumer products markets. No single end-use market accountedfor more than 16% of our 2006 net sales.

We have a number ofgrowth businesses, which are complemented by a diverse portfolio of businessesthat historically have generated stable revenues. Our high margins, strong cashflow generation, capital discipline and ongoing productivity improvementsprovide us with a platform to capitalize on market growth opportunities.

We operate globally,manufacturing our products in 88 manufacturing facilities in 25 countries andselling our products and providing our services to more than 60,000 customers,including some of the world’s preeminent companies. We believe our products aregenerally critical to our customers’ products’ performance, but account for asmall percentage of the total cost of their products. No single customeraccounted for more than 2% of our 2006 net sales. For a geographic descriptionof the origin of our net sales and location of our long-lived assets, see Note4, “Segment Information,” in the accompanying consolidated financial statementsfor further details.

On August 22, 2005, wecompleted an initial public offering (“IPO”) of 23,469,387 shares of our commonstock, which included 3,061,224 shares issued and sold as a result of the underwriters’exercise of the over-allotment option. Net proceeds of approximately $435.7million were primarily used to reduce indebtedness.

On January 9, 2007, wecompleted the sale of our Groupe Novasep subsidiary that was one of our reportablesegments, which included the former Dynamit Nobel custom synthesis business. Asa result, our consolidated financial statements have been reclassified toreflect the former Groupe Novasep segment as a discontinued operation for allperiods presented. See Note 2, “Discontinued Operations,” in the accompanyingconsolidated financial statements for further details.

We operate our business through the following six business segments:(1) Specialty Chemicals; (2) Performance Additives;

(3) Titanium DioxidePigments; (4) Advanced Ceramics; (5) Specialty Compounds; and (6) Electronics.The following table sets forth for each of our six segments net sales of suchsegment, and the percentage of our net sales for the year ended December 31,2006, as well as our principal products and our principal end-use markets. Forfinancial information about each segment, see Note 4, “Segment Information.”
|                        | **2006 Net Sales** | ** **    | **Principal Products** | ** **                                                    | ** **                                                         | **Principal End-Use Markets** | ** ** |
|------------------------|--------------------|---------------|------------------------|---------------------------------------------------------------|--------------------------------------------------------------------|-------------------------------|------------|
| **Segment**            | ** **         | **$ in** | ** **             | **% of**                                                      | ** **                                                         | ** **                    |
| ** **             | **Millions**       | ** **    | **Total**              | ** **                                                    | ** **                                                         |
| Specialty Chemicals    | $918.3             |          | 31%                    | ·      Lithium compounds and    | ·      Automotive— Pre-coating  |
|                        |               |          |                   | chemicals                                                     | metal treatment  and car body                                      |
|                        |               |          |                   | ·      Metal surface treatment  | pre-treatment                                                      |
|                        |               |          |                   | chemicals  including corrosion                                | ·      Steel and metal working       |
|                        |               |          |                   | protection/prevention  oils                                   | ·      Life sciences (pharmaceutical |
|                        |               |          |                   | ·      Synthetic metal sulfides | synthesis and  polymers)                                           |
|                        |               |          |                   | ·      Maintenance chemicals    | ·      Polymerization initiators for |
|                        |               |          |                   |                                                          | elastomers                                                         |
|                        |               |          |                   |                                                          | ·      Aerospace                     |
|                        |               |          |                   |                                                          | ·      Mobile batteries              |
|                        |               |          |                   |                                                          | ·      Disc brakes                   |
|                        |               |          |                   |                                                          | ·      Aircraft industry             |
|                        |               |          |                   |                                                          |                                                               |
| Performance  Additives | $766.3             |          | 26%                    | ·      Iron oxide pigments      | ·      Residential and commercial    |
|                        |                    |               |                        |                                                               |                                                                    |                               |            |  |  |  |

 

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|                           |     |   |   | ·      Wood protection products     | construction,  coatings and                                        |
|---------------------------|----------|--------|--------|-------------------------------------------------------------------|--------------------------------------------------------------------|
|                      |     |   |   |                                                              | plastics                                                           |
|                      |     |   |   | ·      Inorganic chemicals          | ·      Coatings                      |
|                      |     |   |   | ·      Synthetic and organic        | ·      Personal care, paper          |
|                      |     |   |   | thickeners                                                        | manufacturing, foundries                                           |
|                      |     |   |   | ·      Branded specialty pool, spa  | ·      Pool products distributors,   |
|                      |     |   |   | performance  chemicals,                                           | private and  public lakes,                                         |
|                      |     |   |   | algaecides and  aquatic                                           | ponds and reservoirs                                               |
|                      |     |   |   | herbicides                                                        |                                                               |
|                      |     |   |   |                                                              |                                                               |
| Titanium Dioxide Pigments | $441.1   |   | 15%    | ·      Titanium dioxide pigments    | ·      Synthetic fibers for clothing |
|                           |     |   |   | ·      Barium compounds             | ·      Plastics                      |
|                           |     |   |   | ·      Zinc compounds               | ·      Paper                         |
|                           |     |   |   | ·      Flocculants                  | ·      Paints and coatings           |
|                           |     |   |   |                                                              | ·      Pharmaceutical contrast media |
|                           |     |   |   |                                                              | ·      Water treatment               |
|                      |     |   |   |                                                              |                                                               |
| Advanced  Ceramics        | $389.6   |   | 13%    | ·      Ceramic-on-ceramic ball head | ·      Medical (hip replacement      |
|                      |     |   |   | and liner  components used in                                     | surgery)                                                           |
|                      |     |   |   | hip joint  prostheses systems                                     | ·      Mechanical systems            |
|                      |     |   |   | ·      Ceramic tapes                | ·      Electronics                   |
|                      |     |   |   | ·      Cutting tools                |                                                               |
|                      |     |   |   | ·      Other ceramic components     |                                                               |
|                      |     |   |   |                                                              |                                                               |
| Specialty Compounds       | $251.0   |   | 8%     | ·      High specification compounds | ·      Voice and data transmission   |
|                           |     |   |   | such as PVC and  TPE                                              | cables, food and  beverage                                         |
|                           |     |   |   |                                                              | packaging,  medical                                                |
|                           |     |   |   |                                                              | applications, footwear  and  automotive                            |
|                      |     |   |   |                                                              |                                                               |
| Electronics               | $208.9   |   | 7%     | ·      High purity chemicals and    | ·      Semi-conductors and printed   |
|                      |     |   |   | printed circuit  board                                            | circuit board  manufacturing                                       |
|                      |     |   |   | chemicals                                                         |                                                               |
|                      |     |   |   | ·      Photo-imaging masks          |                                                               |
|                      |     |   |   | ·      Recycling and repair service |                                                               |
|                      |     |   |   |                                                              |                                                               |
|                      | $2,975.2 |   | 100%   |                                                              |                                                               |

 

**Our Competitive Strengths**

***LeadingMarket Positions.*** We believe we hold leading marketpositions within many of our businesses. For example, we believe that based onour 2006 net sales, we have leading market positions for the following productsin our segments:

 
|                           | **Operating Segment**                                                                        | ** ** | ** **                 | **Products** | ** ** | ** ** | **Market Positions** | ** ** |
|---------------------------|----------------------------------------------------------------------------------------------|------------|----------------------------|--------------|------------|------------|----------------------|------------|
| Specialty Chemicals       | ·      Lithium compounds and chemicals                         |       | #1 globally                |
|                           | ·      Metal surface treatment chemicals and  related services |       | A leading global  producer |
|                      |                                                                                         |       |                       |
| Performance  Additives    | ·      Synthetic iron oxide pigments                           |       | One of top 3 globally      |
|                      | ·      Wood protection products                                |       | One of top 3 globally      |
|                      |                                                                                         |       |                       |
| Titanium Dioxide Pigments | ·      Anatase titanium dioxide pigment for the                |       | A leading global  producer |
|                           | synthetic fiber  manufacturing industry                                                      |       |                       |
|                           | ·      Zinc- and barium-based pigments                         |       | A leading global  producer |
|                      |                                                                                         |       |                       |
| Advanced  Ceramics        | ·      Ceramic-on-ceramic ball head and liner                  |       | #1 globally                |
|                      | components used  in hip joint prostheses systems                                             |       |                       |
|                      | ·      Ceramics cutting tools                                  |       | #1 in Europe               |
|                           |                                                                                              |            |                            |              |            |            |                      |            |  |

 

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| Specialty Compounds | ·      Value-added thermoplastics compounds for  use in |   | #1 in North America |
|---------------------|---------------------------------------------------------------------------------------|--------|---------------------|
|                     | high-end data  and video communication wire and                                       |   |                |
|                     | cable                                                                                 |   |                |

 

***Specialty businesses in nichemarkets with significant barriers to entry.***   Webelieve that nearly all of our businesses operate in niche markets protected bysignificant barriers to entry. We believe that many of our customers wouldexperience significant disruption and costs if they were to switch to anothersupplier because of the following:

·                  *Customized products and solutions.* We develop and manufactureproducts that meet specific customers’ performance requirements. For example,our Performance Additives segment provides specialized pigments and colorformulations to specific customers by producing synthetic iron oxide pigmentsin a wide range of colors, grades and physical forms to serve the construction,paints and coatings and specialty applications markets. Our Specialty Chemicalssegment provides lithium compounds that are tailored to specific customerapplications, including lithium batteries, pharmaceuticals and high performance greases.

·                  *Technological know-how and expertise.* We use ourtechnological know-how to improve and develop innovative products to meet ourcustomers’ specific requirements and needs. For example, our PerformanceAdditives segment developed a proprietary chemical formulation known asClearwood that acts as a fungicide, insecticide and water repellant to improve theperformance of wood windows and doors. In addition, in our Advanced Ceramicssegment, we produce ceramic-on-ceramic ball head and liner components used inFDA-approved hip prostheses systems medical devices in the United States andare expanding our focus to additional applications including knee joint andintervertebral disc replacements.

·                  *Significant switching costs.* Many of our products have beenpre-qualified for use by our customers. We believe that many of our customerswould experience significant disruption and costs if they were to switch to anothersupplier. For example, in our Titanium Dioxide Pigments segment, our specialtytitanium dioxide pigments represent a small portion of the production cost ofour customers’ products; however, we believe that switching to a new supplierby a customer would require a significant period of production downtime.

***DiverseCustomer and End-Use Market Base.*** We operate a diverseportfolio of distinct specialty chemicals and advanced materials businesses. Wehave more than 60,000 customers worldwide that cover a wide variety ofindustries and geographic areas. Of our 2006 net sales, 49% were shipments toEurope, 34% to North America (predominantly the United States) and 17% to therest of the world. No customer accounted for more than 2% of such net sales,and our top ten customers represented only approximately 9% of such net sales.Our largest end-use market represented approximately 16% of such net sales. 

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The following chartprovides a breakdown of our 2006 net sales by end-use markets:

Within these end-use markets, there is furtherdiversification by sector, product and region. For example, within theconstruction end-use market, our Performance Additives segment companiesprovide materials for new construction as well as companies that focus onremodeling and renovation. In addition, we serve construction materials clientsin both the residential and commercial sectors located in North America, Europeand Asia. Within the life sciences end-use market, we serve a number ofsectors, including: the medical applications sector through our SpecialtyCompounds and Advanced Ceramics segments; and the pharmaceutical sector throughour Specialty Chemicals segment.

***Limited exposure to raw materialsand energy prices.*** We have a broad raw material baseconsisting primarily of inorganic (nonpetrochemical) materials, most of whichare readily available and whose prices follow their own individual supply anddemand relationships and have historically shown little correlation to eachother. Our largest and second largest raw material purchases represented approximately1.7% and 1.5% of our 2006 net sales, respectively, while our top ten rawmaterial purchases represented less than 10% of our 2006 net sales. Further,our exposure to energy prices is limited as energy costs accounted forapproximately 3% of our 2006 net sales.

***Leadingtechnologies and strong brand names.*** We believe we arerecognized as an innovative industry leader in many of our businesses due toour technological know-how and strong customer focus. We identify,commercialize and market new products, which we develop internally or withthird parties, as well as license or otherwise acquire. We believe that anumber of our products and business brands have gained strong recognition,including the following:

·                  SpecialtyChemicals—*Ardrox,*which provides a complete rangeof globally recognized products specifically developed for use in aircraftmaintenance programs, ranging from daily cleaning to complete aircraftoverhaul;

·                  SpecialtyChemicals—Our *Gardo*products (such as *Gardoclear*and *Gardobond*),which provide complete process solutions for all steps of the chemicaltreatment of metal surfaces, are often tailored for individual customers andtheir applications;

·                  PerformanceAdditives—*Granufin,*our patented iron oxidegranulated pigment, which provides significant advantages in terms of producthandling, color consistency and ease of use when used with our *Granumat* dispensing system;

·                  PerformanceAdditives—*Preserve*and*PreservePlus,*our environmentally advanced ACQ timber treatment products,which we introduced as alternatives to traditional arsenic-based chemicals suchas CCA;

·                  PerformanceAdditives—*Garamite,*our clay-based additive, whichis used in the manufacture of fiberglass composites and provides productionefficiencies and enhanced performance of the end-product;

·                  PerformanceAdditives—*Cloisite,*a clay mineral known asnanoclay, which is used in the production of certain plastics;

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·      TitaniumDioxide Pigments—*Hombitan,* which is recognized asthe world’s #1 anatase titanium dioxide pigment for the synthetic fiber manufacturing industry; and

·                  AdvancedCeramics—*Biolox,* our hip joint replacementcomponents made of advanced ceramic materials.

***Experienced and proven managementteam with significant equity interests.*** We have anexperienced management team with a proven record of financial and operationalexcellence. Since joining us in 2001, Seifi Ghasemi, our chairman and chiefexecutive officer, and Robert Zatta, our senior vice president and chieffinancial officer, together with other members of our senior management team,have been responsible for instilling a culture of ownership and introducingseveral initiatives that have resulted in significant improvement in ourbusiness including increased growth in net sales, development of new products,cost reductions, working capital improvements, capital expenditure reductionsand improved customer relationships. The heads of our business lines have, onaverage, over 20 years of experience in the specialty chemicals and advancedmaterials industry and over ten years at their respective businesses. Membersof management and certain other employees currently hold approximately 6.0% ofthe outstanding shares of our common stock on a fully-diluted basis.

**Our Business Strategy**

Building on thesestrengths, we plan to continue our existing strategy to grow revenue and cashflow and increase profitability as follows:

***Capitalizeon expected market growth opportunities.*** We expect ourbusinesses to benefit from a number of growth trends, including:

·      SpecialtyChemicals—increased demand for longer-life lithium-based batteries and lithiumcompounds in pharmaceuticals.

·                  PerformanceAdditives—a growing trend toward the use of color in concrete paving stones andother home remodeling. 

·                  PerformanceAdditives—a growing demand for the use of organic next generation woodpreservative products.

·                  TitaniumDioxide Pigments—sales of newly-introduced nano-particle titanium dioxide pigmentsthat are used to provide ultraviolet lightprotection for plastics and coatings.

·                  AdvancedCeramics—a growing trend toward replacing plastics and metals withhigh-performance ceramics and increasing use of ceramic substrates forelectronics.

***Focuson our core businesses.*** We intend to focus on our corebusinesses that have leading market positions, growth opportunities and highermargins. We set aggressive performance targets for all of our businesses andwill refocus or divest those activities that fail to meet our targets or do notfit our long-term strategies. For example, in early 2007 we divested our GroupeNovasep segment, which focused on the custom synthesis and production of activeingredients for pharmaceuticals and the development of purifications solutions,and the US operations of our wafer reclaim business.

***Achieveprofitable growth through selective acquisitions.*** Weintend to continue to selectively pursue cash flow accretive acquisitions andstrategic alliances in order to strengthen and expand our existing businesslines and enter into complementary business lines. For example:

·                  InDecember 2005, we acquired the rheological additives and carbonless developersbusinesses of Süd–Chemie AG. This acquisition complements our existing businessand allows us to better serve our customers with a broader product line, enhancedtechnical resources and increased production capability.

·                  InJanuary 2007, we formed a joint venture with Rohm and Haas Company bringingtogether their wood biocide business and our wood protection business anddistribution channels to take advantage of customer desire for the introductionof next generation organic wood preservatives. Our alliance expects to begincommercialization of these products in late 2007.

Although we are notsubject to any agreement or binding letter of intent with respect to potentialacquisitions, we are engaged in acquisition discussions with other parties

***Reducefinancial leverage.*** We intend to reduce our financialleverage. Since our initial public offering, we have reduced our debt and ourdebt-to-adjusted ebitda ratios. In addition, we expect to use a significantportion of the proceeds from the sale of our Groupe Novasep segment to repayindebtedness. We believe that our strong cash flow generation from organicgrowth opportunities within our existing markets, cost-reduction programs andproductivity gains applied to our businesses and improved working capitalmanagement will further reduce our leverage ratios.

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**Operating Segments**

The following describeseach of our operating segments, as well as the principal products or principaldivisions within each segment.

**Specialty Chemicals (31*% of 2006 net sales*)**

Our Specialty Chemicals segment, which we acquired inthe Dynamit Nobel Acquisition, and which operates under the *Chemetall* brand name, develops and manufactures metalsurface treatment products and services, lithium chemicals and fine chemicalsfor a wide range of industries and end markets. This segment is comprised oftwo business lines: (1) Surface Treatment, which supplies surface treatmentproducts and solutions for metal processing industries; and (2) Fine Chemicals,which supplies lithium products across the entire value chain from rawmaterials to specialty lithium compounds and advanced metal-based specialtychemicals to niche markets. Our Specialty Chemicals segment generated net salesof $918.3 million and $842.0 million for the years ended December 31, 2006 and2005, respectively. Actual net sales for the five months ended December 31,2004 were $321.1 million and net sales were $759.6 million on a pro forma basisfor the year ended December 31, 2004. See Note 4, “Segment Information,” foradditional financial information regarding our Specialty Chemicals segment.

***Surface Treatment***

We believe that our Surface Treatment business line isa leading global supplier of surface treatment products and solutions. SurfaceTreatment’s products are used for a variety of applications and serve theautomotive, aerospace and general industrial markets, including steel and metal-workingindustries. This business line supplies more than 5,000 different products,many of which are based on proprietary formulations and extensive applicationknow-how, to over 50,000 customers and operates in 29 different locations for productionor research and development in over 20 countries. Surface Treatment operates inthe following core end-markets: Automotive Technologies, Automotive Components,Cold Forming and Coil Coating, General Industry and Aerospace Technologies.

In Surface Treatment, we develop and supply productsand solutions for the chemical pretreatment of metals and other substrates,some of which are customized for individual customers and applications. Ourproducts and solutions are critical to many areas of the metal processingindustry because they protect metals from corrosion, facilitate forming andmachining, allow parts to be processed in a clean and grease-free environmentand ensure good coating adhesion. Other products are used in the cleaning andmaintenance of aircraft. As an integrated part of the business, we also offer afull range of customer services, including process control and analysis ofchemical baths at clients’ facilities.

Surface Treatment competes in markets characterized bysignificant barriers to entry, proprietary manufacturing technologies and know-how,demanding product-handling requirements, rigorous product quality andperformance standards and specifications and longstanding service-intensivecustomer relationships. In order to remain competitive, we are focused ondeveloping new products, improving process technologies and expanding ourcustomer base and broadening our technology capabilities in existing and new marketsthrough internal research and development. In 2006, we increased our marketingefforts in Eastern Europe and Asia, especially in China. In addition, during2006, there was further development and the market introduction of chrome-freetechnology in the areas of thin organic coating. We currently have a number ofjoint ventures across Asia, which we believe will provide us with theopportunities to further penetrate these high growth regions. The core-endmarkets that Surface Treatment operates in are as follows:

*Automotive Technologies.* Weprovide surface treatment products and solutions for automotive originalequipment manufacturers (“OEM”), including an entire range of products andservices for use in the “paint shop” step of car-body manufacture. The productsand services we provide typically represent a low percentage of total car bodyproduction costs, but have high value in terms of corrosion protection andsurface quality. Major applications include car body treatment(zinc-phosphating) and paint coagulation. Our services typically includeintensive process control and chemical management function in the customer’sproduction processes.

*Automotive Components.* We offercleaning and pretreatment products and services to automotive partsmanufacturers for use in the making of automotive parts, such as axles, seatsand other metal components. We believe that products for the treatment of steeland aluminum wheels, including a new generation of products based onself-assembling molecules, represent an attractive growth area in this market.

*Cold Forming and Coil Coating.*We provide products and services used to facilitate the cold forming of tubes,wire drawing and cold extrusion of metal. We provide products and services usedin forming, cleaning and pretreating metal sheets used in the production ofsteel and aluminum coil.

*General Industry.*General Industry includes the largest number of customers among the SurfaceTreatment businesses. The size of these customers varies between small andlarge. We offer a range of products and services to a broad range of industrialend-markets that have metal surface treatment applications, including cleaning,activation, conversion coating and final rinsing. Our products

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include cleaners, iron phosphates, coolants, paintstrippers and flocculants. We have introduced a new generation of iron-phosphatingproducts in the U.S. market, which we expect will provide growth in the nextfew years. In addition, we started to offer silane or oxsilan-based systems.The markets in general industry include household appliances manufacturing, canproducers, heating, ventilation, aluminum finishing and other diverseend-markets.

*Aerospace Technologies.* Weprovide products and services for aerospace OEMs, airlines and maintenancecompanies. Aerospace Technologies focuses on four major application areas: cleaning;corrosion protection; maintenance chemicals; and sealants. Cleaning productsare used for the interior and exterior cleaning of airplanes. Ardrox productsprovide a complete range of globally recognized products specifically developedfor use in aircraft maintenance programs, ranging from daily cleaning tocomplete aircraft overhaul. Corrosion protection products include waxes used toprotect airframes. Maintenance chemicals for aircraft engines and turbines includehigh performance cleaners and products for non-destructive testing of engines.Aircraft sealants provide high technology sealing solutions for airplanes andare expected to contribute significantly to growth in the next few years. In2006, we introduced further variances of low-density sealants in the marketplace. In addition, we produce specialty products, which are similar to metalsurface treatment products, but are used on the glass substrates for glassmanufacturers, including specialty cleaners, polishing products, cutting oilsand cooling lubricants.

*Competition*

We believe that the top five competitors in the globalmetal surface treatment market held an estimated market share of more than 50%in 2006. We believe that Henkel Surface Technologies is the global marketleader, followed by us. The remaining main competitors include NihonParkerizing, PPG and Nippon Paint Co., Ltd. Competition in this market is basedprimarily on customer service, product quality and technological capabilities.

*Customers*

Surface Treatment serves a large customer base that isdependent on the individual segment and its specific customer mix. SurfaceTreatment’s largest customers include Daimler Chrysler AG, RNUR (Renault),Arcelor and Volkswagen AG. The composition of the customer base varies widelyamong product groups and industries served. Automotive Technologies businessdivision serves approximately 20 customers, primarily global OEMs, and theAutomotive Components business division serves approximately 500 small to largecustomers. Cold Forming and Coil Coating business division serves approximately800 mid size to large customers and the General Industry business divisionserves approximately 45,000 small to large customers in a broad range ofindustries worldwide. Aerospace Technologies business division servesapproximately 4,200 small to large customers worldwide.

***Fine Chemicals***

Our Fine Chemicals business line consists of ourlithium, special metals and metal sulfides product lines. We believe that ourFine Chemicals business line is the leading global producer of basic andspecialty lithium compounds and chemicals and advanced metal-based specialtychemicals.

Fine Chemicals develops and manufactures a broad rangeof basic lithium compounds, including lithium carbonate, lithium hydroxide,lithium nitrate, lithium chloride, and value added lithium reagents, includingbutyllithium and lithium aluminum hydride. Lithium is a key component inproducts and processes used in a variety of applications and industries, whichrange from lithium batteries, high performance greases, thermoplasticelastomers for car tires, rubber soles and plastic bottles to intermediates inthe pharmaceutical industry. In our Fine Chemicals business, we operate ourlithium business along the following four business divisions reflecting itscore end-markets: (1) Specialities/Life Sciences; (2) Base Chemicals; (3)Elastomers; and (4) Electronics.

Lithium carbonate can be resold or used as a primaryraw material for more specialized forms of lithium-based materials. We have developedan integrated, low cost manufacturing capability based on a range ofproprietary technologies and advanced equipment, including brine processingtechnology and aqueous chemistry for a broad variety of lithium salts. Inaddition to developing and supplying lithium compounds, we provide technicalservice, including training of customers’ employees, for handling reactivelithium products. We also offer our customers recycling services for lithiumcontaining by-products resulting from synthesis with organolithium products,lithium metal and other reagents. Product quality is critical in the lifesciences, elastomers and electronics industries. We believe that these servicesand our ability to handle highly reactive compounds in large quantities serveto build customer loyalty. We plan to continue to focus on the development ofnew products and applications. Over the last 20 years, the use of lithiumproducts has grown substantially in a variety of applications, such as lifesciences and electronics, largely as a result of innovation and productdevelopment. Currently, we are in the process of developing lithium compoundsfor several near- to medium term, new and potentially high growth products forapplications such as fuel cells, batteries for electric vehicles orlithium-aluminum alloys.

Fine Chemicals alsodevelops and manufactures advanced metal-based specialty chemicals along twobusiness divisions based on its principal product groups: (1) Metal Sulfides,which develops and manufactures natural and synthetic metal sulfides used inbrake pads and clutch facings and cutting and grinding wheels and (2) SpecialMetals, which develops and manufactures cesium products for the

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chemical and pharmaceutical industries and zirconium,barium and titanium products for various pyrotechnical applications includingairbag igniters. Fine Chemicals is a major commercial producer of certaincesium compounds, which are used for X-ray image intensifiers and displays fordigital X-ray technology. Fine Chemicals also sells accelerators for the rubberindustry.

In our metal-based specialty chemicals business, weare well positioned in the field of metal sulfides and special metals, offeringa broad range of products and fully integrated production processes, as aresult of which we are a single source supplier for many of our customers. FineChemicals benefits from a long-standing expertise in handling, processing anddeveloping new specialty metal products. Fluctuations in purity grades of theproducts can lead to significant losses in customers’ production processes.Fine Chemicals has a reputation among its customers for consistently producinghighly customized, quality products. We have had strong sales growth over thepast three fiscal years in our metal-based specialty chemicals business, drivenby the shift towards synthetic sulfides in brake pads. Currently, we are amajor supplier of synthetic metal sulfides for use in brake pads. In addition,we hold several key patents, which, we believe, gives us a competitiveadvantage in the fast growing synthetic metal sulfides market. In order to furtherstrengthen our competitive position in the metal-based specialty chemicalsmarket, we are focused on the production of new variations of synthetic metalsulfides, and new cesium products for organic synthesis. We also continuouslymonitor our customers’ industries for potential new applications for ourproducts and often achieve a sole supplier position by being the first to offerour products to potential new customers. In addition, we plan to expand ourbusiness by penetrating growth areas such as the United States and Asia.

We believe that demand for synthetic metal sulfideswill increase further in the future as a result of the continuing substitutionof asbestos-based friction linings, transition from naturally occurringsulfides to synthetic sulfides worldwide and the transition from drum to diskbrakes in Asia and the Americas. We also believe that the market for cesiumcompounds will grow as a result of new applications being developed in thechemicals industry, the pharmaceutical industry, the defense industry and forthe use in catalytic applications. As a result of our competitive strengths asa supplier of cesium products for established markets, we believe we are wellpositioned to take advantage of this market trend.

*Principal Business Divisions*

*Lithium*

*Specialities/Life Sciences.* Wedevelop and manufacture lithium compounds and other products for life scienceapplications, such as special reagents for the synthesis of drug intermediatesas well as for the flavor and fragrances industry. The two principal lithiumproducts are butyllithium and lithium aluminum hydride, in which we believe wehave strong market positions. We also produce various other compounds which includelithium metal, grignard reagents and alkoxides. Our research and developmentteam often works closely together with research and development departments ofpharmaceutical companies, especially in the European market in order to developproducts and solutions tailored for the customers’ needs. In addition, broadvariations of our specialities are designed to produce liquid crystals for flatscreens.

*Base Chemicals.* We develop andmanufacture basic lithium compounds, which serve a wide range of industries andapplications. Our products include (1) lithium carbonate, which is used as afluxing agent for enamels, glass and ceramic production to lower processtemperature in aluminum electrolysis, and as a cement additive for constructionapplications; (2) lithium hydroxide, which is principally used in highperformance greases for automotive and industrial applications; (3) lithiumnitrate, which is principally used in the rubber industry and (4) lithiumchloride, which is principally used in gas and air treatment.

*Elastomers.* Wedevelop and manufacture high-technology lithium compounds for use in rubber andelastomer applications. Our main product, butyllithium, is used as apolymerization initiator for synthetic rubber and thermoplastic elastomers. Generally,these products require a high degree of handling, transport and applicationknow-how and customer service due to their high reactivity. We benefit frombeing a major supplier with butyllithium manufacturing facilities in all threegeographic regions with plants in the United States, Germany and Taiwan.

*Electronics.* We develop andmanufacture lithium products for electronic applications, mainly for theprimary (disposable) and secondary (rechargeable) battery industries. Our majorproduct is lithium metal, which is used as anode material for primarybatteries. Lithium ion-based batteries are used extensively in consumerelectronics, such as mobile phones, camcorders and laptops. We are currentlydeveloping a new generation of conductive lithium salts used for the batterymarket, which, we believe, has the potential to drive significant growth in thefuture.

*Metal-based Specialty Chemicals*

*Metal Sulfides.*This business division has two major product lines: friction stabilizers andabrasive additives. Friction stabilizers enhance the power and performance ofbrake pads and clutch facings and primarily serve the automotive supplierindustry while abrasive additives are additive compounds. When bound withsynthetic resin, additive compounds act as active fillers in cutting wheels,enhancing cutting effectiveness and tool life of cutting and grinding wheelsand primarily serve the mechanical engineering industry. The demand for metalsulfides is driven primarily by the demand in the automotive supplier industry.

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*Special Metals*. In this businessdivision, we develop and manufacture a unique range of products based onspecial metal compounds derived from cesium, rubidium, titanium, zirconium andbarium. These products are used in highly specialized, technology-drivenend-applications such as X-ray diagnostic systems, airbags, television cathoderay tube and vacuum lamps and serve various endmarkets, such as chemical,pharmaceutical, metallurgical, automotive, electronics and pyrotechnicalindustries.

*Competition*

*Lithium*. We believe the globallithium market consists of three major producers and a number of other smallproducers. We believe that we are the global market leader in the lithiummarket. While we offer a diverse range of products from raw materials to specialtylithium compounds, FMC Corporation offers mainly specialty lithium compoundsand Sociedad Quimica y Minera de Chile S.A. (“SQM”) offers a more limitedproduct line focused on basic lithium compounds. Competition in this market isbased on product quality, reliability of products and customer service.

*Metal-based Specialty Chemicals*.We believe that in the metal-based specialty chemicals business, Fine Chemicalshas a leading market position in its niche markets. It has a leading positionin friction materials and is the only supplier offering a full product range offriction stabilizers and abrasive additives based on metal sulfides. Mostcompetitors only offer single product lines in this market. Key competitorsinclude: Dow Corning Corporation, Frimeco Productions GmbH, and AmericanMinerals, Inc., in Metal Sulfides division and Cabot Corporation and SAESGetters, S.p.A. in the Special Metals division. Competition in the metal-basedspecialty chemicals markets in which Fine Chemicals competes is based onproduct quality and product diversity.

*Customers*

Fine Chemicals serves approximately 1,000 customersworldwide in its lithium business and 700 customers worldwide in its metal-basedspecialty chemicals products business. Fine Chemicals’ customers of lithiumproducts include Bayer CropScience, Kraton Polymers U.S. LLC, EnergizerHoldings, Inc. and DSM N.V.

**PerformanceAdditives *(26% of 2006 net sales)***

Our Performance Additives segment consists of businesslines, which develop and manufacture a range of specialty chemicals that areused in industrial and consumer products and processes to enhance performanceor create unique characteristics. This segment manufactures and marketsproducts that are based on a focused research and development effort and astrong technology base. Our Performance Additives segment generated net salesof $766.3 million, $680.7 million, and $630.9 million for the years endedDecember 31, 2006, 2005 and 2004, respectively. See Note 4, “Segment Information,”for additional financial information regarding our Performance Additivessegment.

***Color Pigments and Services***

Our Color Pigments and Services business line is aglobal producer of synthetic iron oxide and other inorganic pigments in a widerange of yellow, red, orange, blue, black or blended shades, and serves theconstruction, paints and coatings, plastics, and specialty application marketswith powder, granular and liquid grades. Color Pigments and Services focuses ondeveloping and manufacturing high value-added inorganic pigments. The businessalso offers a number of unique pigment dispensing systems. Color Pigments andServices generates sales from construction applications, which includecolorings for concrete products such as paving stones, bricks, concrete blocks,roofing tiles, ready mix, stucco and mortar; for paints and coatings as well ascolorants for plastics, paper and rubber; and for specialty applicationsincluding security inks, toners for printers and copiers, catalysts and cosmetics.

Our Color Pigments and Services business line has beendriven by product innovation, our brand names and our customer and technicalservice, including customer-specific color blending. We expect this segment tobenefit from the growing trend towards the use of color in concrete pavingstones and other home remodeling fueled in part by increased exposure at “do-it-yourself”home centers.

An important component of Color Pigments and Services’product innovation has been our granulated pigment, *Granufin*,which, when used in conjunction with our *Granumat*dispensing system, offers significant advantages to customers over traditionalpigment systems in the coloring of manufactured concrete products, such as easeof handling and consistency in coloring. We believe that *Granumat*is the leading granulated pigment dispensing system worldwide and is a resultof Color Pigments and Services’ research and development focus on process anddelivery systems for its products. Our *Chameleon*dispensing system electronically controls the delivery of color pigments tocustomers and the supply of pigments into ready-mix concrete when used with ourliquid pigment product line.

Our iron oxide pigments joint venture in Chinaprovides us with a continuing source of pigments, as well as an importantplatform to expand Color Pigments and Services’ commercial activities insidethe Asia Pacific region. Color Pigments and Services has an agreement pursuantto which an affiliate of W.R. Grace & Co., which sells admixtures andfibers, distributes our liquid pigments and *Chameleon*dispensing systems to ready-mix and precast producers in the concrete industry.We believe our combined efforts will 

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provideready mix and precast customers with added value in the form of colored readymix concrete.

In September 2004, we acquired the assets of thepigments and dispersions business of Johnson Matthey Plc. The pigments anddispersions business produces transparent iron oxide pigments and dispersions,color concentrates and complex inorganic color pigments used in the surface andwood coatings, plastics, building materials and print ink markets. In addition,during 2004 we acquired the assets of a producer of liquid pigments, whichincluded a facility in King of Prussia, Pennsylvania.

*PrincipalProducts*

*Construction Color Pigments and Services.*We develop and manufacture principally iron oxide pigments for manufacturers ofconstruction products for use in the coloring of concrete products, includingpaving stones, bricks, concrete blocks, roofing tiles, stucco and mortar. Wealso expanded our product portfolio into the brick and decorative marketsegments through a prior acquisition. This also provided us with access to thepackaged mortar tolling business. Color Pigments and Services’ major U.S. brandis *Davis Colors* and its key productsinclude *Granufin/Granumat, Hydrotint, Mix-Ready andChameleon*. *Granufin* is aunique, dry, microgranulated pigment that combines the flow characteristics ofa liquid with the storage and handling advantages of a powder. The *Granumat* dispensing system offers a variety ofconfigurations and features designed to accommodate the varying requirementsand budgets of concrete product manufacturers. *Granufin*pigments and the *Granumat* system improve producthandling and color consistency for our customers. The patent on the granulationtechnology used in *Granufin* willexpire in the third quarter of 2007. Our *Chameleon*system, which works in combination with our liquid pigments, automaticallyweighs, blends and conveys colors into a ready-mix truck using a standardpersonal computer and custom-developed Windows-based software.

*Paints, Coatings and Colorants.*We also develop and manufacture colored pigments for the paints, coatings,plastics, paper and rubber end-use markets including the brands *Ferroxide, Trans-oxide and Colourplex*. We produce a widevariety of pigments for these markets that include synthetic iron oxides,corrosion inhibitor pigments, complex inorganic color pigments and processnatural pigments such as burnt umbers and siennas. The largest application forthese products is colorant used in architectural, industrial and specialpurpose paints and coatings. Color, ease of dispersion and chemical stabilityare the primary characteristics of our products, which can be used in a widevariety of both solvent and water-borne systems. We believe that a number ofColor Pigments and Services’ products are considered industry standards in themarkets in which we compete, such as our Mapico yellow pigment forarchitectural and industrial applications and our heat stable tans, which cantolerate applications requiring high temperature processing, such as plasticcompounding and roofing granules.

*Specialties*. Our iron oxidepigments are also used in a wide variety of specialty applications such astoner for large printers and copiers, security inks used to print bank notes,catalysts for styrene production and cosmetics. Each of these markets requiresspecialized pigments with unique properties, which are often as important asthe coloring characteristics. For example, printer toners require specificmagnetic properties whereas pigments used in cosmetics require color andpurity.

*Competition*

We believe that there are a significant number ofproducers of iron oxide pigments across the globe at both the pigment synthesisand finishing levels with whom we compete. We believe these producers includeLanxess Corporation, Elementis plc, Cathay Pigments, Interstar, Yipin Pigmentsas well as other producers in Japan and China. Competition in this growingsegment is based on customer service, product attributes, such as product formand quality, and price. Product quality is critical in the higher end of thebusiness on which Color Pigments and Services focuses as inconsistent productquality can have an adverse impact on the color consistency of the end-product.

*Customers*

Color Pigments and Services’ key customers includeBASF Group, Oldcastle (CRH plc), Pavestone Company, The Sherwin-WilliamsCompany, Degussa, Unilock Ltd. and Xerox Corporation, each of which has beenour customer for at least ten years. Color Pigments and Services’ customer baseis highly fragmented.

***Timber Treatment Chemicals***

Our Timber Treatment Chemicals business line is amanufacturer of wood protection products primarily in North America. Woodprotection products enhance the performance of wood by increasing its longevitythrough protection from decay and fungal or insect attack. Our specialty timberchemicals also add water repellency, fire retardancy and other properties towood products. Timber Treatment Chemicals’ products include wood protectionproducts based on our alkaline copper quaternary, or ACQ technology, which wasawarded the Environmental Protection Agency (“EPA”) Presidential GreenChemistry Challenge Award in 2002, and chromated copper arsenate, or CCA. Otherproducts include Clearwood, our wood protection product for wood windows anddoors, as well as a range of specialty additives with fire retardant, waterrepellent or moldicide properties. Applications include wood protectionproducts used for decking, fencing, playground equipment, garden furniture,house construction materials, utility poles, and other wood constructions.

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Timber Treatment Chemicals also manufactures inorganicchemicals such as nitrates and chlorides for various industrial applications,including chemicals that are added to concrete as curing accelerants andcorrosion inhibitors, chemicals that are used for odor control in watertreatment, galvanizing fluxes, micronutrients, pesticides, and catalysts usedin the manufacture of textile resins. We believe that Timber TreatmentChemicals is a leading provider in North America of new generation alternativetimber treatment chemicals, such as ACQ, which does not contain chrome, arsenicor any other chemicals classified as “hazardous” by the EPA. We developed thistechnology to produce ACQ pursuant to a license agreement with Domtar Inc. andthrough the acquisition of the Kemwood business from Kemira OY. We have furtherdeveloped this technology and created our own proprietary line of ACQ productsunder the brand names *Preserve and Preserve Plus*.As a result, in February 2001, we signed a licensing agreement with Osmose,Inc., another major producer of timber treatment chemicals, to license ourproprietary ACQ technology to Osmose. Our ACQ technology is patent protected inthe United States through May 2007.

In addition, Timber Treatment Chemicals provides abroad range of technical expertise and services to its customers. Inparticular, Timber Treatment Chemicals works closely with its customers toassist them in reducing the total cost of their manufacturing process, bysupplying timber treatment chemicals as well as treatment equipment, along withtechnical support.

In January 2007, our Timber Treatment Chemicals businessand Rohm and Haas Company completed the formation of Viance, LLC, a jointventure company that provides an extensive range of advanced wood treatmenttechnologies and services to the global wood treatment industry. Viance isjointly-owned by us and Rohm and Haas and was formed, in part, through thecontribution of our global wood protection chemicals business and thecontribution by Rohm and Haas of its wood biocides business. We expect thisjoint venture to take advantage of consumer desire for organic wood protectionproducts and the significant growth potential in the development andcommercialization of the next generation of wood protection products. We expectthis joint venture to begin commercialization of such products in late 2007.See Note 22, “Subsequent Events,” for further details.

Many of our Timber Treatment products are registeredpesticides and subject to extensive regulation. In February 2002, the EPAannounced a voluntary decision by CCA manufacturers, including our subsidiary,to amend their registrations for CCA to limit use of CCA-treated lumber in mostresidential settings. In the culmination of that process, in March 2003, theEPA amended the registrations for CCA prohibiting CCA treatment of wood,effective December 31, 2003, for use in most residential settings, includingplay structures, decks, picnic tables, landscaping timbers, residentialfencing, patios, walkways and boardwalks. Similar initiatives were enacted inCanada by the Pest Management Regulatory Agency, which imposed similarlimitations on the use of CCA-treated wood. The EPA is currently conducting arisk assessment of CCA-treated wood and results are expected in 2007. The useof ACQ has increased following the industry-wide voluntary transition tonon-arsenic chrome-based wood protection products discussed above.

Likewise, in Japan, the use of arsenic-basedchemicals, such as those used in the manufacture of CCA wood protectionproducts, is restricted through legislation limiting the levels of arsenicallowed in rainwater runoff from outdoor wood product storage areas. Due inpart to the effect of this legislation, we have been able to attain asignificant portion of the Japanese timber treatment chemicals market throughour ACQ product line. Various types of restrictive legislation, which wouldfurther affect the ability to use arsenic-based chemicals are currently beingproposed in various jurisdictions in other countries, e.g., Australia. InEuropean Union markets, restrictions were enacted in mid-2004.

*Principal Products*

We develop and manufacture a broad range of woodprotection products, fire retardant and specialty chemicals for use inresidential and industrial wood applications. In addition, we provide treatmentequipment, which facilitates the handling and treatment of wood and chemicalsand we provide comprehensive technical support services to our customers.Timber Treatment Chemicals’ key brands include *Preserve,Preserve Plus, Ultrawood, SupaTimber, D-Blaze and Clearwood.*

We also develop and manufacture inorganic metallicchemicals for certain specialty markets. These include zinc chloride-basedproducts, other chlorides, and a range of nitrates and other chemicals. Some ofthese products are manufactured using by-products from other large chemicalcompanies.

*Competition*

We believe that Timber Treatment Chemicals was one ofthe leading manufacturers of wood protection products in North America in 2006,along with Arch Chemicals, Inc. and Osmose, Inc. BASF Group, Kurt ObermeierGmbH & Co. KG and Rutgers AG are other competitors, particularly in Europe.Competition for wood protection products is mainly based on price, customersupport services, innovative technology and product range. In the inorganicchemicals market, we operate in niche areas, and therefore have few overallcompetitors. Competition in the inorganic chemicals market is mainly based onquality, customer support services and price.

*Customers*

Timber Treatment Chemicals sells its productsprimarily to wood processors who pressure-treat wood. Major customers include 

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Georgia Pacific, Aljoma Lumber, Inc., BB&S TreatedLumber of New England, Coos Bay Lumber Company, Culpeper, Inc., KoshiiPreserving Co. Ltd., Jeld-Wen, Inc., and Sunbelt Forest Products Corporation.Customers of our inorganic chemicals product line include Degussa AG, Rohm andHaas Company, Nalco Company and W.R. Grace & Co. Most of these companieshave been our customers for at least ten years.

***Clay-based Additives***

Our Clay-based Additives business line is a developerand manufacturer of specialty rheology modifiers and additives. These productsare used in a wide variety of applications to modify viscosity, thickness andflow characteristics, and keep solids in suspension. End products in whichthese additives are used include industrial and architectural coatings,oilfield drilling fluids, inks, paper-making, household care products andcomposites.

During the last several years, this business line hasdeveloped a number of new value-added products and applications. One of Clay-basedAdditives’ recently developed applications is the use of our *Laponite* ® synthetic clay as a retention aid in thepaper-making process. In addition, we are currently developing new products,including anti-static coatings for paper and variants of *Laponite*® to replace current types of thickeners in personal care products. Otherproducts recently introduced by Clay-based Additives include *Garamite* ®, a cost-effective and easy-to-use thickener whichprovides low volatile organic content compared to traditional additives used inthe manufacture of fiberglass composites; and *Cloisite*®, used in the manufacture of nanocomposite plastics, which are speciallyengineered composite materials exhibiting superior mechanical, barrier and fireresistant properties compared to traditional plastics and which result inlighter plastic end products. In 2001, our Clay-based Additives businessworking with General Motors introduced the first commercial exterior automotiveapplication of a new lightweight nanocomposite material based on *Cloisite* ® nanoclay on the step assist of the GMC Safari andChevrolet AstroVan. We continue to develop additional applications fornanocomposite materials with our strategic partners.

In December 2005, we completed an acquisition of therheological additives and carbonless developers businesses of Süd-Chemie AG,which included the *Tixogel*®organoclays, *Optiflo* ® associative thickenersand *Optigel*® activated clay product lines,as well as production facilities in Moosburg, Germany and Louisville, Kentucky.We also purchased Süd-Chemie’s *Copisil* ® clayproduct line, which is used in the manufacture of carbonless paper. Thisacquisition complements our existing businesses and allows us to better serveour customers with a broader product line, enhanced technical resources andincreased production capability. See Note 5, “Acquisitions,” for furtherdetails.

*PrincipalProducts*

*Coatings and Inks*. We offer acomprehensive line of additives which modify the viscosity, flow and suspensionproperties of coatings and inks, including *Claytone*® forthe manufacture of industrial and special purpose coatings, such as bridge,marine and maintenance paints, and architectural coatings, and *Laponite*® for the manufacture of automotive coatings. Our *Garamite* ® additives are used in the manufacture of highsolids, low volatile organic content epoxy coatings for industrialapplications.

*Paper-Making*. We serve the paperindustry with a product line that includes bentonite retention aids, which areused in the paper-making process to reduce fiber losses and aid in waterdrainage from the sheet, and an additive, which provides fade-resistant colorfor carbonless copy paper. We also produce a form of *Laponite*®which is used in the production of clear, flexible and moisture-resistant filmsand coatings with conductive, anti-static and anti-sticking properties, thatare used in the manufacture of specialty photographic and anti-static papers,ink jet papers and anti-static packaging.

*Consumer and Household Care Products*.We develop and manufacture a wide range of natural clay-based rheologymodifiers, including *Gelwhite*® and *Bentolite*®, for the consumer and household care markets. Inaddition, *Laponite*® also has functional propertiesthat improve the performance of a wide range of consumer products, such aspersonal care products, creams, lotions, cosmetics and hard surface householdcleaning products for the kitchen and bathroom.

*Oilfield*. We offer a line of *Claytone*® organoclays, which are a type of specially treatedclays, for use in diesel and synthetic oilfield drilling fluids, which help tocontrol viscosity and flow properties. These additives also help to suspend thecuttings in the fluid, so that they can be expelled from the well efficiently.We recently introduced a *Garamite*®additive for use in deep well drilling that requires higher performance.

*Composites*. We developed the *Cloisite*® range of clays for the manufacture ofnanocomposite plastics and composites. While the majority of our customerspurchase *Cloisite*® for developmental products andapplications, we have entered into a joint development agreement in the UnitedStates with General Motors Corporation in connection with our efforts to developnanoclays for automotive components, such as external trim and facia. InJanuary 2004, General Motors adopted this technology for the body side moldingon the 2004 Chevrolet Impala. *Cloisite* claysare also being evaluated in a wide range of rubber-based formulations forindustrial applications and in other plastic and composite applications. Inaddition, our *Garamite* range of clays is usedin the manufacture of fiberglass composites.

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*Competition*

Clay-based Additives operates in specialty markets,and competes based on its research and development capabilities, its ability toproduce innovative high-value product solutions and its sales and technicalsupport. Our direct competitors in these markets include Elementis plc, andR.T. Vanderbilt Company, Inc. We also compete with manufacturers who producenon-clay-based alternatives to our end-users.

*Customers*

We supply major coatings manufacturers such asInternational Paint Limited, BASF Group, E.I. duPont de Nemours and Company,PPG Industries Inc., and The Sherwin-Williams Company; paper chemical andpaper-making companies such as Mitsubishi Hi Tec Paper; ink-makers such as SunChemical Corporation; and oil drilling and services companies such as M-I SWACOL.L.C. Each of these companies has been our customer for at least ten years.

***Water Treatment Chemicals***

Our Water Treatment Chemicals business line is aproducer of pool and spa specialty chemicals in the United States. Thisbusiness line also develops and manufactures surface water chemicals. Our pooland spa specialty chemicals, which are primarily non-chlorine based, are allsold under premium brand names as well as private label brands mainly throughdistributors to pool and spa professionals and retailers that then sell toconsumers. The surface water chemicals portion of this business serves theprofessional aquatic applicator, turf and ornamental, aquaculture, vegetationmanagement, drinking water, industrial process water and agriculturalirrigation industries. We also provide professional water management andtreatment services for lakes, ponds and reservoirs.

*PrincipalProducts*

Our pool and spa chemicals are primarily non-chlorinebased specialty chemicals such as algaecides, clarifiers, fragrances and foamreducers. Our major pool and spa product lines include *GLB Pool& Spa*, which offers a comprehensive selection of pool and spaspecialty chemicals and sanitizers under the *GLB*and *Rendézvous* brand names; *Leisure Time*, which offers a complete spa water caretreatment line; and *Robarb*, whichincludes *Super Blue*, a leading water clarifierwith over 30 years of history as a brand. In addition, our *AppliedBiochemists* brand offers a full line of pool chemicals includingspecialty algaecides for service professionals and the *Ultima*brand offers several multi-function chemicals for consumers. We alsomanufacture private label brands for our customers.

Our surface water chemicals include copper-basedalgaecides and herbicides to control aquatic plant growth, dyes to controlaquatic weed and algae growth, and a range of enzyme and microorganism blendsfor use in ponds, septic and waste water systems. Our surface water treatmentproduct lines include *Clearigate*which is a patented, environmentally advanced herbicide developed to controlnuisance aquatic vegetation especially for the agricultural irrigation market.Our *Applied Biochemists* brand of surfacewater treatment chemicals includes specialty algaecides and aquatic herbicides.*Cutrine Plus* and *CutrineUltra* are liquid algaecides, which can be used in a wide range ofapplications, and *Aquashade* is a line of aquaticdyes, which help to control aquatic plant growth in lakes and ponds. Severalrelated formulations are repacked under our brand names to compliment theproduct line.

*Competition*

We believe that Water Treatment Chemicals is a leadingpool and spa specialty chemicals producer in the United States. Othercompetitors include Arch Chemicals, Inc. and Biolab, Inc. In the surface waterchemicals segment, competitors include Baker Hughes Incorporated and SeProCorporation. Some of our competitors are also customers in other product areas.Competition in these markets is mainly based on brand identity, technicalcompetence, price and customer relationships. In addition, a number of theproducts in the water treatment chemicals market are subject to governmentalenvironmental regulation, use permits and registration requirements, which canaffect the ability of other manufacturers to offer competing products.

*Customers*

The majority of Water Treatment Chemicals’ sales arethrough distributors that then sell to mainly local or regional dealers.However, our surface water chemicals division often sells through distributorsthat sell directly to end users. We also sell directly to some of the largerpool and spa dealers. Pool and spa specialty chemicals customers include KellerSupply Company, Leslie’s Poolmart, Inc. and PoolCorp. Surface water customersinclude Cygnet Enterprises, Inc. and Helena Chemical Company. Each of thesecompanies has been our customer for at least five years.

**TitaniumDioxide Pigments*****(15% of 2006 net sales)***

Our Titanium Dioxide Pigments segment, which weacquired in the Dynamit Nobel Acquisition and which operates under the *Sachtleben* brand name, is a leading producer of high qualitychemical products with a unique range of small inorganic particles that addsignificant value to customers’ products and reduce the cost of customers’production processes. Titanium Dioxide Pigments comprises three business lines:(1) Titanium Dioxide; (2) Functional Additives; and (3) Water Chemistry. OurTitanium Dioxide 

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Pigments segment generated net sales of $441.1 millionand $430.5 million for the years ended December 31, 2006 and 2005,respectively. Actual sales for the five months ended December 31, 2004 were$175.7 million and net sales were $422.0 million on a pro forma basis for theyear ended December 31, 2004. See Note 4, “Segment Information,” for additionalfinancial information regarding our Titanium Dioxide Pigments segment.

***Titanium Dioxide***

Our Titanium Dioxide business line is a leadingproducer of specialty grade titanium dioxide (“TiO2”), serving a wide variety ofcustomers in the synthetic fibers, plastics, paints, coatings, life sciences,cosmetics, pharmaceuticals and paper industries. TiO2 is a fine white powder that derives its value from itsunparalleled whitening strength and opacifying ability, which is commonlyreferred to as hiding power. Our Titanium Dioxide business line’s principalproducts include TiO2 in anatasegrade, TiO2 in rutile grade andtitanium specialties. This business line also provides recycling services forsulfuric waste acid.

There are two ways of producing TiO2: the sulfate process and the chlorideprocess. The chloride process permits production of only rutile TiO2 and is primarily suited for largevolume production of standard TiO2grades. The sulfate process is capable of producing both the rutile and anatasegrade of TiO2. Approximately 58%of the globally installed TiO2capacity uses the chloride process with the remaining using the sulfateprocess. Unlike rutile grades, anatase grades can only be made through thesulfate process. We employ the sulfate process for TiO2 production and thus, the output from approximately 58% of theglobally installed TiO2 productioncapacity does not compete with our anatase products.

We believe that we have a competitive advantage infiber anatase production and special sophisticated anatase applications basedon our strong technological capabilities, long-term customer relationships andextensive test runs with regular monitoring of product and process parameters.Although it represents a negligible part of the fiber material cost, TiO2 application know-how and alongstanding application track record of homogeneous anatase crystals, both ofwhich avoid production interruptions and excessive wear or breakdown of ourcustomers’ equipment are critical to our customers. For over thirty years, wehave worked closely with fiber producers on the optimization of their productand processes and as a result we have built up a significant wealth ofcustomer-problem solution know-how. We intend to grow our Titanium Dioxidebusiness line by focusing the rutile business on selected markets andapplications and further developing our titanium specialties business. Weexpect this segment to benefit from sales of newly introduced nano-particletitanium dioxide pigments that are used to provide ultraviolet light protectionfor plastics and coatings.

*PrincipalProducts*

*TiO**2 in Anatase Grade*. We develop and manufacture high qualityanatase TiO2 pigments. Thesepigments are sold primarily to the global synthetic fiber industry, as well aspaper, food and pharmaceutical industries. We believe our anatase pigment, soldunder the brand name *Hombitan*®, is aleading global selling TiO2product for applications in the synthetic fiber industry.

*TiO**2 in Rutile Grade*. We develop and manufacture rutile TiO2 pigments, which are mainly used inspecial applications such as selected coatings, paints, plastics and laminatedpaper production processes. In this product area, we are geographically focusedon the European market. Rutile-based TiO2pigments generally possess performance characteristics different fromanatase-based pigments. Rutile-based pigments significantly improve theweatherability and durability of polymer products by providing protectionagainst yellowing and preventing embrittlement of the material. Our rutilegrades are state of the art products and are used in applications with hightechnical requirements.

*Titanium Specialties*. Ourtitanium specialties products primarily include “nano-particles,” which areexceptionally fine-particled, transparent and easy-to-use pigment formulationsthat are used across a large and diverse range of applications in smallvolumes. For example, the specialty grade TiO2 products are used as UV-absorbers in sun protection cosmetics.In addition, the new nano-particles form the basis for innovativewood-protection products and innovative color variations, by the paints andcoatings industry. Other uses include catalysts, gas cleansing, photocatalystsand intermediates for special ceramics.

*Recycling Services*. We operate awaste acid recycling plant in Europe in our production facility in Duisburg,Germany. The sulfuric waste acid, which results from the production of TiO2, is recycled and used in theproduction process. This service is also offered to other TiO2 manufacturers in Europe, and we havea long-term contract with one of our competitors to provide this service.

*Competition*

Titanium Dioxide’s key competitors include: (1) FujiTitanium Industry Co., Ltd. and Kronos Worldwide, Inc. for anatase-based TiO2;(2) DuPont Titanium Technologies,Millennium Chemicals, Inc., Tronox Corporation, Huntsman LLC, and Kemira oyjfor rutilebased TiO2; (3) Kemiraoyj, Tayca Corporation, Ishihara Corporation and Degussa for TiO2 specialties; and (4) captive capacityof manufacturers for recycling services. Competition in the markets in whichTitanium Dioxide competes is generally based on technological capabilities,product quality, price in rutile grade and customer service.

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*Customers*

Titanium Dioxide’s customers include leadingmanufacturers of paints, such as BASF Group and E.I. duPont de Nemours andCompany; fibers, such as Nan Ya Plastics Corporation and Invista Inc.; plastic,such as Ampacet Corporation and Innovene; and paper, such as Munksjo AB andPapierfabrik August Koehler AG.

***Functional Additives***

Our Functional Additives business line is a leadingglobal manufacturer of barium-based and zinc-based inorganic fine whitepigments and additives. The main function of these products is to improvebrilliance of colors and shine of coatings, improve the mechanical strength ofplastic parts and prevent degradation due to exposure to light. Our FunctionalAdditives business line serves diverse end markets, including the plasticsindustry, the coatings industry and the pharmaceutical industry.

*PrincipalProducts*

*Barium-based Additives*. Weproduce highly dispersed powders of barium sulfate and are the largest globalproducer of precipitated synthetic barium sulfates (Blanc Fixe). We provide aunique range of barium-based additives customized for applications in coatings,plastic, colorants, lubricants, PVC stabilizers and thermoplastics, fibers andpaper to improve optical, chemical and mechanical properties. We also producean X-ray-grade barium sulfate used as contrast agent in medical applications,such as X-rays for the stomach and intestine area. The barium-based productsalso include nano-particle barium sulfates, which are mainly used in coatingsand plastics. Barium hydroxide grades are used as intermediates, including forthe production of PVC stabilizers and as an additive in phenolic resinsynthesis, including for the production of phenolic-resin-based plastics usedfor sanitary products and electrical insulations.

*Zinc-based Additives*. We believewe are also a leading producer of pure zinc sulfide pigments, mainly used inglass fiber reinforced plastic parts and coatings and a leading supplier ofLithopone, a white zinc sulfide pigment, which is used in plastics andcoatings. Lithopone is manufactured by our Huali Sachtleben joint venture inGuangzhou, China.

*Competition*

Key competitors for barium-based additives includeSolvay S.A., Gruppo Chimico Dalton S.p.A., Sakai Chemical Industry Co., Ltd.and Chinese barium-producers. Key competitors for zinc-based additives includeChinese lithopone producers. Competition in the functional additives market isprimarily based on application know-how, brand recognition, product qualityand, to a certain extent, price.

*Customers*

Functional Additives’ customers include E.I. duPont deNemours and Company, Ampacet Corporation, BASF Group, Akzo Nobel Coatings andA. Schulman Plastics.

***Water Chemistry***

We believe that our Water Chemistry business line is aleading manufacturer of polyaluminium chloride, or PAC, and polyaluminiumnitrate-based flocculants in Europe. Flocculants are added to water to improveits purity before, during and after its use in industrial, commercial andmunicipal applications. PAC flocculants are widely used in public, industrialand swimming pool water treatment and as a process agent in the paper industry.

We believe we have achieved a strong market positionin Europe due to our comprehensive customer service arrangements, well establishedbrand names, competitive cost structure and innovative products. Customers inthis market increasingly prefer full service offers, which include supply ofwater treatment chemicals together with services. Given this market trend, webelieve that our ability to provide full services will help us maintain ourmarket position. We also believe that demand for PAC flocculants will increaseas a result of increased demand from the paper industry and moderate growth inpublic water treatment.

*Competition*

We believe that our Water Chemistry business linecompetes in a €190.0 million niche market for inorganic flocculants in Europe.The relevant market is characterized by production overcapacity and isgeographically constrained to an approximately 300 mile radius around theproduction plant because the delivered product contains 80% to 90% water. Keycompetitors of this business line include Kemira Oyj, Feralco AB, TotalFina Elfand Israel Chemical Ltd.. Competition in the water chemistry market isprimarily based on customer service, brand recognition and location.

*Customers*

Water Chemistry’s customers include Sappi Limited,Akzo Nobel, Brenntag AG, LEIPA Georg Leinfelder GmbH, and Stora Ensooyj.

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***Advanced Ceramics (13% of 2006 net sales)***

Our Advanced Ceramics segment was acquired in theDynamit Nobel Acquisition and operates under the *CeramTec*brand name. We believe it is a leading global producer of high-performanceadvanced ceramics materials and products. Advanced Ceramics serves fourprincipal end-markets: (1) medical; (2) electronics; (3) industrial; and (4)automotive, with strong market positions in various niche markets such asmedical products, cutting tools and mechanical applications. Our AdvancedCeramics segment generated net sales of $389.6 million and $369.6 million forthe years ended December 31, 2006 and 2005, respectively. Actual net sales forthe five month period ended December 31, 2004 were $146.3 million and net saleswere $349.5 million on a pro forma basis for the year ended December 31, 2004.See Note 4, “Segment Information,” for additional financial informationregarding our Advanced Ceramics segment.

The global ceramics market comprises products andcomponents based on inorganic, non-metallic, microcrystalline materials thatare manufactured at high temperatures. The global ceramics market can bedivided into traditional ceramics, such as bricks, tiles and white ware, andhigh-performance ceramics, which are ceramic materials and products optimizedfor special purposes. High performance ceramics have superior physical,electrical, chemical or biological properties as compared to traditionalceramics and competing materials, like metals or plastics. Accordingly, they haveincreasingly replaced plastics and metals as key engineering materials. Wecompete in the high-performance ceramics segment of the market, offering a widerange of high-performance ceramics products from sealing discs for sanitaryfittings to ceramic components for hip joint prostheses. These products servethe market’s needs for materials that are light, strong, corrosion-resistantand capable of performing in high-temperature environments.

High-performance ceramics materials include ceramicpowders, ceramic additives, structural ceramics and functional ceramics.Ceramic powders and ceramic additives are inputs to the manufacturing processesof structural and functional ceramics. Structural ceramics, also calledengineering ceramics, take advantage of the mechanical properties such ashardness and wear-resistance to produce load-bearing or engineered components.Due to their resistance to corrosion and heat properties, structural ceramicsare also used to perform under special chemical conditions or at hightemperatures. We believe that we are one of the leading suppliers in thestructural ceramics market. Functional ceramics, also referred to as electronicceramics, focus on the unique electrical and magnetic properties of ceramics.Ceramic applications in electronic components, such as integrated circuitpackages, capacitors and transformers, account for the majority of today’shigh-performance ceramic materials. We believe that increasing demand forelectronic components will continue to offer significant growth opportunitiesfor high-performance ceramics, such as piezo ceramics. As a leading supplier ofelectronic ceramics materials, we believe we are well positioned to takeadvantage of these growth opportunities.

We believe that we have achieved success in theAdvanced Ceramics segment as a result of our focus on selected segments of thehigh-performance ceramics market and our close customer relationships. Almostall of Advanced Ceramics’ products are made to order, taking into accountspecific customer requirements. In many cases, our engineers work in closecooperation with our customers during the design and development phase of newproducts to ensure highest quality and customer satisfaction. Through itsextensive experience, Advanced Ceramics has gained detailed expertise andknow-how in the applications areas it is active in.

*PrincipalProducts*

*Medical*. We currently serve themedical applications market with two product groups: ceramic components for hipjoint prostheses, such as ball heads and inserts; and ceramic glove formers forhigh-quality latex gloves. The ceramic components for hip joint prostheses aremainly supplied to orthopedic implant manufacturers in the United States andEurope. Besides their high wear resistance and good friction behavior,high-performance ceramics are biologically inert, making them one of the fewmaterials that are durable and stable enough to withstand the corrosive effectsof bodily fluids. As a result, we expect high-performance ceramics willincreasingly become more common for medical applications, such as for repairand replacement of hips, knees and other human body parts.

We believe that ceramic-on-ceramic hip implantsbenefit from additional substitution effects as young people and more activeelderly people are better suited to use ceramic implants, given their numerousattractive properties. Currently, the penetration rate for ceramic-on-ceramichip-implants in Europe is significantly higher than in North America becausethe first FDA approval for ceramic-on-ceramic hip joint prostheses systems wasgranted only in 2003. However, given the relative superior performance andpositive early acceptance levels in the United States, we expect the market forceramic-on-ceramic hip joint prostheses systems to grow significantly in futureyears. We believe we are well positioned to take advantage of the growingmarket as we are currently the only manufacturer of ceramic-on-ceramic hipimplant components used in FDA-approved hip joint prostheses systems in theUnited States to date. Given the difficulties and time involved in obtaining anFDA approval, we believe that we will be the sole supplier in the intermediateterm. We also enjoy strong relationships with the largest U.S. and Europeanorthopedics implant manufacturers. We are also expanding our focus to possiblenew applications in knee joint and intervertebral disc replacements.

*Electronics*. We develop andmanufacture substrates, electrical resistor cores and ceramic tapes as carriersfor electronic circuits. Substrates are ceramic plates with electrical, thermaland mechanical properties that serve as carriers in electronic applications.These 

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highly specialized products are used in a wide rangeof industries, such as automotive, consumer electronics, aeronautics andtelecommunications industries. The demand for these products is driven, inlarge part, by the activity levels of the semiconductor market. We believe thatthe recovery of the semiconductor market, as well as a positive substitutioneffect for ceramic applications, will increase the demand for our products.

*Cutting Tools*. We develop andmanufacture products used in cutting tools, tools and tooling systems. Ceramicmaterial properties such as high melting points, excellent hardness and goodwear resistance make ceramics an excellent high-speed cutting tool material. Webelieve we are a leading supplier of ceramic cutting tools, tools and toolingsystems for high speed processing in the automotive, metalworking andmechanical engineering industries, with automotive OEMs and their suppliersbeing our main customers. The longer life and faster cutting speeds possiblewith ceramic tools allow customers to save costs by increasing their throughputand reducing the downtimes for replacing the cutting tools.

*Mechanical Applications and Systems*.We also develop and manufacture high performance ceramic components that areused in mechanical applications and systems. Key product groups in mechanical applicationsinclude cutting blades, drawing and forming tools, drawing cones and capstans,guide elements, precision parts, preforms and friction discs. We primarilysupply the general industrial, machinery, metalworking, automotive and textileindustries with a large number of products customized to the customerrequirements. Mechanical systems include products used in the sanitary fittingsand automotive supplier industries in areas where fluids are pumped, compressedor stirred such as bushings, face seal rings, pump components and valve shimsand discs. In June 2006, we acquired a business focused on the production ofceramic discs and cartridges for faucets.

Our customers are currently located mainly in Germanyand other parts of Europe. However, we plan to expand our geographic reach. Forexample, we opened a new plant in China and plan to grow over the next fiveyears by further penetrating the rapidly growing Asian market.

*Other products*. We also producevarious products in other smaller niche markets. Some of these products areused for applications in certain niche markets with limited growth potential,such as electrical/thermal and ceramic metal connections. Other products, suchas piezo ceramic components, are used for applications in certain niche marketswith growth potential the next few years, primarily in the automotive sector.

*Competition*

Advanced Ceramics’ key competitors are KyoceraCorporation, CoorsTek, Inc., Saint Gobain, The Morgan Crucible Company plc andNGK Ceramics Europe S.A. However, each of these competitors has either adifferent geographical focus or product strategy with respect to small nicheapplications. Competition in the high performance ceramics market is primarilybased on product quality, product specifications and customer service.

*Customers*

Advanced Ceramics’ key customers include Robert BoschGmbH, Stryker Corporation, EPCOS AG, Siemens AG, De Puy Orthodics, VishayEurope GmbH, Ideal Standard and Zimmer.

***Specialty Compounds (8% of 2006 net sales)***

Our Specialty Compounds segment develops andmanufactures thermoplastic materials possessing specialized characteristics,such as fire and smoke retardance, reduced weight or barrier properties, whichare tailored to the specific needs of each intended end-product. These productsare grouped into several key end-product areas: wire and cable, consumerperformance products, medical applications and regulated packaging. OurSpecialty Compounds segment had net sales of $251.0 million, $237.5 million and$200.4 million for the years ended December 31, 2006, 2005 and 2004,respectively. See Note 4, “Segment Information,” for additional financialinformation regarding our Specialty Compounds segment.

Our Specialty Compounds segment focuses on sales ofhigh margin products and operates as a global specialty performance plasticcompounding business. We developed and commercialized *SmokeGuard*,our specialty compound for use in high-end data and video communication wireand cable, which must meet stringent fire retardant and low smoke generationstandards. We also developed a compound for beverage closure seals and caps.This compound prevents ozone from attacking the seal and does not affect thetaste of water and carbonated beverages, therefore significantly increasing theshelf life of these beverages. We also focus on thermoplastic elastomer, orTPE, compounds in our consumer performance and automotive products areas. Arecent success in the TPE area was the development and successfulcommercialization of a synthetic wine-cork material. In addition to our productofferings, we provide strong, comprehensive customer service and technicalexpertise by developing innovative products to satisfy our customers’ uniqueneeds.

We have invested in next generation plastic compoundingtechnologies, including the development of fluoropolymer materials and theimprovement of our production of zero halogen materials. Specialty Compounds isalso working closely with our Clay-based Additives business to create apatented composite material that exhibits superior flame retardancy for wireand cable jacketing and 

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sheathing.

*Principal Products*

*Wire and Cable Compounds*. Wedevelop and manufacture low-smoke vinyl alloys, such as *SmokeGuard*,which are used in high-end data and video communication, fiber optic and firealarm wire and cable; halogen-free plastics, such as *Sentra*,which are used in industrial, aerospace, shipboard or oil rig cables as well asin communication cables; and a variety of TPE compounds, such as *Garaflex*, which are used in flexible cords, tray cables,booster cables, welding cables and automotive wiring. We believe that there issignificant growth potential for the wire and cable product line in Europe as aresult of the evolution of a common market standard with higher specificationsfor wire and cable compounds. Unlike in North America, European wire and cablestandards dictating certain safety specifications such as fire and smokeresistance have not yet been enacted. However, we anticipate that Europeanlegislation mandating specific guidelines for wire and cable will beimplemented within the next several years, providing significant new marketopportunities for the *SmokeGuard* and *Sentra* product lines. In October 2006, we acquired theMegolon division of Scapa Group, plc. Megolon is the tradename for a variety ofhalogen-free wire and cable products and is the leading brand name for suchproducts in Europe.

*Consumer Performance Products*. Wedevelop and manufacture custom-made plastic compounds for use in products suchas moldings, sealing gaskets, tool handles, writing instruments and ladder feetas well as other TPE-based products. Our product line includes *Garaflex*, *Garaflex V*, *Garaflex E*, *GE Series* and *GM Series*. We have also developed a soft-touch compound, *Evoprene*, that is currently undergoing approval processesfor a number of applications, including seals for consumer storage devices. Wealso develop and manufacture compounds for interior and exterior automotiveapplications such as airbag covers, steering wheel covers, gear shift knobs andboots, handle grips, body side molding and window gaskets. In addition, wedevelop and manufacture a broad range of compounds for unit soles, uppers,mid-soles, slippers and heels for the diverse requirements of the footwearmarket. The applications include industrial boots, deck shoes, casual dressshoes, snow boots, slippers and athletic wear.

*Medical Applications Compounds*.We develop and manufacture a series of high-quality polyvinyl chloride, or PVC,compounds which are used to manufacture products such as tubing, disposablemasks, and extraction resistant compounds used to make products to handle bloodand bodily fluids.

*Regulated Packaging.* Under the *Alphaseal* trademark, we develop and manufacture specialtyclosure materials for soft drinks, beer, bottled water, juice, and otherbeverage applications which have proven their performance, including purity intaste and odor, consistency in the force needed to remove the closures,reliable carbonation retention, and performance on a variety of molding machinetypes in various applications.

*Competition*

Specialty Compounds’ key competitors are AdvancedElastomers Systems, L.P., Colorite Plastics Co., DS Chemie GmbH, EuropeanVinyls Corporation, Georgia Gulf Corporation, Norsk Hydro ASA, PolyOneCorporation, Teknor Apex Company and W.R. Grace & Co., most of which serveonly a subset of Specialty Compounds’ markets. We believe that only Teknor Apexis active in all of Specialty Compounds’ markets. Competition in Specialty Compoundsoccurs primarily on the basis of quality, product innovation and the ability tomeet demanding customer and regulatory specifications.

*Customers*

Specialty Compounds sells products to a wide range ofcustomers. Its major customers include Alcoa Inc., Belden/CDT Inc., BerkTekConsolidated, Coleman Worldwide Corporation, CommScope/Systimax, Inc., CorningIncorporated and Judd Wire Inc. Each of these companies has been our customerfor at least ten years.

**Electronics(7% of 2006 net sales)**

We supply our customers in the semiconductor andprinted circuit board industries with chemicals used in the manufacture ofsemiconductors and printed circuit boards from our Electronic Chemicalsbusiness line, photo-imaging masks from our Photomasks business line, and siliconwafer refurbishment services from our Wafer Reclaim business line. OurElectronics segment generated net sales of $208.9 million, $181.8 million and$168.1 million for the years ended December 31, 2006, 2005 and 2004, respectively.See Note 4, “Segment Information,” for additional financial informationregarding our Electronics segment.

***Electronic Chemicals***

Our Electronic Chemicals business line is a producerof high purity process chemicals, used in the manufacture of semiconductors,with market positions in Europe and Singapore, as well as chemicals used byprinted circuit board manufacturers and photomask manufacturers, with marketpositions in the United States and Taiwan. In addition, we expanded ourmanufacturing capabilities for printed circuit board chemicals in China toenable us to supply this expanding market. We also offer related outsourcingservices to manage the process chemical needs of semiconductor manufacturers.Electronic Chemicals’ key products include acids, bases,

 

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solvents and mixturesused principally for cleaning and etching silicon wafers and printed circuitboards.

Electronic Chemicalsbundles high-quality tailor-made formulations and patented products withtechnical service and strong systems capabilities. These characteristics alsoenable us to offer our customers a service we call total *chemicals*management, through which we are able to manage a customer’s supply ofelectronic process chemicals, including chemicals supplied by third parties,and related logistics.

*Principal Products*

*Printed Circuit Board Chemicals.*We develop and manufacture chemicals for the printed circuit board industry,such as oxide treatments, electroplating additives, etching technology,electroless copper processes, *Co-Bra Bond*,the newer oxide replacement technology and a proprietary direct metallizationprocess known as *Shadow*.

*High Purity Chemicals*.We develop and manufacture a wide range of ultra-pure chemicals used in themanufacture of electronic and computer components such as semiconductors,silicon chips, wafers, and liquid crystal displays. These products includechemicals used to remove controlled portions of silicon and metal, cleaningsolutions, photoresist strippers, which control the application of certainlight-sensitive chemicals, edge bead removers, which aid in the uniformapplication of other chemicals, and solvents.

*Photomask Chemicals*.We also develop and manufacture a broad range of chemicals used in themanufacture of photomasks. Like the high purity chemicals, these products aresubject to strict purity specifications, although these specifications aregenerally not as stringent as those for our high purity chemicals.

*Electronic**Chemicals Services*. We provide a range of analytical,logistical and development support services to the semiconductor industry.These include total chemicals management, primarily offered in Singapore, underwhich we manage our clients’ entire electronic process chemicals operationsincluding providing logistics services, development of application-specificchemicals, analysis and control of customers’ chemical distribution systems andquality audit and control of all inbound chemicals, including third partyproducts.

*Competition*

Key competitors inprinted circuit board chemicals are Atotech Deutschland GmbH, Cookson Groupplc, MacDermid Incorporated, Rohm and Haas Electronic Materials (Shipley). Keycompetitors in high purity chemicals include Honeywell International, Inc., AirProducts & Chemicals, Inc., BASF Group, Kanto Corporation, MitsubishiChemical Corporation and Mitsubishi Gas Chemical Company, Inc. The keycompetitor in photomask chemicals is Air Products & Chemicals, Inc.Competition in this market is based mainly on customer service, product qualityand technological advancements.

*Customers*

We supply our electronicchemicals and related services to semiconductor and printed circuit boardmanufacturers, including Compeq Manufacturing Co. and Motorola, Inc. Both ofthese companies have been our customers for at least ten years.

**Photomasks**

We manufacture photomasksboth in Europe and North America under the *Compugraphics*brand name. Photomasks are a key enabling technology to the semiconductor andintegrated circuit industries, and perform a function similar to that of anegative in conventional photography.

We believe thatPhotomasks has achieved its success through its technical abilities and productquality, as well as through customer service and its low cost base. We haveachieved high standards of specification, quality, delivery and manufacturingefficiency through our use of statistical process control and other advancedmanufacturing techniques. Our business strategy and technology are targeted onmainstream semiconductor manufacturing.

*Principal Products*

We manufacture photomasks,which are used as master images to transfer integrated circuit detail ontosemiconductor wafers during the fabrication of integrated circuits and othertypes of electronic components, such as thin film magnetic recording heads andoptoelectronic devices. All sizes of photomask (e.g., image of the wafer) andreticle (e.g., image of one or more die) are produced in the range from threeinches to seven inches. We can produce both traditional chrome (binary) andembedded attenuated phase shift masks. In addition, we refurbish and replacepellicles on photomasks manufactured by us and other photomask manufacturers.

*Competition*

Photomasks competes primarily with Toppan Photomasks, Inc. andPhotronics, Inc. Competition occurs primarily on the basis of technicalspecification, product quality, delivery performance, price and customerservice and support.

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*Customers*

Photomasks’ customer baseincludes many major semiconductor manufacturers such as Analog Devices, PhilipsSemiconductors and Freescale, Inc., most of which have been our customers formore than ten years.

***WaferReclaim***

Our Wafer Reclaim business line is a provider of semiconductor waferrefurbishment services with market positions in 

Europe and during 2006,the United States. Silicon wafers that have been used to monitor or testsemiconductor manufacturing processes are generally reclaimed and reused astest pieces. We estimate that three out of every ten wafers used in anestablished semiconductor manufacturing facility are test wafers.

We work with semiconductormanufacturers to refurbish used test wafers and return them to the manufacturerfor reuse in test and process monitor applications.

In 2005, we announced arestructuring plan, which included closing our Riddings, U.K. and Providence,Rhode Island facilities. These two facilities were closed in the first quarterof 2006 and our customer base was successfully transferred to our Greasque,France and Prescott, Arizona facilities. In February 2007, we completed thesale of our United States Wafer Reclaim business.

*Principal Products*

Wafer Reclaim does notmanufacture products, but rather is a service business that refurbishes usedwafers for global semiconductor manufacturers and returns them for reuse in thetesting process. We clean and inspect the wafers, restore surfaces, and removefilm from the wafer surface in order to improve the performance of the wafer.We have the ability to reclaim 4” (100mm), 5” (125mm), 6” (150mm), and 8”(200mm) wafers.

*Competition*

Wafer Reclaim’s primarycompetitors include Hamada Heavy Industries Limited, Kobe Precision Inc.,Mimasu Semiconductor Industry Co. Ltd., Rasa Industries Limited, and Pure WaferPLC. We also compete to a degree with manufacturers of virgin test wafers. Theprimary bases of competition for this business line are quality of service andprice.

*Customers*

Wafer Reclaim’s customersinclude most of the major semiconductor producers including Atmel Corporation,Freescale Semiconductor, Inc., International Rectifier Corporation, PhilipsSemiconductors, and Tower Semiconductor Ltd. Each of these companies has beenour customer for at least ten years.

***RawMaterials***

We purchase raw materialsand chemical intermediates from a large number of third parties. We have abroad raw material base, with the cost of no single raw material representingmore than 3% of our cost of products sold in 2006. Raw materials constitutedapproximately 53% of our 2006 cost of products sold. The table below lists theten most significant raw materials in 2006 and the principal products for whichthe materials were used.
| **Raw Material**                           | ** ** | ** **                                                             | ** ** | **Segment**                                                                   | ** ** | ** ** | ** ** | **Products** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|------------|------------|--------------|------------|------------|
|                                       |       |                                                                   |       |                                                                          |
| Titanium-bearing slag                      |       | Titanium Dioxide  Pigments                                             |       | Titanium dioxide                                                              |
| Copper                                     |       | Performance Additives                                                  |       | Wood protection  products                                                     |
| Zinc/Zinc oxide                            |       | Specialty Chemicals,  Titanium Dioxide Pigments, Performance Additives |       | Conversion coating  zinc, zinc-based pigments, zinc phosphate, tan iron oxide |
| Monoethanolamine                           |       | Performance Additives                                                  |       | Wood protection  products                                                     |
| Plasticizers                               |       | Specialty Compounds                                                    |       | Compounds                                                                     |
| Iron oxide                                 |       | Performance Additives                                                  |       | Iron oxide pigments                                                           |
| PVC resin                                  |       | Specialty Compounds                                                    |       | Compounds                                                                     |
| Quaternary amines                          |       | Performance Additives                                                  |       | Organoclays/wood  protection products                                         |
| Ammonium Octa Molybdate  (“AOM”) |       | Specialty Compounds                                                    |       | Compounds                                                                     |
| Molybdenum                                 |       | Specialty Chemicals                                                    |       | Metal Sulfides                                                                |

 

Titanium-bearing slag,our largest raw material (in terms of dollars), is the most important rawmaterial used in the production of specialty grade titanium dioxide in ourTitanium Dioxide business line of our Titanium Dioxide Pigments segment. Wepurchase Titanium-bearing slag primarily from two suppliers under long-termcontracts.

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As a result of theconversion from CCA to ACQ, in 2005 our principal raw materials for our TimberTreatment Chemical business in our Performance Additives segment shifted fromchromic acid to quaternary amines, solvents and copper. In our Timber TreatmentChemical business, we predominately source quaternary amines under a contractthat expires in late 2008, with automatic annual renewals subject to terminationby either party. We source monoethanolamine used in our Timber TreatmentChemical business from two suppliers under contracts that expire in December2008, subject to automatic annual renewals except where terminated by eitherparty, and December 2010. Prices under our solvent and quaternary aminecontracts are tied to the ethylene price index. We source copper, which is acommodity, from several sources. Prices for our copper purchases are tied tomarket conditions. However, we expect the commercialization of next generationwood protection products to reduce our exposure to copper prices.

In the SpecialtyChemicals segment, zinc and zinc oxide are purchased from a few suppliers inEurope and the United States and we have not experienced any supply shortages.Prices for these purchases are tied to market conditions and have been athistorical high levels in 2006. In the Titanium Dioxide segment, zinc is usedto produce zinc-based pigments and is purchased from a number of suppliersunder long-term contracts. In the Performance Additives segment, zinc oxide isused in the production of tan iron oxide and zinc phosphate. There are nolong-term zinc purchase contracts.

Historically, we havereceived iron oxide from multiple sources and have not experienced anysignificant supply shortages. Iron oxide is primarily sourced from our plantsin the United States, Italy and China, as well as from third parties in China.

In our Clay-basedAdditives business line of our Performance Additives segment, quaternary amineis sourced under a long-term contract, which expires in late 2008 and issubject to quarterly adjustment for the price of tallow, the base component ofquaternary amine.

In our SpecialtyCompounds segment, we use AOM to promote fire retardancy in certain wire andcable products. AOM is supplied under a contract with a fixed price thatexpires in December 2007. Some of the plasticizers we use in our SpecialtyCompounds segment are generic and considered a commodity product, while othersare specific and considered a specialty product. Our supply contracts forplasticizers do not specify a fixed price, and most of them contain marketprice and discount adjustments. PVC resin is a commodity product used in ourSpecialty Compounds segment and its pricing is directly related to the price ofethylene and chlorine, as well as PVC industry operating rates and energyprices.

In addition, Lithiumbrine is a primary raw material source for all lithium chemicals and is foundin only a small number of locations, including most significantly for us, theAtacama Desert in Chile. We have a long-term contract with the Chileangovernment to mine lithium brine in the Atacama Desert in Chile, which webelieve provides a secure long-term access to lithium. Tight supplies in the globalmarket and unfavorable weather conditions at the lithium ponds in Chile inearly 2006 led to shortages in lithium salts as a raw material and customerdemand for lithium carbonate was not completely satisfied.

Major requirements forour key raw materials and energy are typically satisfied pursuant tocontractual agreements and medium- or long-term relationships with suppliers.We are not generally dependent on any one supplier for a major part of our rawmaterial requirements, but certain important raw materials are obtained from afew major suppliers. In general, where we have limited sources of rawmaterials, we have developed contingency plans to minimize the effect of anyinterruption or reduction in supply, such as sourcing from different facilitiesand multiple suppliers and utilizing alternative formulations.

Temporary shortages ofraw materials may occasionally occur and cause temporary price increases. Inrecent years, these shortages have not resulted in unavailability of rawmaterials. However, the continuing availability and price of raw materials areaffected by unscheduled plant interruptions occurring during periods of highdemand, domestic and world market and political conditions, as well as thedirect or indirect effect of governmental regulations. During periods of highdemand, our raw materials are subject to significant price fluctuations, and,in the past, such fluctuations have had an adverse impact on the results ofoperations of our business. For example, the price of copper reached recordhighs in 2006. The impact of any future raw material shortages on our businessas a whole or in specific geographic regions cannot be accurately predicted.

**Intellectual Property**

Our business is dependentto a large extent on our intellectual property rights, including patents andother intellectual property, trademarks and trade secrets. We believe that ourintellectual property rights play an important role in maintaining ourcompetitive position in a number of the markets we serve. We rely ontechnological know-how and formulation and application expertise in many of ourmanufacturing processes in order to develop and maintain our market positions.Where appropriate, we protect our new technology, applications andmanufacturing processes by seeking patent protection. We have more than 2,000patents and patent applications in key strategic markets worldwide, reflectingour commitment to invest in technology and covering many aspects of ourproducts and processes for making those products. We also own and register inmultiple jurisdictions numerous trade names and marks applicable to ourbusiness and products, which we believe are important to our business. Inaddition, we have entered into agreements, pursuant to which we licenseintellectual property from third parties for use in our business and we licensecertain intellectual property to third parties. For example, we developed thetechnology to produce ACQ pursuant to an exclusive license

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agreement with the rightto sublicense from Domtar Inc. Under the term of the license, our TimberTreatment Chemicals business of our Performance Additives segment pays aroyalty to Domtar based upon the percent of net sales less certain costs. Thelicense agreement expires in May 2007 in connection with the expiration of thepatent and may be terminated by either party upon a material breach of theother party and the failure to cure. We also develop intellectual property withthird parties as discussed below in “Research and Development.”

**Research and Development**

We are committed tofurther investing in our asset base and research effort. Our research anddevelopment costs were approximately 1% of our net sales in 2006. We incurcertain expenses related to modifications and improvements in current products.In addition, we believe we allocate our research and development resourcesselectively based on the need and requirements for each business line todevelop innovative products. Research and development costs are charged toexpense, as incurred. Such costs were $41.5 million, $43.5 million and $19.0million for the years ended December 31, 2006, 2005 and 2004, respectively. The2004 amount includes only five months of costs of $8.9 million from the DynamitNobel businesses acquired on July 31, 2004.

The objective of ourresearch and development effort is to develop innovative chemistries andtechnologies with applications relevant within targeted key markets. Researchand development efforts are generally focused on both process development,which is the stage at which products move from development to manufacturing,and new product development. Each business line, however, also has selectedlong-term strategic projects with the aim to develop new competencies andtechnologies.

Each of our businesslines manages its own research and development effort and has separate researchand development facilities dedicated to its specific area. However, wheretechnologically applicable, advances and findings are shared between businesslines to foster greater cross-fertilization of ideas and applications.

In certain cases, weconduct research and development efforts with third parties, includinguniversities, customers and other entities. We endeavor to obtain ownership ofor license on terms favorable to us the intellectual property developed with athird party.

**Seasonality**

There is a seasonaleffect on a portion of our sales due to the end-use of some of our products. Inour Water Treatment Chemicals business line of our Performance Additivessegment, it is industry standard practice to offer significantly extendedpayment terms to customers prepared to purchase their spring and early summerrequirements in the fourth quarter of the previous year. Following thispattern, the fourth quarter customarily includes large sales and shipmentsalthough the associated cash payments are not received until the second quarterof the following year. In addition, our Color Pigments and Services and TimberTreatment Chemicals business lines of our Performance Additives segment showsome seasonality related to the outdoor construction market. As such, the firstquarter has historically been the quarter where we experience the lowest sales.Also, along with the accounts receivable build in the first quarter discussedabove, during this quarter we typically build inventory for the pool and spabusiness, as well as our construction related businesses, in anticipation ofincreased sales during the spring and summer months. Thus, the first quarter isusually the quarter with the highest working capital requirements for us. Otherthan these seasonal trends in certain end-use markets, our overall results ofoperations tend to show few seasonal effects.

**International Operations**

The following tablepresents net sales based on geographic area (attributed based on seller’slocation):
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)** | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  sales:**               |       |                                       |       |   |   |   |   |
| United States                 |       | $                                          | 965.3      |   | $ | 903.3 |   | $ | 741.0 |   |
| Germany                       |       | 1,140.6                                    |       | 1,062.6 |   | 443.6 |   |
| Rest of Europe                |       | 577.6                                      |       | 535.5 |   | 330.8 |   |
| Rest of World                 |       | 291.7                                      |       | 240.7 |   | 127.1 |   |
|                          |       | $                                          | 2,975.2    |   | $ | 2,742.1 |   | $ | 1,642.5 |   |
|                               |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

The significant increasein net sales in 2005 from 2004 is primarily due to the acquisitions made in2004. See Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” for further details.

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The following tablepresents our long-lived assets located in the regions indicated:
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Long-lived  assets:**       |       |                  |       |   |   |
| United States                 |       | $                     | 228.8      |   | $ | 232.5 |   |
| Germany                       |       | 700.3                 |       | 595.6 |   |
| Rest of Europe                |       | 277.5                 |       | 247.5 |   |
| Rest of World                 |       | 168.3                 |       | 162.0 |   |
|                          |       | $                     | 1,374.9    |   | $ | 1,237.6 |   |
|                               |            |                       |            |  |  |  |  |  |  |

 

**Sales and Marketing**

We sell our products andservices globally. We sell our products and services primarily by using ourdirect sales forces, although we also sell through distributors in certain ofour business lines, such the as Color Pigments and Services, Clay-basedAdditives and Water Treatment Chemicals of our Performance Additives segmentand the Electronic Chemicals business line of our Electronics segment or byusing third party sales representatives. Each of our direct sales forces isresponsible for marketing only one of our business lines, and is administeredpursuant to policies established by the management of that business line.Within each business line, these direct sales forces are organized based ongeographic regions, end-use applications or sub-business divisions within thebusiness line. As of February 28, 2007, our in-house sales forces consisted ofapproximately 1,650 personnel worldwide.

Our direct sales forcesinteract with our customers to provide both purchasing advice and technicalassistance. In general, our sales forces arrange and coordinate contact betweenour customers and our research and development or technical personnel toprovide quality control and new product solutions. In certain of ourbusinesses, such as the Surface Treatment and Fine Chemicals business lines ofour Specialty Chemicals segment, most sales managers have a chemicalengineering background with advanced degrees and significant technicalexperience in applying our products, and they play a critical role indeveloping client relationships and acquiring new clients. Our closeinteraction with our customers and tailored solutions have allowed us todevelop and maintain strong customer relationships as well as focus our salesefforts on those customers who we believe will provide us with higher profitmargins in recognition of our superior products, service and technical support.

Sales in each of ourbusiness lines are generally made on a purchase order basis. However,longer-term arrangements have been established with certain key customers.

Our marketing strategy isgenerally aimed at working directly with customers to gauge the success of ourproducts, evaluate the need for improvements in product and process technology,and identify opportunities to develop new product solutions for our customersand their end-use markets. We also use media activities and lectures andparticipate in tradeshows as part of our sales and marketing effort.

**FDA Regulation**

Our Advanced Ceramicssegment and to a lesser extent, our Specialty Chemicals segment, are alsosubject to regulation by the FDA with respect to certain products we produce,including pharmaceutical intermediates and ceramic-on-ceramic ball head andliner components used in hip joint prostheses systems. Foreign, state, localand other authorities also may regulate us and our products. Regulatoryagencies have established requirements that apply to the design, manufactureand marketing of pharmaceutical and medical device products. We sell ourpharmaceutical intermediates and ceramic-on-ceramic components to othercompanies that also may be regulated by such authorities.

*Premarket Approval.*While we are not required to seek FDA approvals for our pharmaceuticalintermediates, the customers to whom we supply such products may be subject toFDA approval requirements prior to testing a new drug on humans as well asmarketing a new drug for commercial use in the United States. Our customerswith FDA approval for the finished drug may also be required to obtain FDAapproval of design, manufacturing or labeling changes to the pharmaceuticalintermediates used in their finished products.

Medical devices also aresubject to extensive regulation by the FDA prior to commercial distribution inthe United States, including premarket approval, or PMA, which is required fordevices deemed to pose the greatest risk and certain other devices. OurAdvanced Ceramics segment currently supplies ceramic-on-ceramic ball head andliner components to manufacturers for incorporation into their total hipprostheses systems, which are subject to the FDA’s PMA requirements. Inaddition, our Advanced Ceramics business or our customers who have obtained PMAapproval may be required to obtain FDA approval for changes to the design,manufacturing or labeling of our ceramic-on-ceramic ball head and linercomponents. Also, any other medical devices which our Advanced Ceramics segmentseeks to produce in the future, such as knee replacement products, would likelyrequire FDA approval.

*Compliance Requirements*.Once on the market, drug manufacturers and medical device manufacturers aresubject to numerous postmarket regulations.

Finished devicemanufacturers such as our customers who manufacture hip prostheses systems aresubject to the FDA’s Quality

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System Regulation, orQSR, which requires quality assurance practices and procedures that address,among other things: management responsibility, audits and training; design controls;purchasing controls; identification and traceability of components; productionand process controls; acceptance activities; handling of nonconforming product;the initiation of corrective and preventive actions; labeling and packagingcontrols; handling, storage and distribution of products; and complainthandling and record keeping. The FDA does not directly require componentsuppliers of finished medical devices to comply with the QSR. However, becauseour ceramic-on-ceramic ball head and liner components are critical elements ofhip joint prostheses systems, our customers may require us to comply with someor all of the QSR. Moreover, the FDA may in the future take the position thatthe types of components that we supply meet the definition of a finished deviceand are thus subject to the QSR. Our current contracts with our customers ofceramic-on-ceramic ball head and liner components require us to comply orassist our customers in complying with various FDA regulatory requirements.

The FDA’s inspectionalauthority extends to component suppliers. Pursuant to this authority, the FDAhas the ability to conduct inspections at our facilities at which wemanufacture our ceramic-on-ceramic ball head and liner components.

If we or our customersviolate FDA or other governmental regulatory requirements during either thepre- or post-marketing stages, there may be various adverse consequences. Forexample, in the United States, the FDA has the authority to impose: fines,injunctions, and civil penalties; recall or seizure of products; operating orimport restrictions, partial suspension or total shutdown of production; theFDA’s delay in granting approval or refusal to grant approval of new products;or withdrawal of the submission or the approved product from the market.

**Safety, Health and EnvironmentalMatters**

See Note 21, “Commitmentsand Contingencies,” for a discussion of our safety, health and environmentalmatters.

**Employees**

As of February 28, 2007,we had approximately 9,525 employees, with 66% located in Europe, 21% in theUnited States and the remaining 13% located in the rest of the world. Of ouremployees, approximately 3,000, or 31%, are subject to either collectivebargaining agreements or other similar arrangements.

We observe local customs,legislation and practice in labor relations and, where applicable, innegotiating collective bargaining agreements. Management believes that itsrelations with employees and their representatives are good. We have notsuffered any material work stoppages or strikes in our worldwide operations inthe last five years.

**Available Information**

Rockwood Holdings, Inc.files annual, quarterly and current reports and other information with theSecurities and Exchange Commission (the “SEC”). You may read and copy any documentswe file at the SEC’s public reference room at Room 1580, 100 F Street, N.E.,Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information onthe public reference room. The SEC maintains a website that contains annual,quarterly and current reports, proxy statements and other information thatissuers file electronically with the SEC. The SEC’s website is *www.sec.gov.*

The Company’s website is *www.rocksp.com*. We have made available, free of chargethrough our website, our Annual Report on Form 10-K, and will make availableour quarterly reports on Form 10-Q and current reports on Form 8-K, as well asany amendments to those reports filed or furnished pursuant to the SecuritiesExchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicableafter such material is electronically filed with, or furnished to, the SEC.

**Item 1A.Risk Factors.**

You should carefullyconsider these risk factors in evaluating our business. In addition to thefollowing risks, there may also be risks that we do not yet know of or that wecurrently think are immaterial that may also affect our business. If any of thefollowing risks occur, our business, results of operations, cash flows orfinancial condition could be adversely affected.

***SubstantialLeverage—Our available cash and access to additional capital may be limited byour substantial leverage.***

We are highlyleveraged and have significant debt service obligations. As of December 31,2006, we had $2,838.7 million of indebtedness outstanding and total stockholders’equity of $1,120.5 million. This high level of indebtedness could haveimportant negative consequences to us and you, including:

·                     wemay have difficulty obtaining financing in the future for working capital,capital expenditures, acquisitions or other purposes;

·                     wewill need to use a substantial portion of our available cash flow to payinterest and principal on our debt, which will 

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reduce the amountof money available to finance our operations and other business activities;

·                     someof our debt, including borrowings under the senior secured credit facilities,have variable rates of interest, which will expose us to the risk of increasedinterest rates;

·                     ourdebt level increases our vulnerability to general economic downturns andadverse industry conditions;

·                     ourdebt level could limit our flexibility in planning for, or reacting to, changesin our business and in our industry in general;

·                     oursubstantial amount of debt and the amount we need to pay to service our debtobligations could place us at a competitive disadvantage compared to ourcompetitors that have less debt; and

·                     ourfailure to comply with the financial and other restrictive covenants in ourdebt instruments which, among other things, require us to maintain specifiedfinancial ratios and limit our ability to incur debt and sell assets, couldresult in an event of default that, if not cured or waived, could cause ourlenders to terminate commitments under our debt agreements, declare allamounts, including accrued interest, due and payable, and enforce their rightsin respect of collateral.

Our cash interest expensefor the year ended December 31, 2006 was $193.2 million. At December 31, 2006,we had $1,771.4 million of variable rate debt. After including the notionalamounts of variable to fixed interest rate swaps, the variable amount was$411.2 million. A 1% increase in the average interest rate would increasefuture interest expense by approximately $4.1 million per year. As of December31, 2006, our debt service for 2007, which represents expected principalpayments of our long-term debt and estimated scheduled cash interest payments, wasexpected to be $322.2 million. See Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources—Liquidity—Contractual Obligations” for years beyond 2007.

***AdditionalBorrowings Available—Despite our substantial leverage, we and our subsidiarieswill be able to incur more indebtedness. This could further exacerbate therisks described above, including our ability to service our indebtedness.***

We and our subsidiariesmay be able to incur substantial additional indebtedness in the future.Although our indirect, wholly-owned subsidiary, Rockwood Specialties Group,Inc.’s (“Group” or “Group’s”) senior secured credit facilities and theindentures governing the 2011 Notes and the 2014 Notes contain restrictions onthe incurrence of additional indebtedness, such restrictions are subject to anumber of qualifications and exceptions, and under certain circumstancesindebtedness incurred in compliance with such restrictions could besubstantial. As of December 31, 2006, the revolving credit facility under thesenior secured credit facilities provided for additional borrowings of up to$186.5 million, after giving effect to $26.5 million of letters of creditissued on our behalf and outstanding borrowings of $37.0 million under therevolving credit facility. In addition, the term loans and the availabilityunder the revolving credit facility under the senior secured credit facilitiesmay be increased by up to $250.0 million in aggregate, subject to certainexemptions and provided that Group procures lender commitments for suchincrease. To the extent new debt is added to our debt levels, the substantialleverage risks described above would increase.

***RestrictiveCovenants in Our Debt Instruments—Our debt instruments contain a number ofrestrictive covenants which may limit our ability to finance future operationsor capital needs or engage in other business activities that may be in ourinterest.***

Group’s senior securedcredit agreement and indentures governing the 2011 Notes and 2014 Notes impose,and the terms of any future indebtedness may impose, operating and otherrestrictions on us. Such restrictions will affect, and in many respects limitor prohibit, among other things, our ability to take certain actions. See Item7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” section for further details. Inaddition, Group’s senior secured credit facilities also require us to achievecertain financial and operating results and maintain compliance with specifiedfinancial ratios. Our ability to comply with these ratios may be affected byevents beyond our control. The restrictions and financial covenants containedin Group’s senior secured credit agreement and indentures governing the 2011Notes and 2014 Notes could adversely affect our ability to finance ouroperations, acquisitions, investments or strategic plans or other capital needsor to engage in other business activities that would be in our interest.

A breach of any of thesecovenants or our inability to comply with the required financial ratios couldresult in a default under the senior secured credit facilities and/or theindentures. If an event of default occurs under the senior secured creditfacilities, which includes an event of default under the indentures governingthe 2011 Notes and 2014 Notes, the lenders could elect to:

·                     declareall borrowings outstanding, together with accrued and unpaid interest, to beimmediately due and payable;

·                     requireus to apply all of our available cash to repay the borrowings; or

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·                     preventus from making debt service payments on the 2011 Notes and 2014 Notes;

any of which would resultin an event of default under the 2011 Notes and 2014 Notes. The lenders willalso have the right in these circumstances to terminate any commitments theyhave to provide further financing. If we were unable to repay or otherwiserefinance these borrowings when due, our lenders could sell the collateralsecuring the senior secured credit facilities, which constitutes substantiallyall of our and our subsidiaries’ assets.

***RisksAssociated with Acquisitions—We may not be able to successfully integrateacquisitions we may make in the future.***

The process of combiningor acquiring businesses with Rockwood involves risks. We may face difficultycompleting the integration of the new operations, technologies, products andservices of acquisitions or combinations, and may incur unanticipated expensesrelated to those integrations. The difficulties of combining operations may bemagnified by integrating personnel with differing business backgrounds andcorporate cultures. Failure to successfully manage and integrate acquisitionswith our existing operations could lead to the potential loss of customers ofthe acquired business, the potential loss of employees who may be vital to thenew operations, the potential loss of business opportunities or other adverseconsequences that could affect our financial condition and results ofoperations. Even if integration occurs successfully, failure of any futureacquisition or combination to achieve levels of anticipated sales growth,profitability or productivity comparable with those achieved by our existingoperations, or otherwise not perform as expected, may adversely impact ourfinancial condition and results of operations.

***NetLoss—We have experienced losses in the past and may experience losses in thefuture and cannot be certain that our net operating loss carryforwards willcontinue to be available to offset our tax liability.***

We have incurred netlosses in the past (e.g., a net loss of $216.1 million was incurred in2004) and we may incur net losses in the future. We may not generate cash flowsufficient to meet debt service obligations and other capital requirements,such as working capital and maintenance capital expenditures.

As of December 31, 2006,we had deferred tax assets of $164.4 million related to worldwide netoperating loss carryforwards. Additionally at December 31, 2006 we had atotal valuation allowance of $100.1 million. If our operating performancedeteriorates in the future in certain tax jurisdictions, we may be unable torealize these net operating loss carryforwards and we may be required to recordan additional valuation allowance.

***CurrencyFluctuations—Because a significant portion of our operations is conducted inforeign currencies, fluctuations in currency exchange rates may adverselyimpact our financial condition and results of operations and may affect thecomparability of our results between financial periods.***

Our operations areconducted by subsidiaries in many countries. The results of their operationsand financial condition are reported in the local currency and then translatedinto U.S. dollars at the applicable exchange rates for inclusion in ourconsolidated financial statements. The exchange rates between some of thesecurrencies and the dollar in recent years have fluctuated significantly and maycontinue to do so in the future. As a result of the Dynamit Nobel Acquisition,a significantly larger portion of our net sales and cost of products sold isnow denominated in euros. Approximately 48% of our 2006 net sales were derivedfrom subsidiaries whose local currency is the euro. This increases the impactof the fluctuation of the euro against the U.S. dollar.

Furthermore, because a portion of our debt is denominated in euros,which as of December 31, 2006 equaled an aggregate of €889.8 million ($1,174.4 million based on the Friday, December 29, 2006exchange rate of €1.00 = $1.3199), we are subject to fluctuation in theexchange rate between the U.S. dollar and the euro. For example, thedollar-euro noon buying rate announced by the Federal Reserve Bank of New Yorkincreased from $1.00 = €1.065 on December 31, 2000 to $1.00 = €0.7576 onFriday, December 29, 2006. Being subject to this currency fluctuation may havean adverse effect on the carrying value of our debt and may also affect thecomparability of our results of operations between financial periods. As ofDecember 31, 2006, a weakening or strengthening of the euro against the U.S.dollar by $0.01 would decrease or increase, respectively, by $8.9 million theU.S. dollar equivalent of our total euro-denominated debt of €889.8 million. Inaddition, because our consolidated financial statements are reported in U.S.dollars, the translation effect of such fluctuations has in the pastsignificantly impacted, and may in the future, significantly impact thecarrying value of our debt and results of operations and may affect thecomparability of our results between financial periods. We also incur currencytransaction risk whenever we enter into either a purchase or sale transactionusing a currency other than the local currency of the transacting entity.

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We may not be able toeffectively manage our currency translation and/or transaction risks andvolatility in currency exchange rates may have a material adverse effect on thecarrying value of our debt and results of operations.

***Regulationof Our Raw Materials, Products and Facilities—Our business could be adverselyaffected by regulation to which our raw materials, products and facilities aresubject.***

Some of the raw materialswe handle, and our products and facilities, are subject to governmentregulation. These regulations affect the manufacturing processes, uses andapplications of our products.

In addition, some of oursubsidiaries’ products contain raw materials, such as arsenic pentoxide, carbondisulfide, lithium carbonate, tetrahydrofuran, copper, chromic acid, silica,zinc chromate and lead, that are deemed hazardous materials in certainsituations. The use of these materials is regulated and some of theseregulations require product registrations, which also are subject to renewaland potential revocation. These regulations may affect our ability to marketcertain chemicals we produce.

There is also a risk thatother key raw materials or one or more of our products may be found to have, orbe recharacterized as having, a toxicological or health-related impact on theenvironment or on our customers or employees. If such a discovery orrecharacterization occurs, the relevant materials, chemicals or products,including products of our customers incorporating our materials or chemicals,may be recalled or banned or we may incur increased costs in order to complywith new regulatory requirements. Change in regulations, or theirinterpretation, may also affect the marketability of certain of our products.

***ManufacturingHazards—Hazards associated with chemical manufacturing could adversely affectour results of operations.***

Due to the nature of ourbusiness, we are exposed to the hazards associated with chemical manufacturingand the related storage and transportation of raw materials, products andwastes in our manufacturing facilities or our distribution centers, such asfires, explosions and accidents. These hazards could lead to an interruption orsuspension of operations and have an adverse effect on the productivity andprofitability of a particular manufacturing facility or on our company as awhole. Other hazards include piping and storage tank leaks and ruptures,mechanical failure, employee exposure to hazardous substances, chemical spillsand other discharges or releases of toxic or hazardous substances or gases andinclement weather and natural disasters.

These hazards may causepersonal injury and loss of life, damage to property and contamination of theenvironment, which could lead to government fines or work stoppage injunctionsand lawsuits by injured persons. For example, our subsidiaries were named asdefendants in a wrongful death suit filed by the family of an employee who wasfatally injured in an accident in our Clay-based Additives facility inGonzales, Texas. While we are unable to predict the outcome of this case andother such cases, if determined adversely to us, we may not have adequateinsurance to cover such claims and, if not, we may not have sufficient cashflow to pay for such claims. Such outcomes could adversely affect our customergoodwill, cash flow and results of operations.

***RawMaterials—Fluctuations in costs of our raw materials or, our access to suppliesof our raw materials could adversely affect our results of operations.***

Although no single rawmaterial represented more than 3% of our cost of products sold in 2006, rawmaterial costs generally account for a high percentage of our total costs ofproducts sold. In 2006, raw materials constituted approximately 53% of our costof products sold. We generally purchase raw materials based on supplyagreements linked to market prices and therefore our results of operations aresubject to short-term fluctuations in raw materials prices. These fluctuationslimit our ability to accurately forecast future raw material costs and henceour profitability.

Many of the raw materialswe use are commodities, and the price of each can fluctuate widely for avariety of reasons, including changes in availability, major capacity additionsor reductions or significant facility operating problems. Historically, therehave been some price increases we have not been able to pass through to ourcustomers. This trend may continue in the future.

In addition, titanium-bearingslag used in our Titanium Dioxide Pigments segment is our largest raw material(in terms of dollars) and is sourced primarily from two suppliers. If one ofour suppliers is unable to meet its obligations under our present supplyagreement or we are unable to enter into new supply arrangements on competitiveterms when our existing short-term supply arrangements expire, we may be forcedto pay higher prices to obtain these necessary raw materials. Furthermore,certain of our raw materials, such as cesium and lithium salts, are sourcedfrom countries where political, economic and social conditions may be subjectto instability. In addition, one of our raw materials, lithium brine, requiresa period of gestation before it can be used to produce lithium compounds. Inthe event there is an increase in market demand for lithium products, orunfavorable weather conditions at the lithium ponds, as we experienced in early2006, we may not be able to respond to such market demand on a timely basis.Any interruption of supply or any price increase of raw materials could resultin our inability to meet demand for our products, loss of customer goodwill andhigher costs of producing our products.

***EnergyCosts—Fluctuations in energy costs could have an adverse effect on our resultsof operations.***

Energy purchases in 2006constituted approximately 5% of Rockwood’s cost of products sold. Fluctuationsin the price of energy limit

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our ability to accuratelyforecast future energy costs and consequently our profitability. For example,natural gas prices were volatile and continued to increase in North America in2006, due in part to global political conditions and weather conditions. Incontrast, natural gas prices in Europe, where our Titanium Dioxide Pigments segmentis located, have historically been relatively stable. Rising energy costs mayalso increase our raw material costs. If energy prices fluctuate significantly,our business, in particular, our Titanium Dioxide segment, or results ofoperations may be adversely affected. In addition, rising energy costs alsonegatively impact our customers and the demand for our products. These riskswill be heightened if our customers or production facilities are in locationsexperiencing severe energy shortages.

***Environmental,Health and Safety Regulation—Compliance with extensive environmental, healthand safety laws could require material expenditures or changes in ouroperations.***

Our operations aresubject to extensive environmental, health and safety laws and regulations atnational, international and local levels in numerous jurisdictions. Inaddition, our production facilities and a number of our distribution centersrequire operating permits that are subject to renewal and, in somecircumstances, revocation. The nature of the chemicals industry exposes us torisks of liability under these laws and regulations due to the production,storage, transportation, disposal and sale of chemicals and materials that cancause contamination or personal injury if released into the environment. In2006, our capital expenditures for safety, health and environmental matters(SHE) were approximately $35.3 million. For 2007, we estimate capitalexpenditures for compliance with SHE laws to be at similar levels. We may bematerially impacted in the future by the Registration, Evaluation andAuthorization of Chemicals, or REACH, program proposed by the EU, whichrequires compliance beginning in June 2007.

Compliance withenvironmental laws generally increases the costs of registration/approvalrequirements, the costs of transportation and storage of raw materials andfinished products, as well as the costs of the storage and disposal of wastes,and could have a material adverse effect on our results of operations. We mayincur substantial costs, including fines, damages, criminal or civil sanctionsand remediation costs, or experience interruptions in our operations, forviolations arising under these laws or permit requirements. Furthermore,environmental laws are subject to change and have tended to become stricterover time. Such changes in environmental laws or their interpretation, or theenactment of new environmental laws, could result in materially increasedcapital expenditures and compliance costs.

In addition, thediscovery of contamination arising from historical industrial operations atsome of our former and present properties has exposed us, and in the future maycontinue to expose us, to cleanup obligations and other damages. For example,soil and groundwater contamination is known to exist at several of ourfacilities. At December 31, 2006, we had approximately $37.0 million inreserves for estimated environmental liabilities.

Under the sale andpurchase agreement regarding the Dynamit Nobel acquisition, GEA GroupAktiengesellschaft (formerly known as mg technologies ag) is required toindemnify us for certain environmental matters, subject to certain limitations.See Note 21, “Commitments and Contingencies—Indemnity Matters” section forfurther details. However, GEA Group may not adhere to its indemnity obligationsto us and the indemnity may not adequately cover any related environmentalmatters, and we may have to institute proceedings to pursue recovery for suchmatters. Such legal proceedings may be costly and may require a substantialamount of management attention.

***EnvironmentalIndemnities—We may be subject to environmental indemnity claims relating toproperties we have divested.***

The discovery ofcontamination arising from properties that we have divested may expose us toindemnity obligations under the sale agreements with the buyers of suchproperties or cleanup obligations and other damages under applicableenvironmental laws. For example, we have obligations to indemnify the buyers ofthe former explosives business and automotive ignition systems business ofDynamit Nobel for certain environmental matters. Under such sale agreements,these indemnities are not limited as to amount. In addition, we agreed toindemnify the buyers of our Groupe Novasep subsidiary for three years forcertain known and unknown environmental actions which may arise in the future.Furthermore, we have an obligation to indemnify the buyers of a portion of ourformer manufacturing sites at Troisdorf, Germany, for which we have a total reserveof approximately $13.7 million as of December 31, 2006. We may not haveadequate insurance coverage or cash flows to make such indemnity payments. Suchpayments may be costly and may adversely affect our financial condition andresults of operations.

***ProductLiability—Due to the nature of our business and products, we may be liable fordamages arising out of product liability claims.***

The sale of our products involves the risk of product liability claims.For example, some of the chemicals or substances that are used in ourbusinesses, such as arsenic pentoxide, have been alleged to representpotentially significant health and safety concerns. Class action suits had beenfiled in Louisiana, Florida and Arkansas, for example, naming one of oursubsidiaries and a number of competitors of our Timber Treatment Chemicalsbusiness line in our Performance Additives segment, as well as treaters andretailers, as defendants. In addition, our subsidiary has been named as adefendant in personal injury suits in several jurisdictions with retailers andtreaters named as other defendants. Furthermore, there are other similar suits,including putative class actions, pending against retailers, treaters and otherformulators to which we may be eventually named as a defendant. These suitsallege, among other things,

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product liability claims in connection with the use oftimber products treated with CCA, which utilizes arsenic pentoxide as a rawmaterial. In addition, a subsidiary in our Advanced Ceramics segment has beennamed as a defendant in several product liability lawsuits in Europe relatingto broken artificial hip joints, which allege negligent manufacturing by oursubsidiary of ceramic components used in the production of artificial hipjoints. Likewise, our subsidiary in our Specialty Compounds segment has beennamed in lawsuits relating to compounds we supplied our customers to producemedical products and packaging materials. The suits allege, among other things,contract and tort causes of action. Further, a subsidiary in our SpecialtyChemicals segment has been named as a defendant in several lawsuits in theUnited States regarding exposure to solvents and other chemicals contained insome of our products. We are unable to estimate our exposure, if any, to theselawsuits at this time.

We may be subject to future claims with regard tothese suits or others like them and we may not be able to avoid significantproduct liability exposure. A successful product liability claim or series ofclaims against us for which we are not otherwise indemnified or insured couldmaterially increase our operating costs or prevent such operating subsidiaryfrom satisfying its financial obligations. For example, for policies renewed onor after November 2002, our insurers excluded CCA from our insurance coverageunder our general liability policies. We may not have sufficient cash flow fromoperations or assets to pay a judgment resulting from a product liabilityclaim, if any, for which there is no or inadequate insurance coverage. Any suchjudgment could materially increase our operating costs or prevent suchoperating subsidiary from satisfying its financial obligations.

***Product Liability—Due to thenature of our business and products, we may be liable for damages arising outof certain indemnity claims.***

We may be subject to indemnity claims for productliability lawsuits relating to products we have sold. For example, our TimberTreatment Chemicals business has entered into indemnity agreements with variouscustomers who purchased CCA-based wood protection products. Pursuant to thoseagreements, one of our subsidiaries agreed to defend and hold harmless thosecustomers for certain causes of action, based on domestic mammalian, and insome cases, human toxicity, caused by our CCA-based wood protection products,subject to certain conditions. Our Timber Treatment Chemicals business, andseveral of our customers were named as defendants in several suits, includingputative class actions, relating to CCA-based wood protection products. OurTimber Treatment Chemicals business has received and may in the future receiveclaims for indemnity from customers in connection with litigation relating toCCA-based wood protection products and may be required to pay indemnity claimsunder such agreements to one or more of its customers. If our Timber TreatmentChemicals business is required to pay one or more indemnity claims, insuranceor indemnity arrangements from Degussa (the successor to Laporte, from whichthe specialty chemicals business lines that formed Rockwood in the KKRAcquisition were acquired) may not cover such claims and, if not, oursubsidiary may not have sufficient free cash flow to pay such claims. We areunable to estimate our exposure, if any, to these claims and lawsuits at thistime.

In addition, our Specialty Chemicals segment’ssubsidiary that formerly manufactured insulating glass sealants has been namedas a defendant in several product liability lawsuits relating to allegednegligent manufacturing of these sealants. Pursuant to the sale and purchaseagreement with respect to the divested business, one of our Specialty Chemicals’subsidiaries may be required to pay indemnity claims for a limited number ofyears. If this subsidiary is required to pay indemnity claims, our insurancemay not cover such claims and, if not, our subsidiary may not have sufficientcash flow to pay these claims. One or more of these claims could adverselyaffect our financial condition or results of operations.

***Cyclicality—Downturns in cyclicalindustries and general economic conditions could adversely affect ourprofitability.***

Our products are used in certain industries that arecyclical in nature, such as the automotive, data and communications andelectronics industries. In addition, sales to the construction market aredriven by trends in commercial and residential construction, housing starts andtrends in residential repair and remodeling. Downturns in one or more of theseindustries could severely reduce demand for our products. For example, thetelecommunications market has experienced a similar downturn, which affectedthe results of operations of our Specialty Compounds segment in prior years,and in recent years the semiconductor market experienced a severe downturn,which affected the results of operations of our Electronics segment in prioryears.

In addition, downturns in general economic conditions,whether in a particular region or globally, could reduce demand for ourproducts. An economic downturn in one or more of the markets or geographicregions in which we sell our products may result in a decline in our net sales.

***FDA Regulation—Some of ourmanufacturing processes and facilities, pharmaceutical customers and medicaldevice customers are subject to regulation by the FDA or similar foreignagencies. These requirements could adversely affect our results of operations.***

Regulatory requirements of the FDA are complex. Anyfailure to comply with them could subject us and/or our customers to fines,injunctions, civil penalties, lawsuits, recall or seizure of products, total orpartial suspension of production, denial of government approvals, withdrawal ofmarketing approvals and criminal prosecution. Any of these actions couldadversely impact our net sales, undermine goodwill established with ourcustomers, damage commercial prospects for our products and materiallyadversely affect our results of operations.

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The manufacture and supply of ceramic-on-ceramic ballhead and liner components for hip joint prostheses systems by our AdvancedCeramics segment may also be subject to the FDA’s Quality System Regulation,which imposes current Good Manufacturing Practice requirements on themanufacture of medical devices. In addition, certain lithium compoundsmanufactured by our Fine Chemicals business line of our Specialty Chemicalssegment are subject to FDA regulation.

Medical device customers of our Advanced Ceramicssegment to whom we supply our ceramic-on-ceramic ball head and liner componentsare subject to FDA regulation, including premarket approval of their productsand post market compliance requirements. The FDA may take three years or longerto grant premarket approval, if at all. Once approved, our customers’ total hipprostheses systems may be withdrawn from the market either voluntarily by ourcustomers or as a result of the FDA’s or a foreign equivalent’s withdrawal ofmarketing approval or removal of such products for a number of reasonsincluding safety, current Good Manufacturing Practice or Quality SystemRegulation problems with our products or our customers’ final products. Thesefactors could significantly limit our net sales generated by our AdvancedCeramics segment and may have a material adverse effect on our financialcondition and results of operations.

***Competition—Our industry ishighly competitive. The end-use markets in which we compete are also highlycompetitive. This competition may adversely affect our results of operations.***

We face significant competition from majorinternational producers as well as smaller regional competitors. Our mostsignificant competitors include major chemicals and materials manufacturers anddiversified companies, a number of which have revenues and capital resourcesexceeding ours. In addition, there is increasing competition from marketparticipants in China.

Within the end-use markets in which we compete,competition between products is intense. Substitute products also exist formany of our products. Therefore, we face substantial risk that certain events,such as new product development by our competitors, changing customer needs,production advances for competing products, price changes in raw materials, ourfailure to secure patents or the expiration of patents, could result indeclining demand for our products as our customers switch to substituteproducts or undertake manufacturing of such products on their own. If we areunable to develop and produce or market our products to effectively competeagainst our competitors, our results of operations may materially suffer.

We believe that our customers are increasingly lookingfor strong, long-term relationships with a few key suppliers that help themimprove product performance, reduce costs, or support new product development.To satisfy these growing customer requirements, our competitors have beenconsolidating within product lines through mergers and acquisitions. We mayalso need to invest and spend more on research and development and marketingcosts to strengthen existing customer relationships, as well as attract newcustomers. As a result, our substantial debt level could limit our flexibilityto react to these industry trends and our ability to remain competitive.

***Product Innovation—If we are notable to continue our technological innovation and successful commercialintroduction of new products, our profitability could be adversely affected.***

Our industries and the end-use markets into which wesell our products experience periodic technological change and product improvement.Manufacturers periodically introduce new generations of products or require newtechnological capacity to develop customized products. Our future growth willdepend on our ability to gauge the direction of the commercial andtechnological progress in all key end-use markets and upon our ability to fundand successfully develop, manufacture and market products in such changingend-use markets. We will have to continue to identify, develop and marketinnovative products on a timely basis to replace or enhance existing productsin order to maintain our profit margins and our competitive position. We maynot be successful in developing new products and/or technology, either alone orwith third parties, or licensing intellectual property rights from thirdparties on a commercially competitive basis. Our new products may not beaccepted by our customers. If we fail to keep pace with the evolvingtechnological innovations in our end-use markets on a competitive basis, ourbusiness, financial condition and results of operations could be adverselyaffected.

***Dependence on IntellectualProperty—If our intellectual property were copied by competitors, or if theywere to develop similar intellectual property independently, our results ofoperations could be negatively affected.***

Our success depends to a significant degree upon ourability to protect and preserve our intellectual property rights, which rightswe own or use pursuant to licenses granted to us by third parties. Theconfidentiality and patent assignment agreements we enter into with most of ourkey employees and third parties to protect the confidentiality, ownership anduse of intellectual property may be breached, may not be enforceable, or mayprovide for joint ownership or ownership by a third party. In addition, we maynot have adequate remedies for a breach by the other party, which couldadversely affect our intellectual property rights.

The use of our intellectual property rights orintellectual property similar to ours by others or our failure to protect suchrights could reduce or eliminate any competitive advantage we have developed,adversely affecting our net sales. If we must sue to protect, defend or enforceour intellectual property rights, any suits or proceedings could result insignificant costs and diversion of company resources and management attention,and we may not prevail in such action. In addition, when our patents expire,competitors or new market entrants may manufacture products substantiallysimilar to our products previously protected by a patent. For example, our 

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patent in ACQ technology expires in May 2007 and as aresult, there may be new entrants into this market.

We conduct research and development activities withthird parties and license certain intellectual property rights from thirdparties and we plan to continue to do so in the future. For example, in ourTimber Treatment Chemicals business, we developed the technology to produce ACQpursuant to a license agreement with Domtar Inc. and through the acquisition ofthe Kemwood business from Kemira Oyj. We endeavor to license or otherwiseobtain intellectual property rights on terms favorable to us. However, we maynot be able to license or otherwise obtain intellectual property rights on suchterms or at all. Our inability to license or otherwise obtain such intellectualproperty rights could have a material adverse effect on our ability to create acompetitive advantage and create innovative solutions for our customers, whichwill adversely affect our net sales and our relationships with our customers.

The steps we take to protect our intellectual propertymay not provide us with any competitive advantage and may be challenged bythird parties. We have been and currently are subject to oppositions of ourpatents and trademarks by third parties before regulatory bodies in certainjurisdictions. Our failure to defend these patents or registered trademarks maylimit our ability to protect the intellectual property rights that theseapplications were intended to cover. In addition, a failure to obtain anddefend our trademark registrations may impede our marketing and branding effortsand competitive position. A failure to protect our intellectual property rightscould have a material adverse effect on demand for our products and our netsales.

***Risk of Intellectual PropertyLitigation—Our products or processes may infringe the intellectual propertyrights of others, which may cause us to pay unexpected litigation costs ordamages or prevent us from selling our products.***

Although it is our intention to avoid infringing orotherwise violating the intellectual property rights of others, our processesand products may infringe or otherwise violate the intellectual property rightsof others. We may be subject to legal proceedings and claims, including claimsof alleged infringement by us or our licensees of the patents, trademarks andother intellectual property rights of third parties. Intellectual propertylitigation is expensive and time-consuming, regardless of the merits of anyclaim, and could divert our management’s attention from operating ourbusinesses.

If we were to discover or be notified that ourprocesses or products potentially infringe or otherwise violate theintellectual property rights of others, we may need to obtain licenses fromthese parties or substantially re-engineer our products and processes in orderto avoid infringement. We might not be able to obtain the necessary licenses onacceptable terms, or at all, or be able to re-engineer our productssuccessfully. Moreover, if we are sued for infringement and lose the suit, wecould be required to pay substantial damages and/or be enjoined from using orselling the infringing products or technology. Any of the foregoing could causeus to incur significant costs and prevent us from selling our products.

***International Operations—As aglobal business, we are exposed to local business risks in different countrieswhich could have a material adverse effect on our financial condition orresults of operations and the value of our common stock.***

We have significant operations in many countries,including manufacturing facilities, research and development facilities, salespersonnel and customer support operations. Currently, we operate, or othersoperate on our behalf, facilities in countries such as Brazil, Chile, China,Czech Republic, Malaysia, Poland, Portugal, Singapore, South Africa, SouthKorea, Taiwan and Turkey. Of our total net sales in 2006 of $2,975.2 million,approximately 66% were generated by shipments to countries outside NorthAmerica. Our operations are affected directly and indirectly by globalregulatory, economic and political conditions, including:

·         newand different legal and regulatory requirements in local jurisdictions;

·         managingand obtaining support and distribution for local operations;

·         increasedcosts of, and availability of, transportation or shipping;

·         creditrisk and financial conditions of local customers and distributors;

·         potentialdifficulties in protecting intellectual property;

·         riskof nationalization of private enterprises by foreign governments;

·         potentialimposition of restrictions on investments;

·                          potentiallyadverse tax consequences, including imposition or increase of withholding andother taxes on remittances and other payments by subsidiaries;

·         capitalcontrols; and

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·                          localpolitical, economic and social conditions, including the possibility ofhyperinflationary conditions and political instability in certain countries.

In addition, our facilities may be targets ofterrorist activities that could result in full or partial disruption of theactivities of such facilities.

We may not succeed in developing and implementingpolicies and strategies to counter the foregoing factors effectively in eachlocation where we do business. Our failure to do so could limit our ability tosell products, compete or receive payments for products sold in such locations.

Furthermore, our subsidiaries are subject to theexport controls and economic embargo rules and regulations of the UnitedStates, violations of which may carry substantial penalties. These regulationslimit the ability of our subsidiaries to market, sell, distribute or otherwisetransfer their products or technology to prohibited countries or persons.Failure to comply with these regulations could subject our subsidiaries tofines, enforcement actions and/or have an adverse affect on our reputation andthe value of our common stock.

***Retention of Key Personnel—If welose certain key personnel or are unable to hire additional qualifiedpersonnel, we may not be able to execute our business strategy.***

Our success depends, in part, upon the continuedservices of our highly skilled personnel involved in management, research, production,sales and distribution, and, in particular, upon the efforts and abilities ofour executive officers and key employees. Although we believe that we areadequately staffed in key positions and that we will be successful in retainingkey personnel, we may not be able to retain such personnel on acceptable termsor at all. Furthermore, if we lose the service of any executive officers or keyemployees, we may not be able to execute our business strategy. We do not havekey-person life insurance covering any of our employees.

***Relations with Employees—We aresubject to stringent labor and employment laws in certain jurisdictions inwhich we operate, and our relationship with our employees could deteriorate,which could adversely impact our operations.***

A majority of our full-time employees are employedoutside the United States, particularly in Germany where many of our businessesare located. In certain jurisdictions where we operate, particularly inGermany, labor and employment laws are relatively stringent and, in many cases,grant significant job protection to certain employees, including rights ontermination of employment. In addition, in certain countries where we operate,including Germany, our employees are members of unions or are represented by aworks council as required by law. We are often required to consult and seek theconsent or advice of these unions and/or respective works’ councils. Theseregulations and laws coupled with the requirement to consult with the relevantunions or works’ councils could significantly limit our flexibility in managingcosts and responding to market changes.

Furthermore, with respect to our employees that aresubject to collective bargaining arrangements or similar arrangements (approximately31% of our full-time employees as of December 31, 2006), we may not be able tonegotiate labor agreements on satisfactory terms and actions by our employeesmay disrupt our business. If these workers were to engage in a strike, workstoppage or other slowdown, we could experience a significant disruption of ouroperations and/or higher ongoing labor costs. In addition, if our otheremployees were to become unionized, we could experience a significantdisruption of our operations and/or higher ongoing labor costs.

***Tax Liabilities—If mgtechnologies ag (now known as GEA Group Aktiengesellschaft) or Degussa UKHoldings, Ltd. fail to satisfy their contractual obligations, we may be subjectto increased tax exposure resulting from pre-acquisition periods.***

Under the terms of certain purchase agreements, thirdparty sellers have agreed to substantially indemnify us for tax liabilitiespertaining to the pre-acquisition periods. To the extent such companies fail toindemnify or satisfy their obligations, or if any amount is not covered by theterms of the indemnity, we would be required to record an adjustment togoodwill to satisfy any such liabilities and could be negatively impacted infuture periods through increased tax expense.

***Anticipated CapitalExpenditures—Our required capital expenditures may exceed our estimates.***

Our capital expenditures, excluding capital leases,for the year ended December 31, 2006 were $171.9 million, which consistedof expenditures to maintain and improve existing equipment and substantialinvestments in new equipment. For 2007, we expect capital expenditures to becomparable to 2006. Future capital expenditures may be significantly higher,depending on the investment requirements of each of our business lines, and mayalso vary substantially if we are required to undertake actions to compete withnew technologies in our industry. We may not have the capital necessary toundertake these capital investments. If we are unable to do so, we may not beable to effectively compete in some of our markets.

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***Control—A conflict may arisebetween our interests and those of KKR.***

Affiliates of KKR own approximately 50.9% of ourcommon stock on an undiluted basis. In addition, representatives of KKR occupythree of the nine seats on our board of directors, with one of the ninecurrently vacant. As a result, affiliates of KKR have substantial influenceover our decisions to enter into any corporate transaction and have the abilityto prevent any transaction that requires the approval of the stockholdersregardless of whether or not other stockholders believe that any suchtransactions are in their own best interests. For example, affiliates of KKRcould cause us to sell revenue-generating assets, which could impair ourlong-term ability to declare dividends or grow our business. Additionally, KKRis in the business of making investments in companies and may from time to timeacquire and hold interests in businesses that compete directly or indirectlywith us. They may also pursue acquisition opportunities that may becomplementary to our business, and as a result, those acquisition opportunitiesmay not be available to us. So long as affiliates of KKR continue to hold amajority of our outstanding common stock, they will have the ability to controlthe vote in any election of directors even though KKR does not currently occupya majority of the seats on our board of directors.

***We are a “controlled company”within the meaning of the New York Stock Exchange rules and, as a result, qualifyfor, and rely on, exemptions from certain corporate governance requirements.***

Affiliates of KKR continue to control a majority ofour outstanding common stock. As a result, we are a “controlled company” withinthe meaning of the New York Stock Exchange corporate governance standards.Under the New York Stock Exchange rules, a company of which more than 50% ofthe voting power is held by an individual, group or another company is a “controlledcompany” and may elect not to comply with certain New York Stock Exchangecorporate governance requirements, including:

·         therequirement that a majority of the board of directors consist of independentdirectors;

·                          the requirement that we have a nominating/corporategovernance committee that is composed entirely of independent directors;

·                          the requirement that we have a compensationcommittee that is composed entirely of independent directors; and

·                          therequirement for an annual performance evaluation of the nominating/corporategovernance and compensation committees.

We utilize these exemptions, and as a result, we donot have a majority of independent directors and our nominating/corporategovernance and compensation committees do not consist entirely of independentdirectors. Accordingly, you do not have the same protections afforded tostockholders of companies that are subject to all of the New York StockExchange corporate governance requirements.

***LimitedRelevance of Financial Information—Our historical and pro forma financialinformation may not be representative of our results as a combined company.***

The pro forma financialinformation presented in 2004 is based on certain assumptions regarding theintegration of Dynamit Nobel that we believe are reasonable. Our assumptionsmay prove to be inaccurate over time. Accordingly, the historical and pro formafinancial information included herein may not reflect what our results ofoperations and financial condition would have been had we been a combined entityduring the periods presented, or what our results of operations and financialcondition will be in the future.

**Item 1B. Unresolved StaffComments.**

None.

**Item 2. Properties.**

We are an international business, serving customersworldwide. To service our customers efficiently, we maintain 88 manufacturingfacilities in 25 countries around the world with a strategy of global, regionaland local manufacturing to optimize our service offering and minimizeproduction cost to our customers. We believe these facilities are suitable andadequate for their intended use. The table below presents summary informationwith respect to these manufacturing facilities:
| Segment                 | ** ** | **Country** | ** ** | **Locations**     | ** ** | **Leased/Owned** | ** ** | **Major Applications/Industry**                               |
|-------------------------|------------|-------------|------------|-------------------|------------|------------------|------------|---------------------------------------------------------------|
| **Specialty Chemicals** |       |        |       |              |       |             |       |                                                          |
| Surface Treatment       |       | Australia   |       | Bayswater North   |       | Owned            |       | Automotive and other pre-treatment technologies               |
|                         |       |        |       | Girraween         |       | Leased           |       | Aerospace and General Industry                                |
|                         |       | Brazil      |       | São Paulo    |       | Leased           |       | Automotive technologies and other pre-treatment  technologies |
|                         |       | Canada      |       | Bramalea, Ontario |       | Owned            |       | Pre-treatment technologies and aerospace                      |

 

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|                |   | China           |   | Chonggin             |   | Leased |   | Automotive and other pre-treatment technologies                                                                                  |
|----------------|--------|-----------------|--------|----------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|                |   |            |   | Shanghai             |   | Leased |   | Automotive and other pre-treatment technologies                                                                                  |
|                |   | France          |   | Sens                 |   | Owned  |   | Automotive technologies and other pre-treatment  technologies                                                                    |
|                |   | Germany         |   | Soissons             |   | Owned  |   | Aerospace                                                                                                                        |
|                |   |            |   | Mönchengladbach |   | Owned  |   | General Industry                                                                                                                 |
|                |   |            |   | Langelsheim (1)      |   | Owned  |   | Automotive technologies, other pre-treatment  technologies and aerospace (sealants)                                              |
|                |   | India           |   | JV in Worli          |   | Owned  |   | Automotive and other pre-treatment technologies                                                                                  |
|                |   |            |   | JV in Pune           |   | Owned  |   | Automotive and other pre-treatment technologies                                                                                  |
|                |   | Italy           |   | Guissano             |   | Leased |   | Automotive technologies and other pre-treatment  technologies                                                                    |
|                |   |            |   | Rovereto in Piano    |   | Leased |   | General Industry                                                                                                                 |
|                |   | Mexico          |   | Mexico City          |   | Leased |   | Automotive technologies, other pre-treatment  technologies and aerospace                                                         |
|                |   | The Netherlands |   | Oss                  |   | Owned  |   | Automotive technologies and other pre-treatment  technologies                                                                    |
|                |   | Poland          |   | Warsaw               |   | Leased |   | Automotive and other pre-treatment technologies                                                                                  |
|                |   | Singapore       |   | Singapore            |   | Leased |   | Advanced technologies and non-automotive pre-treatment  technologies                                                             |
|                |   | South Africa    |   | Boksburg             |   | Owned  |   | Automotive technologies and other pre-treatment  technologies                                                                    |
|                |   | Spain           |   | Canovelles           |   | Owned  |   | Automotive technologies and other pre-treatment  technologies                                                                    |
|                |   | Sweden          |   | Bålsta          |   | Owned  |   | Automotive technologies and other pre-treatment  technologies                                                                    |
|                |   | Switzerland     |   | Dintikon             |   | Leased |   | Pre-treatment technologies                                                                                                       |
|                |   | Turkey          |   | Istanbul             |   | Owned  |   | Automotive and other pre-treatment technologies                                                                                  |
|                |   | United Kingdom  |   | Bletchley            |   | Leased |   | Automotive technologies, other pre-treatment  technologies and aerospace                                                         |
|                |   | United States   |   | La Mirada, CA        |   | Leased |   | Pre-treatment technologies and aerospace                                                                                         |
|                |   |            |   | Romulus, MI          |   | Owned  |   | Automotive technologies, other pre-treatment  technologies and aerospace                                                         |
| Fine Chemicals |   | Austria         |   | Arnoldstein          |   | Leased |   | Metal sulphides                                                                                                                  |
|           |   | Chile           |   | La Negra             |   | Owned  |   | Lithium-carbonate and lithium chloride                                                                                           |
|           |   | Germany         |   | Langelsheim (1)      |   | Owned  |   | Butyl-Lithium, lithium-hydroxide, specialty  products, lithium metal, lithium-hydrides, cesium, special metals and  accelerators |

 

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|                                                 |   | Taiwan  United States                                 |   | Taichung  Silver Peak, NV  New Johnsonville,  TN  Kings Mountain,  NC                                                                                                               |   | Owned  Owned  Owned  Owned                                                                  |   | Butyl-Lithium  Lithium-carbonate and lithium  hydroxide  Butyl-Lithium and specialty products  Metal and battery                                                                                                                                                                                                                                                                                     |
|------------------------------------------------------|--------|-------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Performance Additives**Color Pigments and Services |   | China  Germany  Italy  United  Kingdom  United States |   | Xinzhuang,  Changshu  Walluf  Hainhausen  Turin  Matlock Bath  Kidsgrove  Sudbury  Los Angeles, CA  St. Louis, MO  Beltsville, MD  Ocala, FL  Cartersville, GA  King of Prussia, PA |   | Leased  Owned  Owned  Owned  Leased  Owned  Owned  Owned  Owned  Owned  Owned  Owned  Owned |   | Construction  Construction and coatings  Construction and coatings  Coatings, specialties and  construction  Construction  Coatings and specialties  Coatings and specialties  Coatings, specialties and  construction  Coatings, specialties and construction  Coatings, specialties and construction  Coatings, specialties and construction  Coatings, specialties and construction  Construction |
| Timber Treatment  Chemicals                          |   | United Kingdom  United States                         |   | Barrow-in-Furness  Freeport, TX  Valdosta, GA  Harrisburg, NC                                                                                                                       |   | Leased  Owned  Owned Owned                                                                  |   | Wood protection products and treatment  Construction and other industrial  markets  Wood protection products and treatment  Wood protection products and treatment                                                                                                                                                                                                                                   |
| Clay-based Additives                                 |   | Germany  United Kingdom  United States                |   | Moosburg  Widnes, Cheshire  Gonzales, TX  Louisville, KY                                                                                                                            |   | Leased  Owned  Owned  Owned                                                                 |   | Paints; inks  Paper-making; consumer and household  care; coatings and paper  Paints; inks and oilfields; paper-making  Paints; inks                                                                                                                                                                                                                                                                 |
| Water Treatment Chemicals                            |   | United States                                         |   | Alpharetta, GA                                                                                                                                                                      |   | Leased                                                                                      |   | Water treatment                                                                                                                                                                                                                                                                                                                                                                                      |
| **Titanium Dioxide Pigments**Titanium Dioxide        |   | Germany                                               |   | Duisburg (2)                                                                                                                                                                        |   | Owned                                                                                       |   | Fibers, plastics, paints, coatings and paper                                                                                                                                                                                                                                                                                                                                                         |
| Functional Additives                                 |   | China  Germany                                        |   | JV in China  Duisburg (2)                                                                                                                                                           |   | Leased  Owned                                                                               |   | Plastics  Coatings, plastics, fibers, paper,  pharmaceuticals, PVC stabilizers and  glass fiber reinforced plastics                                                                                                                                                                                                                                                                                  |
| Water Chemistry                                      |   | Germany                                               |   | Duisburg (2)  Ibbenbueren  Schwarzheide                                                                                                                                             |   | Owned  Leased  Leased                                                                       |   | Flocculants  Flocculants  Flocculants                                                                                                                                                                                                                                                                                                                                                                |

 

38

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| **Advanced Ceramics**               |   | China  Czech Republic  Germany  South Korea Malaysia   United Kingdom  United States |   | Suzhou  Sumperk  Dolni Rychnov  Plochingen  Ebersbach  Lauf  Marktredwitz  Wittlich  Suwon  Seremban  Colyton  Laurens, SC |   | Leased  Owned  Owned  Owned  Owned  Owned  Owned  Leased  Leased  Owned  Owned  Owned |   | General industry  General industry  Electronics  Medical, automotive and general  industry  Automotive and general industry  Automotive, electronics and general  industry  Electronic, automotive, medical and  general industry  General Industry  Electronics  Medical  Electronics  Automotive, electronics and general  industry                                                                                                                                                                                                              |
|-------------------------------------|--------|--------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Specialty Compounds**             |   | Canada  Italy  United Kingdom  United States                                         |   | Stoney Creek,  Ontario  Azeglio  Melton Mowbray  Manchester (3)  Pineville, NC  Leominster, MA                             |   | Owned  Owned  Owned  Owned  Owned   Owned                                             |   | Footwear products, consumer products  and automotive products  Rubber compounds  TPE/Consumer products, packaging  products, medical products, automotive  products and wire and cable sheathing  products  Wire and cable sheathing products  Wire and cable sheathing products;  packaging products; medical products,  consumer goods products; footwear  products; automotive products and  industrial products  Wire and cable sheathing products;  consumer goods products; footwear  products; automotive products and  industrial products |
| **Electronics**Electronic Chemicals |   | China  France   Singapore  Taiwan  United Kingdom   United States                    |   | Suzhou Province  Saint-Fromond  St. Cheron   Singapore  Chung-Li  Riddings  Maple Plain, MN  Fremont, CA                   |   | Leased  Owned  Owned  Leased  Leased  Leased  Owned  Leased                           |   | Printed circuit boards  Semiconductor manufacturing  Semiconductor manufacturing  Semiconductor manufacturing  Printed circuit boards  Semiconductor manufacturing  Printed circuit boards, semiconductor  manufacturing  Photomasks, semiconductor  manufacturing                                                                                                                                                                                                                                                                                 |

 

39

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| Photomasks    |   | United Kingdom |   | Glenrothes, Scotland |   | Owned  |   | Masks and pellicle replacement |
|---------------|--------|----------------|--------|----------------------|--------|--------|--------|--------------------------------|
|               |   | United States  |   | Austin, TX           |   | Leased |   | Repairs                        |
|               |   |           |   | Los Gatos, CA        |   | Leased |   | Masks and pellicle replacement |
| Wafer Reclaim |   | France         |   | Greasque             |   | Owned  |   | Wafer reclaim                  |

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(1)             Thisfacility is shared by both business divisions of the Specialty Chemicalssegment.

(2)             Thisfacility is shared by all three business divisions of the Titanium Dioxide Pigmentssegment.

(3)             Weexpect to close this facility by the end of 2007.

**Item 3. Legal Proceedings.**

We are involved in legal proceedings from time to timein the ordinary course of our business, including with respect to productliability, intellectual property and environmental matters. In addition, we maybe required to make indemnity payments in connection with certain productliability and environmental claims. See Item 1, “Business,” and Item 1A, “RiskFactors,” “Environmental Indemnities—We may be subject to environmentalindemnity claims relating to properties we have divested”; “Product Liability—Due to the nature of our business and products, we may be liable for damagesarising out of product liability claims”; and “Product Liability—Due to the natureof our business and products, we may be liable for damages arising out ofcertain indemnity claims.” However, we do not believe that there is any otherindividual, governmental, legal proceeding or arbitration that is likely tohave a material adverse effect on our business, results of operations, cashflows or financial condition.

**Item 4. Submission of Matters toa Vote of Security Holders.**

During the fourth quarter of the year ended December31, 2006, no matters were submitted to a vote of security holders.

**PART II**

**Item 5. Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities.**

**Market Information; Holders; and Dividends**

The Company’s common stock is traded on the New YorkStock Exchange under the ticker symbol ROC. As of March 9, 2007, there wereapproximately 108 holders of record of the Company’s common stock.

The following table summarizes the Company’s quarterlycommon stock information:

| 2006   | ** ** | **High** | ** ** | **Low** | ** ** |
|--------|------------|----------|------------|---------|------------|
| First  |       | $        | 24.36      |    | $          | 19.05 |   |
| Second |       | 24.90    |       | 21.40   |       |
| Third  |       | 23.60    |       | 19.56   |       |
| Fourth |       | 26.05    |       | 19.79   |       |
|        |            |          |            |         |            |  |  |

 

| 2005   | ** ** | **High** | ** ** | **Low** | ** ** |
|--------|------------|----------|------------|---------|------------|
| Third  |       | $        | 20.40      |    | $          | 17.55 |   |
| Fourth |       | 20.40    |       | 17.93   |       |
|        |            |          |            |         |            |  |  |

 

The Company’s common stock began trading on August 17,2005.

Rockwood Holdings, Inc.’s operations are conductedthrough its subsidiaries and its ability to make payments on any obligations itmay have is dependent on the earnings and the distribution of funds from itssubsidiaries. As a result, we are dependent upon cash dividends and distributionsand other transfers from our subsidiaries to make dividend payments on ourcommon stock. The amounts available to us to pay cash dividends are restrictedby our subsidiaries’ debt agreements. Under Group’s senior secured creditfacilities and indentures governing the 2011 Notes and 2014 Notes, Group isgenerally restricted from making dividends or other distributions to us. Anydecision to declare and pay dividends in the future will be made at thediscretion of our board of directors and will depend on, among other things,our results of operations, cash requirements, financial condition, contractualrestrictions and other factors that our board of directors may deem relevant.See further discussion in liquidity section of Item 7, “Management’s Discussionand 

40

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Analysis of Financial Condition and Results ofOperations.”

There were no repurchases of any of the Company’scommon stock by or on behalf of the Company during the fourth quarter of 2006and no sales of unregistered equity securities by the Company during the fiscalyear ended December 31, 2006.

**Stock Performance Graph**

The following graph compares the performance throughDecember 31, 2006 of a hypothetical $100 investment made on August 17, 2005 in(a) our common stock, (b) the S&P 500 Index ® and (c) the S&PSupercomposite Specialty Chemicals Index.

**Item 6.Selected Financial Data.**

The following selected consolidated financial data of theCompany’s five most recent years ended December 31, 2006 should be read inconjunction with Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and Item 8, “Financial Statements andSupplementary Data.” The Statement of Operations data set forth below withrespect to the three years in the period ended December 31, 2006 and theBalance Sheet data as of December 31, 2006 and 2005, are derived from theCompany’s audited financial statements included elsewhere in this document. TheStatement of Operations data for the years ended December 31, 2003 and 2002 andthe Balance Sheet data as of December 31, 2004, 2003 and 2002 are derived fromaudited consolidated financial statements not included herein.

41

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| ** **                                                                                                     | ** ** | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|--------------------------------------------|------------|
| **($ in millions, except per share data; shares in thousands)**   | ** ** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Statement of operations data:**                                                                              |       |       |                                       |       |   |   |   |   |   |   |   |   |
| Net sales:                                                                                                     |       |       |                                       |       |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                                                           |       | $          | 918.3                                      |       | $ | 842.0 |   | $ | 321.1 |   | $ | — |   | $ | — |   |
| Performance  Additives                                                                                         |       | 766.3      |                                       | 680.7      |   | 630.9 |   | 477.3 |   | 443.8 |   |
| Titanium Dioxide  Pigments                                                                                     |       | 441.1      |                                       | 430.5      |   | 175.7 |   | — |   | — |   |
| Advanced  Ceramics                                                                                             |       | 389.6      |                                       | 369.6      |   | 146.3 |   | — |   | — |   |
| Specialty  Compounds                                                                                           |       | 251.0      |                                       | 237.5      |   | 200.4 |   | 176.4 |   | 168.8 |   |
| Electronics                                                                                                    |       | 208.9      |                                       | 181.8      |   | 168.1 |   | 143.6 |   | 147.3 |   |
| Total net sales                                                                                                |       | 2,975.2    |                                       | 2,742.1    |   | 1,642.5 |   | 797.3 |   | 759.9 |   |
| Cost of products sold                                                                                          |       | 2,045.2    |                                       | 1,877.0    |   | 1,185.7 |   | 581.4 |   | 542.5 |   |
| Total gross profit                                                                                             |       | 930.0      |                                       | 865.1      |   | 456.8 |   | 215.9 |   | 217.4 |   |
| Selling, general and  administrative expenses                                                                  |       | 584.6      |                                       | 522.7      |   | 314.6 |   | 118.0 |   | 112.9 |   |
| Impairment charges (1)                                                                                         |       | 2.2        |                                       | 0.4        |   | 11.0 |   | 35.0 |   | 50.0 |   |
| Restructuring charges,  net (2)                                                                                |       | 5.2        |                                       | 15.4       |   | 1.1 |   | 1.8 |   | 1.2 |   |
| Management services  agreement termination fee (3)                                                             |       | —     |                                       | 10.0       |   | — |   | — |   | — |   |
| Other, net (4)                                                                                                 |       | (0.2       | )                                          | (4.4       | ) | — |   | — |   | — |   |
| Operating income                                                                                               |       | 338.2      |                                       | 321.0      |   | 130.1 |   | 61.1 |   | 53.3 |   |
| Other income  (expenses):                                                                                      |       |       |                                       |       |   |   |   |   |   |   |   |
| Interest  expense, net (5)                                                                                     |       | (195.7     | )                                          | (209.3     | ) | (161.1 | ) | (112.3 | ) | (108.2 | ) |
| Loss on early  extinguishment of debt (6)                                                                      |       | —     |                                       | (26.6      | ) | — |   | — |   | — |   |
| Refinancing  expenses (7)                                                                                      |       | —     |                                       | (1.0       | ) | (27.1 | ) | (38.3 | ) | — |   |
| Loss on  receivables sold                                                                                      |       | —     |                                       | —     |   | — |   | — |   | (1.2 | ) |
| Foreign exchange  gain (loss) (8)                                                                              |       | 8.6        |                                       | 114.5      |   | (126.2 | ) | (18.5 | ) | (24.6 | ) |
| Other, net (9)                                                                                                 |       | 1.8        |                                       | 2.6        |   | (2.8 | ) | — |   | — |   |
| Income (loss) before  taxes                                                                                    |       | 152.9      |                                       | 201.2      |   | (187.1 | ) | (108.0 | ) | (80.7 | ) |
| Income tax provision  (benefit)                                                                                |       | 72.6       |                                       | 64.2       |   | 27.1 |   | (16.3 | ) | (12.5 | ) |
| Net income (loss) from  continuing operations                                                                  |       | 80.3       |                                       | 137.0      |   | (214.2 | ) | (91.7 | ) | (68.2 | ) |
| Income (loss) from  discontinued operations, net of tax (10)                                                   |       | 27.9       |                                       | (44.2      | ) | (1.9 | ) | — |   | — |   |
| Minority interest from  discontinued operations                                                                |       | (5.2       | )                                          | 3.0        |   | — |   | — |   | — |   |
| Net income (loss)                                                                                              |       | $          | 103.0                                      |       | $ | 95.8 |   | $ | (216.1 | ) | $ | (91.7 | ) | $ | (68.2 | ) |
|                                                                                                           |       |       |                                       |       |   |   |   |   |   |   |   |
| Net income (loss) from  continuing operations applicable to common shareholders — basic and diluted  (11) |       | $     | 80.3                                       |       | $  | 132.7 |   | $  | (218.4 | ) | $  | (102.9 | ) | $  | (68.2 | ) |
| Net income (loss)  applicable to common shareholders — basic and diluted (11)                             |       | $     | 103.0                                      |       | $  | 91.5 |   | $  | (220.3 | ) | $  | (102.9 | ) | $  | (68.2 | ) |
|                                                                                                           |       |       |                                       |       |   |   |   |   |   |   |   |
| **Earnings (loss) per common  share data (12):**                                                               |       |       |                                       |       |   |   |   |   |   |   |   |
| Basic earnings (loss)  per common share:                                                                       |       |       |                                       |       |   |   |   |   |   |   |   |
| Earnings (loss)  from continuing operations                                                                    |       | $          | 1.09                                       |       | $ | 2.24 |   | $ | (6.61 | ) | $ | (4.96 | ) | $ | (3.29 | ) |
| Earnings (loss)  from discontinued operations, net of tax                                                      |       | 0.31       |                                       | (0.69      | ) | (0.05 | ) | — |   | — |   |
| Basic earnings  (loss) per share                                                                               |       | $          | 1.40                                       |       | $ | 1.55 |   | $ | (6.66 | ) | $ | (4.96 | ) | $ | (3.29 | ) |
| Weighted average  number of shares outstanding                                                                 |       | 73,782     |                                       | 59,133     |   | 33,054 |   | 20,739 |   | 20,746 |   |
| Diluted earnings (loss)  per common share:                                                                     |       |       |                                       |       |   |   |   |   |   |   |   |
| Earnings (loss)  from continuing operations                                                                    |       | $          | 1.07                                       |       | $ | 2.21 |   | $ | (6.61 | ) | $ | (4.96 | ) | $ | (3.29 | ) |
| Earnings (loss)  from discontinued operations, net of tax                                                      |       | 0.30       |                                       | (0.69      | ) | (0.05 | ) | — |   | — |   |
| Diluted earnings  (loss) per share                                                                             |       | $          | 1.37                                       |       | $ | 1.52 |   | $ | (6.66 | ) | $ | (4.96 | ) | $ | (3.29 | ) |
| Weighted average  number of shares outstanding                                                                 |       | 75,044     |                                       | 60,002     |   | 33,054 |   | 20,739 |   | 20,746 |   |
|                                                                                                           |       |       |                                       |       |   |   |   |   |   |   |   |
| **Cash flow data:**                                                                                            |       |       |                                       |       |   |   |   |   |   |   |   |
| Net cash provided by  (used in) operating activities                                                           |       | $          | 302.6                                      |       | $ | 257.6 |   | $ | 162.3 |   | $ | 42.6 |   | $ | (4.1 | ) |
| Net cash used in  investing activities                                                                         |       | (248.8     | )                                          | (276.6     | ) | (2,232.9 | ) | (48.5 | ) | (30.4 | ) |
| Net cash (used in) provided  by financing activities                                                           |       | (102.7     | )                                          | 8.9        |   | 2,134.4 |   | (1.7 | ) | (18.9 | ) |
| Effect of exchange rate  changes on cash                                                                       |       | (13.8      | )                                          | 1.0        |   | 5.6 |   | 3.8 |   | 2.6 |   |
| Net (decrease) increase in cash and cash equivalents                                                           |       | $          | (62.7                                      | )          | $ | (9.1 | ) | $ | 69.4 |   | $ | (3.8 | ) | $ | (50.8 | ) |

 

42

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| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Other data**:                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                        |       | $                                          | 191.0      |   | $ | 170.6 |   | $ | 106.6 |   | $ | 52.4 |   | $ | 46.3 |   |
| Capital expenditures,  excluding capital leases       |       | 171.9                                      |       | 163.5 |   | 81.0 |   | 34.3 |   | 36.0 |   |
| EBITDA (13)                                           |       | 539.6                                      |       | 581.1 |   | 80.6 |   | 56.7 |   | 73.8 |   |
| Non-cash (gains) and  charges included in EBITDA (14) |       | (6.4                                       | )          | (100.7 | ) | 151.4 |   | 90.4 |   | 74.6 |   |
| Other special charges included in EBITDA (15)         |       | 88.3                                       |       | 90.5 |   | 100.4 |   | 2.4 |   | 2.0 |   |
|                                                       |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| **($ in millions)**                    | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Balance sheet data:**                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                                     | 27.7       |   | $ | 100.5 |   | $ | 91.3 |   | $ | 41.9 |   | $ | 45.7 |   |
| Working capital (16)                             |       | 625.4                                 |       | 556.5 |   | 389.5 |   | 110.6 |   | 73.2 |   |
| Property, plant and  equipment, net              |       | 1,374.9                               |       | 1,237.6 |   | 1,334.5 |   | 418.6 |   | 407.0 |   |
| Total assets (1)                                 |       | 5,219.8                               |       | 4,816.5 |   | 5,388.6 |   | 1,460.7 |   | 1,425.3 |   |
| Total long-term debt,  including current portion |       | 2,838.7                               |       | 2,761.2 |   | 3,280.5 |   | 1,063.5 |   | 1,012.0 |   |
| Redeemable convertible  preferred stock          |       | —                                |       | — |   | 34.3 |   | 30.1 |   | — |   |
| Stockholders’ equity                        |       | 1,120.5                               |       | 834.7 |   | 624.0 |   | 126.1 |   | 172.9 |   |
|                                                  |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)           Werecorded impairment charges of $2.2 million related to the write-down ofproperty, plant and equipment in 2006 within our Specialty Chemicals segmentand $0.4 million related to the write-down of property, plant and equipment in2005 within our Performance Additives segment. As part of our impairmenttesting in 2004, 2003 and 2002, we determined that there were goodwillimpairments of $4.0 million, $19.3 million and $50.0 million, respectively, inour Electronics segment. We also determined that there was a property, plantand equipment impairment of $7.0 million and $15.7 million in 2004 and 2003,respectively, in our Electronics segment. See Note 17, “Impairment Charges,”for further details.

(2)           Restructuringcharges include certain expenses incurred in connection with severance chargesand asset write-offs related to consolidations and cessations of certain of ouroperations. See Note 18, “Restructuring Liability,” for further details.

(3)           Inconnection with the IPO, we recorded an expense of $10.0 million in the thirdquarter of 2005 to terminate the management services agreement with affiliatesof KKR and DLJ Merchant Banking Partners III, L.P. (“DLJMB”).

(4)           We recorded net gains of $0.2 millionand $4.4 million (including a gain of $1.7 million related to the sale andleaseback of a facility in the Specialty Chemicals segment) for the years endedDecember 31, 2006 and 2005, respectively, related to asset sales.

(5)           For the years ended December31, 2006, 2005, 2004, 2003 and 2002, interest expense, net included gains(losses) of $7.2 million, $22.4 million, $6.0 million, $(6.0) million and$(11.6) million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency swaps for the periods.Included in these gains (losses) within interest expense, net for the yearsended December 31, 2006, 2005, 2004 and 2003 are mark-to-market (losses) gainsof $(2.2) million, $3.6 million, $0.8 million and $(10.5) million,respectively, related to cross-currency swaps. In addition, for the years endedDecember 31, 2006, 2005, 2004, 2003 and 2002, interest expense, net includes$9.7 million, $10.7 million, $7.4 million, $6.1 million and $8.0 million,respectively, of amortization expense related to deferred financing costs.

(6)           Inthe third quarter of 2005, the Company paid a redemption premium of $13.2million to redeem long-term debt and wrote off $13.4 million of deferredfinancing costs associated with the debt repaid in connection with the IPO.

(7)           In December 2005, we expensed$1.0 million in connection with the third amendment under the senior securedcredit facilities. In 2004, we wrote off $27.1 million of deferred financing costsin connection with debt repayment and refinancing. In July 2003, we wrote off$36.9 million of deferred debt issuance costs relating to our previouslong-term debt that was repaid as part of the July 2003 debt refinancing. Inaddition, we expensed $1.4 million in December 2003 of investment bankingand professional fees in connection with the refinancing of borrowings underthe then new senior credit facilities.

(8)           Foreign exchange gain (loss)represents the translation impact on our euro-denominated debt resulting fromthe (weakening) strengthening of the euro against the U.S. dollar during theapplicable periods. In 2004, this amount also included a $10.9 millionmark-to-market realized loss on foreign currency derivative agreements that weentered into in connection with the Dynamit Nobel Acquisition.

(9)           The Company recorded $1.8million of income in 2006 primarily related to the correction of an errorrelated to a previously

43

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unrecorded asset in the Titanium Dioxide Pigmentssegment. The effect of this adjustment to our consolidated financial statementsfor the year ended December 31, 2005 is not material. In 2005, we recorded $2.6million of income primarily related to the reversal of a bad debt reserve of$2.9 million related to a note receivable from the buyer in connection with thesale of a business by Dynamit Nobel prior to the Dynamit Nobel Acquisition forwhich the cash was collected from the buyer in 2005. In 2004, the loss of $2.8million primarily relates to a stamp duty tax paid on certain assetstransferred in the United Kingdom in connection with the KKR Acquisition.

(10)         Asnoted above, we completed the sale of our Groupe Novasep subsidiary on January9, 2007 and have accounted for the results of the former Groupe Novasepreportable segment as a discontinued operation in the accompanying consolidatedstatements of operations (see Note 2, “Discontinued Operations,” for furtherdetails). An impairment charge of $44.7 million was recorded in 2005 primarilyrelated to the write-down of property, plant and equipment in conjunction withthe downsizing of the Rohner facility within our former Groupe Novasep segment.In addition, in March 2006, we sold Rohner AG and recorded a pre-tax loss of $11.5million.

(11)         Representsthe net income (loss) applicable to common shareholders after reducing netincome (loss) by the amount of accumulated and unpaid dividends and theaccretion to the redemption value of the redeemable convertible preferred stockfor the respective period. See Note 14, “Earnings Per Share.”

(12)         Net earnings (loss)per share is calculated by dividing net income (loss) applicable to commonshareholders by the weighted average shares outstanding.

(13)         EBITDA is definedas net income (loss) plus interest expense, net, income tax provision (benefit)and depreciation and amortization. EBITDA is not a recognized term under U.S.GAAP and does not purport to be an alternative to net income (loss) as anindicator of operating performance or to cash flows from operating activitiesas a measure of liquidity. Additionally, EBITDA is not intended to be a measureof free cash flow for management’s discretionary use, as it does not considercertain cash requirements such as interest payments, tax payments and debtservice requirements.

The amounts shown for EBITDA differ from the amountscalculated under the definition of consolidated EBITDA used in our debtagreements. The definition of EBITDA used in our debt agreements permitsfurther adjustments for certain cash and non-cash charges and gains; theindentures governing the 2011 Notes and the 2014 Notes exclude certainadjustments permitted under the senior secured credit agreement. ConsolidatedEBITDA as adjusted is used in our debt agreements to determine compliance withfinancial covenants and our ability to engage in certain activities, such asincurring additional debt and making certain payments. In addition to covenantcompliance, our management also uses consolidated EBITDA as adjusted to assessour operating performance and to calculate performance-based cash bonuses anddetermine whether certain performance-based stock options vest, as both suchbonuses and options are tied to EBITDA as adjusted targets. For discussion ofthe adjustments, uses and the limitations on the use of Adjusted EBITDA, seeItem 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Factors Which Affect Our Results of Operations—SpecialNote Regarding Non-GAAP Financial Measures.”

The following table sets forth a reconciliation of netincome (loss) to EBITDA for the periods indicated:
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income  (loss)                            |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) | $ | (91.7 | ) | $ | (68.2 | ) |
| (Income) loss  from discontinued operations   |       | (27.9                                      | )          | 44.2 |   | 1.9 |   | — |   | — |   |
| Minority  interest in discontinued operations |       | 5.2                                        |       | (3.0 | ) | — |   | — |   | — |   |
| Net income  (loss) from continuing operations |       | 80.3                                       |       | 137.0 |   | (214.2 | ) | (91.7 | ) | (68.2 | ) |
| Income tax  provision (benefit)               |       | 72.6                                       |       | 64.2 |   | 27.1 |   | (16.3 | ) | (12.5 | ) |
| Interest  expense, net                        |       | 195.7                                      |       | 209.3 |   | 161.1 |   | 112.3 |   | 108.2 |   |
| Depreciation and  amortization                |       | 191.0                                      |       | 170.6 |   | 106.6 |   | 52.4 |   | 46.3 |   |
| EBITDA                                        |       | 539.6                                      |       | 581.1 |   | 80.6 |   | 56.7 |   | 73.8 |   |
|                                               |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(14)         EBITDA, as definedabove, contains the following non-cash charges and gains for which we believeadjustment is permitted under our senior secured credit agreement, each ofwhich is described under Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Factors Which Affect Our Resultsof Operations—Special Charges and Credits”:

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| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Impairment  charges                        |       | $                                          | 2.2        |   | $ | 0.4 |   | $ | 11.0 |   | $ | 35.0 |   | $ | 50.0 |   |
| Write-off of  deferred debt issuance costs |       | —                                     |       | 13.4 | (a) | 25.1 |   | 36.9 |   | — |   |
| Foreign exchange  (gain) loss              |       | (8.6                                       | )          | (114.5 | ) | 115.3 |   | 18.5 |   | 24.6 |   |
|                                       |       | $                                          | (6.4       | ) | $ | (100.7 | ) | $ | 151.4 |   | $ | 90.4 |   | $ | 74.6 |   |

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(a) Represents pre-taxcharges related to the write-off of deferred debt issuance costs associatedwith debt repaid with IPO proceeds of $13.4 million. This amount is reported in“loss on early extinguishment of debt” in the “Consolidated Statements ofOperations.”

(15)         In addition tonon-cash charges and gains, our EBITDA contains the following other special chargesand gains for which we believe adjustment is permitted under our senior securedcredit agreement, each of which is described under Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—FactorsWhich Affect Our Results of Operations—Special Charges and Credits”:
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Restructuring  and related charges (a)                 |       | **$**                                      | 5.6        |   | $ | 15.9 |   | $ | 1.1 |   | $ | 1.8 |   | $ | 1.2 |   |
| CCA litigation  defense costs                          |       | 0.8                                        |       | 1.2 |   | — |   | — |   | — |   |
| Systems/organization  establishment expenses           |       | 10.7                                       |       | 3.9 |   | 4.8 |   | 1.6 |   | 1.5 |   |
| Cancelled  acquisition and disposition costs           |       | 2.5                                        |       | 1.2 |   | 0.5 |   | 1.9 |   | 0.3 |   |
| Costs incurred  related to debt modifications          |       | —                                     |       | 1.0 |   | 2.0 |   | 1.4 |   | — |   |
| Business  interruption costs and insurance recovery    |       | —                                     |       | — |   | — |   | (4.5 | ) | (2.2 | ) |
| Stamp duty tax                                         |       | —                                     |       | — |   | 4.0 |   | — |   | — |   |
| Inventory  write-up reversal                           |       | 1.1                                        |       | — |   | 53.8 |   | 0.2 |   | — |   |
| Management  services agreement termination fee         |       | —                                     |       | 10.0 |   | — |   | — |   | — |   |
| Long-term debt  redemption premium                     |       | —                                     |       | 13.2 |   | — |   | — |   | — |   |
| Gains related to  asset sales                          |       | (0.2                                       | )          | (4.4 | ) | — |   | — |   | — |   |
| Loss on  receivables sold                              |       | —                                     |       | — |   | — |   | — |   | 1.2 |   |
| Foreign exchange  loss on foreign currency derivatives |       | —                                     |       | — |   | 10.9 |   | — |   | — |   |
| Other                                                  |       | (0.5                                       | )          | (3.4 | ) | 2.7 |   | — |   | — |   |
| Discontinued  operations (b)                           |       | 68.3                                       |       | 51.9 |   | 20.6 |   | — |   | — |   |
|                                                   |       | $                                          | 88.3       |   | $ | 90.5 |   | $ | 100.4 |   | $ | 2.4 |   | $ | 2.0 |   |

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(a) Includes inventorywrite-downs of $0.4 million and $0.5 million recorded in cost of products soldfor the years ended December 31, 2006 and 2005, respectively.

(b) For a reconciliation of net income (loss) to AdjustedEBITDA which sets forth the applicable components of Adjusted EBITDA, see Item7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

(16)         Working capital isdefined as current assets less current liabilities.

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**Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

*The following discussion and analysis of ourfinancial condition and results of operations covers periods prior andsubsequent to the Dynamit Nobel Acquisition consummated on July 31, 2004. Inconnection with the Dynamit Nobel Acquisition, we entered into new financingarrangements and significantly altered our capital structure. The historicalfinancial information of Rockwood during the periods prior to the Dynamit NobelAcquisition included in this Annual Report does not reflect the significantimpact the Dynamit Nobel Acquisition has had on us. The results of operationsof the Dynamit Nobel businesses for the periods ended subsequent to July 31,2004 are included in our consolidated financial statements for the years endedDecember 31, 2006, 2005 and 2004. The Groupe Novasep combination was completedon December 31, 2004 (see Note 5, “Acquisitions”); however, no results ofoperations are reflected in our income statement for the year ended December31, 2004. The results of operations and cash flows of the rheological additivesand carbonless developers businesses of Süd-Chemie AG are not included in thetwelve month period ended December 31, 2005 as the acquisition was completed onDecember 30, 2005.*

*On January 9, 2007, we completed the sale of ourGroupe Novasep segment. As a result, our consolidated financial statements havebeen reclassified to reflect the Groupe Novasep segment as a discontinuedoperation for all periods presented. See Note 2, “Discontinued Operations,” forfurther details.*

*The following discussion contains forward-lookingstatements that involve numerous risks and uncertainties. Our actual resultscould differ materially from those discussed in the forward-looking statementsas a result of these risks and uncertainties, including those set forth underItem 1, “Business—Forward-Looking Statements” and Item 1A, “Risk Factors.” Youshould read the following discussion and analysis together with Item 6, “SelectedFinancial Data,” our consolidated financial statements and the notes to thosestatements that appear elsewhere in this Annual Report. Amounts may notrecalculate due to rounding differences.*

*Given the significance of the Dynamit NobelAcquisition, we have included a limited discussion of the results of ouroperations on a pro forma basis as if the Dynamit Nobel Acquisition had takenplace on January 1, 2004. See “Pro Forma Net Sales, Income (Loss) before Taxes andAdjusted EBITDA” below. The results of operations on a pro forma basis alsoassumes the pigments and dispersions acquisition and the Groupe Novasepcombination had also taken place on January 1, 2004.*

**General**

We are a global developer, manufacturer and marketerof technologically advanced, high value-added specialty chemicals and advancedmaterials. We serve more than 60,000 customers across a wide variety ofindustries and geographic areas. We operate through six business segments: (1) SpecialtyChemicals; (2) Performance Additives; (3) Titanium Dioxide Pigments; (4)Advanced Ceramics; (5) Specialty Compounds; and (6) Electronics. Of these sixsegments, we acquired Specialty Chemicals, Titanium Dioxide Pigments andAdvanced Ceramics in the Dynamit Nobel Acquisition.

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

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

Our selling, general and administrative expensesinclude research and development costs, sales and marketing, divisionalmanagement expenses and corporate services including cash management, legal,benefit plan administration and other administrative and professional services.

We financed the Dynamit Nobel Acquisition primarilythrough the proceeds of net equity investments of $425.0 million from KKR andDLJMB, term loans of approximately $1,454.2 million and a senior subordinatedloan facility of approximately $854.5 million, as described in detail under “Liquidityand Capital Resources” below. We later refinanced significant portions of thisindebtedness with indebtedness bearing lower interest rates. Nonetheless, as aresult of the Dynamit Nobel Acquisition, our interest expense currently is, andwill continue to be, higher than it was prior to the Dynamit Nobel Acquisition.As a result of the repayment of debt in connection with the IPO, interestexpense will be lower than it was prior to the IPO.

We are focused on growth, productivity, costreduction, margin expansion and debt reduction. In connection with this focus,among other things:

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·                   Wehave cut costs, reduced overhead and eliminated duplicative positions in bothacquired and existing businesses. For example, during the first quarter of2006, we closed facilities in the United States and the U.K. in our WaferReclaim business in our Electronics segment. We have also announced theconsolidation in 2007 of several U.K. facilities resulting from the recentacquisition by our Specialty Compounds segment. We also implemented otherrestructuring measures in our other segments, including the closure of ourBaulking, U.K. facility in our Clay-based Additives business;

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

·                    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; and

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

**Factors Which Affect Our Results of Operations**

**Our Markets**

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

***Specialty Chemicals***

·                    Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aerospace industries. In 2005, we benefited from agrowth in demand for most of the markets and regions we serve, especially inthe aerospace and automotive industry which continued in 2006. Despite the lessfavorable automotive conditions in the U.S., we have been able to sustain salesgrowth 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 2006 in all markets and regionsserved, especially in the aerospace and coil industries, as price and volumeincreases offset raw material cost increases. We expect the Surface Treatmentbusiness to grow in 2007 in all markets as price and volume increases areexpected to offset raw material cost increases and higher personnel costs tosupport the continuing growth of the business.

·                    Demandfor our lithium products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven  bydemand for lithium carbonate in industrial applications, the aluminum business,glass ceramics, cement and the general  demandin 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 and 2006. Growth in the Fine Chemicals business occurredin 2006 in most market segments, especially driven by lithium salt applicationsthrough price increases and strong demand for lithium applications,particularly sales of butyllithium, specialty products to the pharmaceuticalindustry and lithium battery products. Tight supplies in the global market andunfavorable weather conditions at the lithium ponds in Chile in early 2006 ledto shortages in lithium salts as a raw material and customer demand for lithiumcarbonate was not completely satisfied. Although we expect shortages forlithium carbonate to continue for 2007, growth in the Fine Chemicals businessis expected in all market segments, particularly driven by lithium saltapplications through price increases and higher demand for lithium specialties.

***Performance Additives***

·                    Althoughthe growth in demand in the North American construction market in general hasslowed, sales in our  Color Pigments andServices business in North America increased in 2006 on higher constructionvolumes and selling price  increases thatwere necessary to recover raw material and energy cost increases. Generally, acontinuing trend towards the increased use of colored concrete products in theNorth American construction market has had a positive effect on our ColorPigments and Services business line. Growth in North America in 2007 isexpected in all markets, especially in the construction market on highervolumes and selling price increases to offset raw material and energy costincreases. Demand for treated wood was negatively impacted in 2006 by theincreasing use of wood substitutes and we expect this trend to continue in2007.

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·       Demandin certain European end-use markets over the last few years has slowed. Thisaffected sales of Color Pigments and Services in the construction market and,as a result, we experienced a decrease in European construction volumes in ourColor Pigments and Services business in 2005 and 2006. European constructionsales in our Color Pigments and Services business increased slightly in 2006 asthe higher selling prices necessary to recover raw material and energy costincreases offset lower volumes. European construction sales in 2007 areexpected to increase on higher selling prices and increased volumes resultingfrom a stronger European economy.

·                      Thechange in the market to environmentally advanced wood treatment chemicalproducts, such as ACQ, and the phase out of chromated copper arsenate, or CCA,for residential use had a positive impact on our Timber Treatment Chemicalsbusiness in 2005, which is a leading supplier of these higher margin products.However, in the Timber Treatment Chemicals business, our ACQ market position wasnegatively impacted in 2006 by some customer losses and competitive pricingpressure. In addition, the expiration of the ACQ patent in May 2007 could havea negative impact on our ACQ market position,sales and margins.

·                      OurClay-based Additives business supplies specialty rheology modifiers andadditives, both clay-based and synthetic, to a variety of end-use markets. For2006, the major drivers of growth in the Clay-based Additives business havebeen the acquisition of Süd-Chemie’s rheological additives and carbonless claybusinesses, continued strength in oilfield sales and growth in additives forwater-based coatings. Growth is expected in 2007 from continued strength inoilfield, coatings and inks sales.

·                      Rawmaterial costs have increased in general in the Performance Additives segmentsince 2004 and continue to trend upward. In the Color Pigments and Servicesbusiness, selling price increases were initiated to partially offset theincreases in raw material and energy costs and we expect to continue toimplement increases in 2007. In 2006, the Timber Treatment Chemicals businessexperienced record high costs for copper, a primary component in the ACQproduction process. Costs of mono-ethanolamine were also higher in 2006. The businesswas unable to pass on these increased material costs to customers in 2006, butselling price increases are expected to be implemented in 2007 to partiallyoffset raw material cost increases. In the Clay-based Additives business, priceincreases were implemented in 2005 in selective product lines and continued in2006 in a majority of product lines to partially offset energy and raw materialcost increases. Further price increases are expected in 2007 as needed tooffset any additional increases in raw material and energy costs.

***Titanium Dioxide Pigments***

·                      Demandfor our titanium dioxide products in anatase grade is driven mainly by demandin the synthetic fiber industry, while demand for titanium dioxide products inrutile grade and our functional additives is driven by demand in the coatings,paper and plastics industries. We experienced an unexpected decrease in volumeof our titanium dioxide products in anatase grade in 2005 due, in part, to thelower cost of cotton, which negatively affected demand for synthetic fibers andin turn our products. Volumes and selling prices in the fiber anatase businessincreased in 2006 and are expected to continue to increase in 2007. Ourfunctional additives business increased in 2006 on higher selling prices and volumes,which is expected to continue in 2007.

·                      Throughout2005 and 2006, 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 were down slightly in2006 as lower volumes were partially offset by higher selling prices. Sales oftitanium dioxide products in rutile grade are expected to increase in 2007 onhigher volumes and some selling price increases.

***Advanced Ceramics***

·                      Demandfor our ceramic medical devices is mainly tied to the aging population inEurope and the United States. As a result  ofthis demographic as well as our market share penetration, the volume of ourproducts used in medical device applications  soldhas experienced double-digit growth each year from 2001 through 2005. However,in 2006 some customers in the U.S. reduced their demand due to high inventorylevels and delayed approvals. As a result, demand stabilized which resulted inlower volumes in 2006. Growth of our medical device applications is expected in2007 on higher volumes and slightly higher selling prices.

·                      Salesof ceramic products for use in cutting tool products and mechanical systemswere higher in 2006 as volume increases were partially offset by the negativeimpact of pricing pressure from Asian competitors. Growth of ceramic productsfor use in cutting tool products and mechanical systems is expected in 2007 onhigher volumes and increased market share. Selling prices in our electronicproducts business as well as for some Piezo applications were lower in 2006. In2007, sales of our electronics products business is expected to decrease onlower volumes.

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Sales of our Piezo applications are expected to behigher in 2007 from increased volumes partially offset by continued lowerselling prices for tape-related products.

***Specialty Compounds***

·                      Our largestproduct line in the Specialty Compounds segment is wire and cable compounds.Sales within this product line are dependent upon the telecommunications marketand related sectors, specifically demand for high-end voice and datacommunication wire and cable, for which our Specialty Compounds segment is a significantprovider of sheathing materials. Sales for these wire and cable products wereup slightly in 2006 and are expected to be higher in 2007 primarily due to theacquisition of the Megolon division of Scapa Group, plc. Newly developednon-halogen products for wire and cable data communication, military and otherapplications have expanded business in North America and created opportunitiesin 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, such as automotive. Our net sales in medical and regulated packagingand consumer/industrial thermoplastic elastomers were up in 2006. Expectationsare for continued growth in these markets for 2007. We are focusing more of ourefforts towards increasing high margin specialty products, in particular,thermoplastic elastomers, and less of our efforts in automotive and footwear.

·                      Theprice of ammonium octamolybdate (“AOM”) and polyvinyl chloride (“PVC”) resinand plasticizers, key raw materials  usedin the production of wire and cable products, have increased since 2004.Selling price increases were successfully initiated in 2005 and 2006 to helpoffset the raw materials price increase to help compensate for the higher rawmaterial costs. Raw material prices are not expected to be as volatile in 2007.

***Electronics***

·                      Demand forour Electronics products generally follows the activity levels of semiconductorand printed circuit board manufacturers. The global semiconductor and printedcircuit board (“PCB”) markets are cyclical in nature. Worldwide sales ofsemiconductors increased in 2006 and we expect sales to continue to rise in2007 driven by strong demand for consumer electronics, including cell phonesand PC’s. The printed circuit board industry in the United States and Europedeclined in 2005, but improved in 2006, while the market in Asia experiencedsignificant growth during this period. Despite the declines in the UnitedStates and Europe in 2005, volumes in our electronic chemicals businessincreased in 2005 and 2006, particularly in Asia, which provides nearly half ofthe global market. We expect this trend to continue in 2007.

·                      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, we have experienced pricing pressure incertain businesses, particularly with respect to photomasks in Europe due tovery aggressive competition. We expect that this pricing pressure will continueduring 2007.

**Global Exposure**

We operate a geographically diverse business. Of our2006 net sales, 49% were shipments to Europe, 34% to North America(predominantly the United States) and 17% to the rest of the world. For ageographic description of the origin of our net sales and location of ourlong-lived assets, see Note 4, “Segment Information.”

We estimate that we sold to customers in more than 60countries during this period. Currently, we serve our diverse and extensivecustomer base with 88 manufacturing facilities in 25 countries. Consequently,we are exposed to global economic and political changes, particularly currencyfluctuations that could impact our profitability.

Our sales and production costs are mainly denominatedin U.S. dollars or euros. Our results of operations and financial conditionhave been historically impacted by the fluctuation of the euro against ourreporting currency, the U.S. dollar. For the twelve months ended December 31,2006, the average exchange rate of the euro against the U.S. dollar was highercompared to the same period in 2005. As a result, our net sales, gross profitand operating income were positively impacted. Historically, however, ouroperating margins have not been significantly impacted by currency fluctuationsbecause, in general, sales and costs of products sold are generated or incurredin the same currency, subject to certain exceptions.

**Raw Materials**

Raw materials constituted approximately 53% of our2006 cost of products sold. We have a broad raw material base, with the cost ofno single raw material representing more than 3% of our cost of products soldin 2006. Nonetheless, the significant price fluctuations

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our raw materials have experienced in the past duringperiods of high demand have had an adverse impact on our results of operations.In particular, record high prices for copper used in the Timber TreatmentChemicals business of our Performance Additives segment had a negative impacton results in 2006. We cannot accurately predict the impact of any future priceincreases for raw materials or any raw material shortages on our business as awhole or in specific geographic regions. In addition, we may not be able topass on raw material price increases to our customers.

**Energy Costs**

In 2006, energy purchases represented approximately 5%of our cost of products sold. However, within certain business lines, such asour Titanium Dioxide Pigments segment and the Color Pigments and Services andClay-based Additives businesses of our Performance Additives segment, energycosts are more significant. The cost of products sold for certain of ourbusinesses, including Color Pigments and Services and Clay-based Additives,increases when the price of natural gas in North America rises. Natural gasprices were volatile and continued to increase in North America in 2006. Incontrast, natural gas prices in Europe, where our Titanium Dioxide Pigmentssegment is located, have historically been relatively stable, although priceswere higher in 2006.

**Income Taxes**

As of December 31, 2006, the Company has U.S. federaland foreign Corporate tax loss carryforwards (excluding state and localamounts) of approximately $456.6 million, of which $285.4 million expire inyears 2007 through 2026 and of which $171.2 million have no current expirationdate. Included in the U.S. federal and foreign carryforwards are U.S. federaltax loss carryforwards of $281.0 million, of which $265.2 million expire in2020 and beyond. The Company also has state and local tax loss carryforwards ofapproximately $204.1 million expiring in years 2007 through 2026.

The Company has increased its worldwide valuationallowance during 2006 by $49.2 million, from $50.9 million on a continuingoperations basis to $100.1 million primarily due to increases in the U.S.valuation allowance due to the increase in U.S. deferred tax assets. Theincrease consists of $1.5 million recorded to goodwill in connection with prioryear acquisitions, $31.0 million recorded to other comprehensive income and$16.1 recorded as an expense to continuing operations. The remainder relates toforeign currency fluctuations.

**Acquisitions**

During the periods presented, we made acquisitionspursuant to our business strategy of achieving profitable growth. See Note 5, “Acquisitions,”for further details.

**Special Charges and Credits**

During the periods presented, we incurred certainspecial charges, along with certain other items, substantially in connectionwith the establishment of the post-acquisition corporate entity thatincorporates the business segments acquired in the Dynamit Nobel Acquisition aswell as in connection with the IPO. These items include systems/organizationestablishment expenses, restructuring and related charges, foreign exchangegains and losses and inventory write-up reversals. See “Items excluded fromAdjusted EBITDA” section in Note 4, “Segment Information,” for a discussion ofspecial charges and credits recorded in the years ended December 31, 2006, 2005and 2004.

**Special Note Regarding Non-GAAP Financial Measures**

A non-GAAP financial measure is generally defined bythe SEC as one that purports to measure historical or future financialperformance, financial position or cash flows but excludes or includes amountsthat would not be so adjusted in the most comparable U.S. GAAP measure. Fromtime to time in this management’s discussion and analysis, we disclose non-GAAPfinancial measures, primarily Adjusted EBITDA, as defined below.

**Definition of Adjusted EBITDA**

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

·                    interestexpense;

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·                    depreciationexpense;

·                    amortizationexpense, including amortization of deferred financing fees;

·                    extraordinarylosses and non-recurring charges;

·                    non-cashcharges;

·                    losses onasset sales;

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

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

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

·                    any fees andexpenses related to permitted acquisitions;

·                    any deductionfor minority interest expense; and

·                    items arisingin connection with CCA litigation related to our Timber Treatment Chemicalsbusiness of our Performance Additives segment;

less:

·                    extraordinarygains and non-recurring gains;

·                    non-cashgains; and

·                    gains on assetsales,

in all cases, subject to certain exclusions.

For presentation purposes within this report, we usethe computation set forth in our senior secured credit agreement as a basis whichreflects management’s interpretations thereof, including treatment ofdiscontinued operations. Specifically, calculation of Adjusted EBITDA accordingto the indentures underlying our 2011 Notes and 2014 Notes excludes certainadjustments prescribed within the senior secured credit agreement. Given thatborrowings under the senior secured credit agreement are secured by most of ourassets and given that the calculation does not materially differ from thecalculation of Adjusted EBITDA for performance measurement purposes, we believethis is the most appropriate computation of Adjusted EBITDA to present.

**Management’s Uses**

We use Adjusted EBITDA on a consolidated basis toassess our operating performance. We believe this financial measure on aconsolidated basis is helpful in highlighting trends in our overall businessbecause the items excluded in calculating Adjusted EBITDA have been deemed bymanagement to have little or no bearing on our day-to-day operatingperformance. It is also the most significant criterion in our calculation ofperformance-based cash bonuses and our determination of whether certain performance-basedstock options vest, both of which are tied to Adjusted EBITDA targets.

We also use Adjusted EBITDA on a consolidated basis asa liquidity measure. We believe this financial measure on a consolidated basisis important in analyzing our liquidity because our senior secured creditagreement and indentures governing the 2011 Notes and 2014 Notes containfinancial covenants that are determined based on Adjusted EBITDA. Thesecovenants are material terms of these agreements, because they governsubstantially all of our long-term debt, which in turn represents a substantialportion of our capitalization. Non-compliance with these financial covenantsunder our senior secured credit facilities—our maximum total leverage ratio andour minimum 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 Adjusted EBITDA on a segment basis as theprimary measure used by our chief operating decision maker to evaluate theongoing performance of our business segments and reporting units. On a segmentbasis, we define Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges determined by our senior management to be non-recurring gains andcharges and certain items deemed by our senior management to have little or nobearing on the day-to-day operating performance of our 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, whichreflects management’s interpretations thereof, including treatment ofdiscontinued operations.

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**Limitations**

Adjusted EBITDA has limitations as an analytical tool,and should not be viewed in isolation and is not a substitute for U.S. GAAPmeasures of earnings and cash flows. Material limitations associated withmaking the adjustments to our earnings and cash flows to calculate AdjustedEBITDA, and using this non-GAAP financial measure as compared to the mostdirectly comparable U.S. GAAP financial measures, include:

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

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

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

·       theresults of our Groupe Novasep segment that was sold in January 2007 have beenreported as a discontinued operation for all periods presented.

An investor or potential investor may find any one orall of these items important in evaluating our performance, results ofoperations, financial position and liquidity. Management compensates for thelimitations of using non-GAAP financial measures by using them only tosupplement our U.S. GAAP results to provide a more complete understanding ofthe factors and trends affecting our business.

Adjusted EBITDA is not an alternative to net income(loss) or income (loss) before taxes or operating income or cash flows fromoperating activities as calculated and presented in accordance with U.S. GAAP.You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAPfinancial measures. We strongly urge you to review the reconciliations ofAdjusted EBITDA to GAAP financial measures and other financial information, ineach case included elsewhere in this Annual Report. We also strongly urge younot to rely on any single financial measure to evaluate our business. Ourmeasure of Adjusted EBITDA may not be comparable to those of other companies.

**Results of Operations**

**Actual Results of Operations**

The following table presents the major components ofour operations on an actual basis and Adjusted EBITDA (the reconciliation tonet income is set forth in—Reconciliation of Net Income to Adjusted EBITDA forthe years ended December 31, 2006, 2005 and 2004), including as a percentage ofnet sales, for the periods presented. See Note 4, “Segment Information,” forsegment information and a reconciliation to income before taxes on a segmentbasis.

52

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| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                | ** ** | ** **                                 | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statement of operations data:**                       |       |                                       |       |   |   |   |   |
| **Net sales:**                                          |       |                                       |       |   |   |   |   |
| Specialty Chemicals                                     |       | **$**                                      | 918.3      |   | $ | 842.0 |   | $ | 321.1 |   |
| Performance Additives                                   |       | 766.3                                      |       | 680.7 |   | 630.9 |   |
| Titanium Dioxide  Pigments                              |       | 441.1                                      |       | 430.5 |   | 175.7 |   |
| Advanced Ceramics                                       |       | 389.6                                      |       | 369.6 |   | 146.3 |   |
| Specialty Compounds                                     |       | 251.0                                      |       | 237.5 |   | 200.4 |   |
| Electronics                                             |       | 208.9                                      |       | 181.8 |   | 168.1 |   |
| Total net sales                                         |       | 2,975.2                                    |       | 2,742.1 |   | 1,642.5 |   |
|                                                    |       |                                       |       |   |   |   |   |
| Gross profit                                            |       | 930.0                                      |       | 865.1 |   | 456.8 |   |
|                                                    |       | 31.3%                                      |       | 31.5 | % | 27.8 | % |
| Selling, general and  administrative expenses           |       | 584.6                                      |       | 522.7 |   | 314.6 |   |
|                                                    |       | 19.6%                                      |       | 19.1 | % | 19.2 | % |
| Impairment charges                                      |       | 2.2                                        |       | 0.4 |   | 11.0 |   |
| Restructuring charges,  net                             |       | 5.2                                        |       | 15.4 |   | 1.1 |   |
| Management services  termination fee                    |       | —                                     |       | 10.0 |   | — |   |
| Other, net                                              |       | (0.2                                       | )          | (4.4 | ) | — |   |
| **Operating income (loss):**                            |       |                                       |       |   |   |   |   |
| Specialty Chemicals                                     |       | 155.0                                      |       | 127.6 |   | 16.3 |   |
|                                                    |       | 16.9%                                      |       | 15.2 | % | 5.1 | % |
| Performance Additives                                   |       | 86.2                                       |       | 106.5 |   | 115.4 |   |
|                                                    |       | 11.2%                                      |       | 15.6 | % | 18.3 | % |
| Titanium Dioxide  Pigments                              |       | 50.3                                       |       | 50.4 |   | 16.0 |   |
|                                                    |       | 11.4%                                      |       | 11.7 | % | 9.1 | % |
| Advanced Ceramics                                       |       | 68.0                                       |       | 64.1 |   | 2.8 |   |
|                                                    |       | 17.5%                                      |       | 17.3 | % | 1.9 | % |
| Specialty Compounds                                     |       | 21.9                                       |       | 21.3 |   | 20.7 |   |
|                                                    |       | 8.7%                                       |       | 9.0 | % | 10.3 | % |
| Electronics                                             |       | 17.4                                       |       | 8.5 |   | (3.2 | ) |
|                                                    |       | 8.3%                                       |       | 4.7 | % | -1.9 | % |
| Corporate costs                                         |       | (60.6                                      | )          | (57.4 | ) | (37.9 | ) |
| Total operating income                                  |       | 338.2                                      |       | 321.0 |   | 130.1 |   |
| **Other income (expenses):**                            |       |                                       |       |   |   |   |   |
| Interest expense, net                                   |       | (195.7                                     | )          | (209.3 | ) | (161.1 | ) |
| Loss on early  extinguishment of debt                   |       | —                                     |       | (26.6 | ) | — |   |
| Refinancing expenses                                    |       | —                                     |       | (1.0 | ) | (27.1 | ) |
| Foreign exchange gain  (loss), net                      |       | 8.6                                        |       | 114.5 |   | (126.2 | ) |
| Other, net                                              |       | 1.8                                        |       | 2.6 |   | (2.8 | ) |
| **Income (loss) before taxes**                          |       | 152.9                                      |       | 201.2 |   | (187.1 | ) |
| Income tax provision                                    |       | 72.6                                       |       | 64.2 |   | 27.1 |   |
| Net income (loss) from  continuing operations           |       | 80.3                                       |       | 137.0 |   | (214.2 | ) |
| Income (loss) from  discontinued operations, net of tax |       | 27.9                                       |       | (44.2 | ) | (1.9 | ) |
| Minority interest in discontinued  operations           |       | (5.2                                       | )          | 3.0 |   | — |   |
| Net income (loss)                                       |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) |
| **Adjusted EBITDA:**                                    |       |                                       |       |   |   |   |   |
| Specialty Chemicals                                     |       | $                                          | 206.6      |   | $ | 174.2 |   | $ | 60.0 |   |
|                                                    |       | 22.5%                                      |       | 20.7 | % | 18.7 | % |
| Performance Additives                                   |       | 134.1                                      |       | 148.3 |   | 149.2 |   |
|                                                    |       | 17.5%                                      |       | 21.8 | % | 23.6 | % |
| Titanium Dioxide  Pigments                              |       | 88.5                                       |       | 86.6 |   | 37.8 |   |
|                                                    |       | 20.1%                                      |       | 20.1 | % | 21.5 | % |
| Advanced Ceramics                                       |       | 104.8                                      |       | 93.8 |   | 35.8 |   |
|                                                    |       | 26.9%                                      |       | 25.4 | % | 24.5 | % |
| Specialty Compounds                                     |       | 31.7                                       |       | 29.5 |   | 28.8 |   |
|                                                    |       | 12.6%                                      |       | 12.4 | % | 14.4 | % |
| Electronics                                             |       | 36.5                                       |       | 26.9 |   | 28.9 |   |
|                                                    |       | 17.5%                                      |       | 14.8 | % | 17.2 | % |
| Corporate costs                                         |       | (49.0                                      | )          | (40.3 | ) | (28.7 | ) |
| Adjusted EBITDA from  continuing operations             |       | 553.2                                      |       | 519.0 |   | 311.8 |   |
| Discontinued operations                                 |       | 68.3                                       |       | 51.9 |   | 20.6 |   |
| Total Adjusted EBITDA                                   |       | $                                          | 621.5      |   | $ | 570.9 |   | $ | 332.4 |   |
|                                                         |            |                                            |            |  |  |  |  |  |  |  |  |

 

53

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| ** **                                              | ** ** | **Change: 2006 versus 2005 ** | ** ** | **Change: 2005 versus 2004 ** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Acquisition** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                                        | ** ** | **%**                                             | ** ** | **FX** | ** ** | ** ** | ** ** | ** ** | ** ** | **%** | ** ** | **FX** | ** ** | **Divestitures,** | ** ** | ** ** | ** ** |
| **($ in millions)**                           | ** ** | **Total**                                         | ** ** | **Change**                                        | ** ** | **Effect (a)** | ** ** | **Organic** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **net** | ** ** | **Organic** | ** ** |
| **Statement of operations data:**                       |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                          |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                     |       | $                                                 | 76.3       |                                              | 9.1        | % | $ | 2.2 |   | $ | 74.1 |   | $ | 520.9 |   | 162.2 | % | $ | (9.6 | ) | $ | 505.7 |   | $ | 24.8 |   |
| Performance Additives                                   |       | 85.6                                              |       | 12.6                                              |       | 1.6 |   | 84.0 |   | 49.8 |   | 7.9 |   | 0.3 |   | 42.4 |   | 7.1 |   |
| Titanium Dioxide  Pigments                              |       | 10.6                                              |       | 2.5                                               |       | 3.1 |   | 7.5 |   | 254.8 |   | 145.0 |   | (9.6 | ) | 249.0 |   | 15.4 |   |
| Advanced Ceramics                                       |       | 20.0                                              |       | 5.4                                               |       | 3.9 |   | 16.1 |   | 223.3 |   | 152.6 |   | (6.0 | ) | 219.2 |   | 10.1 |   |
| Specialty Compounds                                     |       | 13.5                                              |       | 5.7                                               |       | 2.2 |   | 11.3 |   | 37.1 |   | 18.5 |   | 0.7 |   | — |   | 36.4 |   |
| Electronics                                             |       | 27.1                                              |       | 14.9                                              |       | 1.2 |   | 25.9 |   | 13.7 |   | 8.1 |   | 1.7 |   | — |   | 12.0 |   |
| Total net sales                                         |       | 233.1                                             |       | 8.5                                               |       | 14.2 |   | 218.9 |   | 1,099.6 |   | 66.9 |   | (22.5 | ) | 1,016.3 |   | 105.8 |   |
| Gross profit                                            |       | 64.9                                              |       | 7.5                                               |       | 4.5 |   | 60.4 |   | 408.3 |   | 89.4 |   | (8.0 | ) | 358.8 |   | 57.5 |   |
|                                                    |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses           |       | 61.9                                              |       | 11.8                                              |       | 3.0 |   | 58.9 |   | 208.1 |   | 66.1 |   | (6.5 | ) | 213.0 |   | 1.6 |   |
| Impairment charges                                      |       | 1.8                                               |       |                                              |       |   |   | 1.8 |   | (10.6 | ) |   |   |   |   |   |   | (10.6 | ) |
| Restructuring charges                                   |       | (10.2                                             | )          |                                              |       |   |   | (10.2 | ) | 14.3 |   |   |   |   |   |   |   | 14.3 |   |
| Management services  termination fee                    |       | (10.0                                             | )          |                                              |       |   |   | (10.0 | ) | 10.0 |   |   |   |   |   |   |   | 10.0 |   |
| Other, net                                              |       | 4.2                                               |       |                                              |       |   |   | 4.2 |   | (4.4 | ) |   |   |   |   |   |   | (4.4 | ) |
| Total operating expenses                                |       | 47.7                                              |       | 8.7                                               |       | 3.0 |   | 44.7 |   | 217.4 |   | 66.5 |   | (6.5 | ) | 213.0 |   | 10.9 |   |
| **Operating income (loss):**                            |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                     |       | 27.4                                              |       | 21.5                                              |       | 0.1 |   | 27.3 |   | 111.3 |   | 682.8 |   | (1.0 | ) | 77.3 |   | 35.0 |   |
| Performance Additives                                   |       | (20.3                                             | )          | (19.1                                             | )          | (0.1 | ) | (20.2 | ) | (8.9 | ) | (7.7 | ) | 1.6 |   | 3.6 |   | (14.1 | ) |
| Titanium Dioxide  Pigments                              |       | (0.1                                              | )          | (0.2                                              | )          | 0.5 |   | (0.6 | ) | 34.4 |   | 215.0 |   | (1.1 | ) | 28.7 |   | 6.8 |   |
| Advanced Ceramics                                       |       | 3.9                                               |       | 6.1                                               |       | 1.0 |   | 2.9 |   | 61.3 |   | 2,189.3 |   | (1.3 | ) | 36.2 |   | 26.4 |   |
| Specialty Compounds                                     |       | 0.6                                               |       | 2.8                                               |       | 0.1 |   | 0.5 |   | 0.6 |   | 2.9 |   | 0.2 |   | — |   | 0.4 |   |
| Electronics                                             |       | 8.9                                               |       | 104.7                                             |       | — |   | 8.9 |   | 11.7 |   | 365.6 |   | (0.2 | ) | — |   | 11.9 |   |
| Corporate costs                                         |       | (3.2                                              | )          | (5.6                                              | )          | (0.1 | ) | (3.1 | ) | (19.5 | ) | (51.5 | ) | 0.3 |   | — |   | (19.8 | ) |
| Total                                                   |       | 17.2                                              |       | 5.4                                               |       | 1.5 |   | 15.7 |   | 190.9 |   | 146.7 |   | (1.5 | ) | 145.8 |   | 46.6 |   |
| **Other income (expenses):**                            |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                   |       | 13.6                                              |       | (6.5                                              | )          | (0.4 | ) | 14.0 |   | (48.2 | ) | 29.9 |   | (2.0 | ) | — |   | (46.2 | ) |
| Loss on early  extinguishment of debt                   |       | 26.6                                              |       |                                              |       |   |   |   |   | (26.6 | ) |   |   |   |   |   |   |   |   |
| Refinancing expenses                                    |       | 1.0                                               |       |                                              |       |   |   |   |   | 26.1 |   |   |   |   |   |   |   |   |   |
| Foreign exchange gain  (loss), net                      |       | (105.9                                            | )          |                                              |       |   |   |   |   | 240.7 |   |   |   |   |   |   |   |   |   |
| Other, net                                              |       | (0.8                                              | )          |                                              |       |   |   |   |   | 5.4 |   |   |   |   |   |   |   |   |   |
| **Income (loss) before taxes**:                         |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                     |       | 20.7                                              |       |                                              |       |   |   |   |   | 96.5 |   |   |   |   |   |   |   |   |   |
| Performance Additives                                   |       | (12.8                                             | )          |                                              |       |   |   |   |   | (2.4 | ) |   |   |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                              |       | 2.9                                               |       |                                              |       |   |   |   |   | 19.9 |   |   |   |   |   |   |   |   |   |
| Advanced Ceramics                                       |       | 2.3                                               |       |                                              |       |   |   |   |   | 47.9 |   |   |   |   |   |   |   |   |   |
| Specialty Compounds                                     |       | (9.8                                              | )          |                                              |       |   |   |   |   | 1.3 |   |   |   |   |   |   |   |   |   |
| Electronics                                             |       | 10.8                                              |       |                                              |       |   |   |   |   | 15.3 |   |   |   |   |   |   |   |   |   |
| Corporate costs                                         |       | (62.4                                             | )          |                                              |       |   |   |   |   | 209.8 |   |   |   |   |   |   |   |   |   |
| Total                                                   |       | (48.3                                             | )          |                                              |       |   |   |   |   | 388.3 |   |   |   |   |   |   |   |   |   |
| Income tax provision                                    |       | 8.4                                               |       |                                              |       |   |   |   |   | 37.1 |   |   |   |   |   |   |   |   |   |
|                                                    |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) from  continuing operations           |       | (56.7                                             | )          |                                              |       |   |   |   |   | 351.2 |   |   |   |   |   |   |   |   |   |
| Income (loss) from  discontinued operations, net of tax |       | 72.1                                              |       |                                              |       |   |   |   |   | (42.3 | ) |   |   |   |   |   |   |   |   |
|                                                    |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority interest in discontinued  operations           |       | (8.2                                              | )          |                                              |       |   |   |   |   | 3.0 |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                       |       | $                                                 | 7.2        |                                              |       |   |   |   |   |   | $ | 311.9 |   |   |   |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                    |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                     |       | $                                                 | 32.4       |                                              | 18.6       | % | $ | 0.6 |   | $ | 31.8 |   | $ | 114.2 |   | 190.3 | % | $ | (2.1 | ) | $ | 105.2 |   | $ | 11.1 |   |
| Performance Additives                                   |       | (14.2                                             | )          | (9.6                                              | )          | 0.1 |   | (14.3 | ) | (0.9 | ) | (0.6 | ) | 1.0 |   | 5.8 |   | (7.7 | ) |
| Titanium Dioxide  Pigments                              |       | 1.9                                               |       | 2.2                                               |       | 0.9 |   | 1.0 |   | 48.8 |   | 129.1 |   | (1.9 | ) | 50.3 |   | 0.4 |   |
| Advanced Ceramics                                       |       | 11.0                                              |       | 11.7                                              |       | 1.4 |   | 9.6 |   | 58.0 |   | 162.0 |   | (2.1 | ) | 53.3 |   | 6.8 |   |
| Specialty Compounds                                     |       | 2.2                                               |       | 7.5                                               |       | 0.3 |   | 1.9 |   | 0.7 |   | 2.4 |   | 0.2 |   | — |   | 0.5 |   |
| Electronics                                             |       | 9.6                                               |       | 35.7                                              |       | 0.1 |   | 9.5 |   | (2.0 | ) | (6.9 | ) | — |   | — |   | (2.0 | ) |
| Corporate costs and  eliminations                       |       | (8.7                                              | )          | (21.6                                             | )          | — |   | (8.7 | ) | (11.6 | ) | (40.4 | ) | (0.1 | ) | — |   | (11.5 | ) |
| Adjusted EBITDA from  continuing operations             |       | 34.2                                              |       | 6.6                                               |       | 3.4 |   | 30.8 |   | 207.2 |   | 66.5 |   | (5.0 | ) | 214.6 |   | (2.4 | ) |
| Discontinued operations                                 |       | 16.4                                              |       | 31.6                                              |       | 0.5 |   | 15.9 |   | 31.3 |   | 151.9 |   | (1.7 | ) | 36.5 |   | (3.5 | ) |
| Total Adjusted EBITDA                                   |       | $                                                 | 50.6       |                                              | 8.9        | % | $ | 3.9 |   | $ | 46.7 |   | $ | 238.5 |   | 71.8 | % | $ | (6.7 | ) | $ | 251.1 |   | $ | (5.9 | ) |

----

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

54

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***Actual year ended December 31,2006 compared to actual year ended December 31, 2005***

Net sales increased $233.1 million for the year endedDecember 31, 2006 compared with the same period in 2005 as a result of salesincreases in all segments. In particular, our Specialty Chemicals segment hadhigher sales on increased volumes and selling prices to offset higher raw materialcosts. In addition, our Electronics segment posted solid results on increasedsales volumes to the printed circuit board and semiconductor markets. Net salesin our Performance Additives segment benefited from the impact of theacquisition of the Süd-Chemie businesses at the end of 2005 and higher sellingprices to offset higher raw material and energy costs. Lastly, net sales in ourAdvanced Ceramics segment were up primarily from increased volumes ofmechanical systems and mechanical and electronic applications. See furtherdiscussion by segment below.

We also had increased operating income and AdjustedEBITDA in 2006 primarily due to the sales increases noted above. Operatingincome and Adjusted EBITDA results were negatively impacted by higher raw materialand energy costs in all businesses, particularly from the impact of record highcopper costs in 2006 in our Timber Treatment Chemicals business in ourPerformance Additives segment, higher zinc, phosphoric acid and lithium solventcosts in our Specialty Chemicals segment, higher AOM, PVC resin and plasticizercosts in our Specialty Compounds segment and higher zinc and slag costs in ourTitanium Dioxide segment.

Net income from continuing operations decreased $56.7million for the year ended December 31, 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 and higher rawmaterial and energy costs. In October 2005, we designated the majority of oureuro-denominated debt as a net investment hedge. As a result, since October 1,2005, foreign exchange gains and losses are recorded in accumulated othercomprehensive income within stockholders’ equity for as long as the hedgeremains effective. This was partially offset by increased net sales, the losson early extinguishment of debt of $26.6 million recorded in 2005 and themanagement services agreement termination fee of $10.0 million recorded in2005.

Income from discontinued operations, net of tax andminority interest, increased $63.9 million for the year ended December 31, 2006compared with the same period in the prior year primarily due to lossesincurred in 2005 related to capacity utilization issues at the Rohner plant andan impairment charge of $44.7 million recorded in 2005 related to thedownsizing of the Rohner manufacturing facility. This was partially offset bythe pre-tax loss of $11.5 million recorded in 2006 in connection with the saleof Rohner. See Note 2, “Discontinued Operations,” for further details.

Net income increased $7.2 million for the year endedDecember 31, 2006 compared with the same period in the prior year primarily dueto the reasons noted above.

**Net sales**

*Specialty Chemicals*.   Netsales for our Specialty Chemicals segment increased $76.3 million over theprior year, primarily on higher volumes in the Surface Treatment business, andhigher selling prices of $29.8 million in the Fine Chemicals businesses and$11.0 million in the Surface Treatment business. Net sales in the SurfaceTreatment business were favorably impacted by growth in all markets andregions, particularly in general industrial and coil applications. In the FineChemicals business, strong demand for lithium applications, particularly sales ofbutyllithium to the pharmaceutical industry, lithium specialty compounds andlithium battery products, continued to have a favorable impact on sales.Unfavorable weather conditions at our lithium ponds in Chile in early 2006 hada negative impact on sales volumes.

*Performance Additives*.   Netsales for our Performance Additives segment increased $85.6 million over theprior year primarily due to higher selling prices ($17.7 million) and volumes.Higher selling prices were reported in all businesses, particularly the ColorPigments and Services and Clay-based Additives businesses to offset higher rawmaterial and energy costs. Volumes were up primarily in the Clay-basedAdditives, Water Treatment Chemicals and Color Pigments and Servicesbusinesses. In the Clay-based Additives business, volumes were up on increasedsales to the carbonless paper and rheological additives markets primarily fromthe acquisition of the Süd-Chemie businesses on December 30, 2005 and increasedcoatings and inks and oilfield sales. In the Water Treatment Chemicals business,volumes were higher on increased sales of pool and spa chemical products andsurface water products. Higher construction volumes in North America in ourColor Pigments and Services business also had a favorable impact on net sales.Lower volumes of ACQ products in our Timber Treatment Chemicals business had anegative impact on sales year over year.

*Titanium Dioxide Pigments*.   Netsales for our Titanium Dioxide Pigments segment increased $10.6 million overthe prior year. The increase was primarily due to higher selling prices of ourtitanium dioxide products in anatase and rutile grade, as well as volume andselling price increases in our functional additives products. In addition,currency changes of $3.1 million had a positive impact on net sales.

55

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*Advanced Ceramics*.   Netsales for our Advanced Ceramics segment increased $20.0 million over the prioryear. The increase was due to increased sales in most businesses, particularlyfrom increased volumes of mechanical systems and mechanical, electronic andcutting tool applications and the positive impact of currency changes ($3.9million). This increase was partially offset by lower volumes of medicalproducts and selling price declines of $4.9 million primarily in Piezo andelectronic applications.

*Specialty Compounds*.   Netsales for our Specialty Compounds segment increased $13.5 million over theprior year primarily due to the impact of higher selling prices of $12.3million to offset higher raw material costs, a favorable product mix and theimpact of positive currency changes ($2.2 million), partially offset by lowersales volumes. Lower volumes of wire and cable, automotive and footwearproducts had a negative impact on net sales.

*Electronics*.   Net sales forour Electronics segment increased $27.1 million over the prior year primarilydue to higher volumes in our Electronic Chemicals and Photomasks businesses inall regions on sales to the printed circuit board and semiconductor markets.This increase was partially offset by lower volumes in the Wafer Reclaimbusiness primarily due to the closure of our U.K. facility in January 2006 andthe closure of one of our U.S. facilities in March 2006.

**Gross profit**

Gross profit increased $64.9 million over the prioryear primarily due to the sales increases noted above. This was partiallyoffset by raw material cost increases, particularly from the impact of recordhigh copper costs in our Timber Treatment Chemicals business in the PerformanceAdditives segment, higher zinc and slag costs in the Titanium Dioxide segment,PVC resin and AOM cost increases in the Specialty Compounds segment and higherzinc, phosphoric acid and lithium solvent costs in the Specialty Chemicalssegment, and higher energy costs. Gross profit as a percentage of net sales was31.3% in the year ended December 31, 2006 versus 31.5% in the year endedDecember 31, 2005.

**Selling, general and administrative expenses**

Selling, general and administrative expenses, orSG&A, increased $61.9 million primarily due to higher SG&A costs in anumber of our segments related to increased sales volumes. In addition, higherCorporate costs to meet the requirements of being a public company includingexternal and internal audit costs of Section 404 of Sarbanes-Oxley, feesrelating to the implementation of a new consolidation software system, as wellas higher incentive compensation resulted in higher SG&A costs. SG&Aexpenses as a percentage of net sales were 19.6% in the year ended December 31,2006 as compared to 19.1% for the year ended December 31, 2005.

**Impairment charges**

We recorded an impairment charge of $2.2 million in2006 related to the writedown of machinery and equipment in the Fine Chemicalsdivision of the Specialty Chemicals segment. In 2005, we recorded an impairmentcharge of $0.4 million for a plant closure in our Color Pigments and Servicesbusiness within our Performance Additives segment. See Note 17, “ImpairmentCharges,” for further details.

**Restructuring charges, net**

We recorded $5.2 million of restructuring charges inthe year ended December 31, 2006 for miscellaneous restructuring actions in theSpecialty Chemicals, Performance Additives, Advanced Ceramics and Electronicssegments for headcount reductions and facility closures. We recorded $15.4million of restructuring charges in the year ended December 31, 2005 formiscellaneous restructuring actions, primarily in the Electronics segmentrelating to the Wafer Reclaim restructuring. In addition, restructuring chargeswere recorded in the Performance Additives, Advanced Ceramics and SpecialtyChemicals segments for miscellaneous headcount reductions. See Note 18, “RestructuringLiability,” for further details.

**Management services agreement termination fee**

In connection with the IPO, we recorded an expense of$10.0 million in the third quarter of 2005 to terminate the management servicesagreement with affiliates of KKR and DLJMB.

**Other, net**

We recorded gains of $0.2 million and $4.4 million forthe years ended December 31, 2006 and 2005, respectively, related to assetsales.

**Operating income**

*Specialty Chemicals*.   Operatingincome for our Specialty Chemicals segment increased $27.4 million primarilydue to higher sales in

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both the Surface Treatment and Fine Chemicalsbusinesses and lower restructuring costs of $2.2 million. This increase waspartially offset by higher raw material costs of $17.7 million primarilyrelated to zinc, phosphoric acid and lithium solvents, higher selling, generaland administrative expenses of $10.1 million primarily related to the increasedsales volumes and higher depreciation and amortization costs of $2.8 million.

*Performance Additives*.   Operatingincome decreased $20.3 million over the prior year primarily from higher rawmaterial costs of $34.8 million, particularly copper costs in the TimberTreatment Chemicals business that were at record highs and higher energy costsof $6.5 million. Lower volumes of ACQ products in our Timber TreatmentChemicals business and higher depreciation and amortization costs of $9.3million primarily related to the acquisition of the Süd-Chemie businesses alsohad an unfavorable impact on operating income. The above decreases in operatingincome were partially offset by increased sales and lower restructuring costsof $5.1 million.

*Titanium Dioxide Pigments*.   Operatingincome for our Titanium Dioxide Pigments segment decreased $0.1 million overthe prior year due to higher energy costs of $7.9 million for natural gas andelectricity, higher raw material costs of $7.1 million related to costincreases for zinc and slag and increased depreciation and amortization costsof $2.0 million. This was partially offset by higher selling prices of ourtitanium dioxide products in anatase and rutile grade and volume and priceincreases in our functional additives products.

*Advanced Ceramics*.   Operatingincome for our Advanced Ceramics segment increased $3.9 million over the prioryear primarily due to productivity improvements and increased sales in mostbusinesses, particularly from increased volumes of mechanical systems andmechanical, electronic and cutting tool applications. Currency changes of $1.0million also had a favorable impact on operating income. This increase waspartially offset by lower volumes of medical products, selling price declinesof $4.9 million primarily in Piezo and electronic applications, increaseddepreciation and amortization costs of $3.3 million, gains related to assetsales of $2.9 million recorded in 2005 and higher energy costs of $2.6 million.

*Specialty Compounds*.   Operatingincome increased $0.6 million primarily due to the impact of higher sellingprices of $12.3 million to offset higher raw material costs and a favorableproduct mix. This increase was partially offset by higher AOM, PVC resin andplasticizer raw material costs of $8.7 million, higher energy costs of $1.0million and lower sales volumes. Higher systems organization and establishmentexpenses of $0.9 million and higher depreciation and amortization expenses of$0.4 million also had a negative impact on operating income.

*Electronics*.   Operatingincome increased $8.9 million over the prior year primarily due to highervolumes in our Electronic Chemicals and Photomasks businesses in all regions onsales to the printed circuit board and semiconductor markets. Lowerrestructuring costs of $1.9 million also had a favorable impact on operatingincome. This increase was partially offset by increased selling, general andadministrative expenses of $1.6 million related to increased volumes andincreased depreciation and amortization costs of $1.6 million.

*Corporate*.   Operating lossat Corporate increased $3.2 million primarily due to higher Corporate costs tomeet the requirements of being a public company including external and internalaudit costs of Section 404 of Sarbanes-Oxley, fees relating to theimplementation of a new consolidation software system, as well as higherincentive compensation. This increase was partially offset by the managementservices agreement termination fee of $10.0 million incurred in the thirdquarter of 2005.

**Other income (expenses)**

*Interest expense, net*.   Interestexpense, net, decreased $13.6 million in the year ended December 31, 2006compared to the same period in 2005. The years ended December 31, 2006 and 2005included gains of $7.2 million and $22.4 million, respectively, representingthe movement in the mark-to-market valuation of our interest rate andcross-currency hedging instruments as well as $9.7 million and $10.7 million,respectively, of amortization expense related to deferred financing costs. Theremaining change of $27.8 million was primarily due to lower interest expenserelated to debt repaid with IPO proceeds.

*Loss on early extinguishment of debt*.In the third quarter of 2005, we paid redemption premiums of $13.2 million toredeem debt and wrote off $13.4 million of deferred financing costs associatedwith the debt repaid in connection with the IPO.

*Refinancing expenses*.   InDecember 2005, we expensed $1.0 million related to the third amendment of thesenior secured credit agreement resulting in a 25 basis point interest ratereduction on each of our tranche E and tranche F term loans.

*Foreign exchange gain, net*.   Inthe year ended December 31, 2006, we had foreign exchange gains of $8.6 millioncompared to foreign exchange gains of $114.5 million recorded in the year endedDecember 31, 2005. Foreign exchange gains were recorded in 2005 reflecting thenon-cash currency impact on our euro-denominated debt due to the weaker euro asof September 30, 2005 versus December 31, 2004. On October 1, 2005, wedesignated the majority of this debt as a net investment hedge. As a result,since October 1, 2005, foreign currency gains and losses resulting from changesin the U.S. dollar to the euro are recorded in accumulated other 

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comprehensive income within stockholders’ equity andare not reported in the statement of operations for as long as the hedgeremains effective.

*Other, net*.   For the yearended December 31, 2006, we recorded $1.8 million of income primarily relatedto the correction of an immaterial error related to a previously unrecordedasset in the Titanium Dioxide segment ($1.6 million). We recorded $2.6 millionof income for the year ended December 31, 2005 which included the reversal of abad debt reserve of $2.9 million related to a note receivable from the buyer inconnection with the sale of a business by Dynamit Nobel prior to the DynamitNobel Acquisition, which was collected from the buyer in 2005.

**Provision for income taxes**

The effective income tax rate for the year endedDecember 31, 2006 was 47.5%. We recorded an income tax provision of $72.6million for the year ended December 31, 2006. The effective income tax rate comparedto the federal statutory rate was negatively impacted by an increase in thevaluation allowance primarily related to U.S. operations and favorably impactedby the foreign rate differential. The effective income tax rate for the yearended December 31, 2005 was 31.9% and was favorably impacted by the reversal ofvaluation allowances primarily related to the U.S. and the U.K.

**Net income from continuing operations**

Net income from continuing operations for the yearended December 31, 2006 was $80.3 million as compared to net income fromcontinuing operations of $137.0 million for the year ended December 31, 2005for the reasons described above.

**Income (loss) from discontinued operations, net oftax**

Income from discontinued operations increased to $27.9million for the year ended December 31, 2006 compared to a loss of $44.2million for the year ended December 31, 2005 primarily due to losses incurredin 2005 related to capacity utilization issues at the Rohner plant and animpairment charge of $44.7 million recorded in 2005 related to the downsizingof the Rohner manufacturing facility. This was partially offset by the pre-taxloss of $11.5 million recorded in 2006 in connection with the sale of Rohner.

**Minority Interest from discontinued operations**

Minority interest from discontinued operationsrepresents the minority interest portion of the Groupe Novasep net income forthe year ended December 31, 2006 and the Groupe Novasep net loss for the yearended December 31, 2005.

**Net income**

Net income for the year ended December 31, 2006 was$103.0 million as compared to net income of $95.8 million for the year endedDecember 31, 2005 for the reasons described above.

**Adjusted EBITDA**

*Specialty Chemicals*.   AdjustedEBITDA for our Specialty Chemicals segment increased $32.4 million primarilydue to higher sales in both the Surface Treatment and Fine Chemicalsbusinesses. This increase was partially offset by higher raw material costs andhigher selling, general and administrative expenses as discussed above inoperating income.

*Performance Additives*.   AdjustedEBITDA for our Performance Additives segment decreased $14.2 million over theprior year primarily from higher raw material and energy costs. Lower volumesof ACQ products in our Timber Treatment Chemicals business also had anunfavorable impact. These decreases were partially offset by increased sales.  See discussion above in operating income forfurther details.

*Titanium Dioxide Pigments*.   AdjustedEBITDA for our Titanium Dioxide Pigments segment increased $1.9 million overthe prior year due to higher selling prices of our titanium dioxide products inanatase and rutile grade, as well as volume and price increases in ourfunctional additives products. Currency changes of $0.9 million also had afavorable impact on Adjusted EBITDA. This increase was partially offset byincreased energy costs for natural gas and electricity and higher raw materialcosts as discussed above in operating income.

*Advanced Ceramics*.   AdjustedEBITDA for our Advanced Ceramics segment increased $11.0 million over the prioryear primarily due to productivity improvements and increased sales in mostbusinesses, particularly from increased volumes of mechanical systems andmechanical, electronic and cutting tool applications. Currency changes of $1.4million also had a favorable impact on Adjusted EBITDA. This increase waspartially offset by lower volumes of medical products, selling price declinesand higher energy costs. See discussion above in operating income for furtherdetails.

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*Specialty Compounds*.   AdjustedEBITDA increased $2.2 million primarily due to the impact of higher sellingprices to offset higher raw material costs and a favorable product mix. Thisincrease was partially offset by higher AOM, PVC resin and plasticizer rawmaterial costs, higher energy costs and lower sales volumes. See discussionabove in operating income for further details.

*Electronics*.   AdjustedEBITDA increased $9.6 million over the prior year primarily due to highervolumes in our Electronic Chemicals and Photomasks businesses in all regions onsales to the printed circuit board and semiconductor markets. This increase waspartially offset by increased selling, general and administrative expensesrelated to increased volumes. See discussion above in operating income for furtherdetails.

*Corporate*.   AdjustedEBITDA loss at Corporate increased $8.7 million primarily due to higherCorporate costs to meet the requirements of being a public company includingexternal and internal audit costs of Section 404 of Sarbanes-Oxley, as well ashigher incentive compensation.

*Discontinued operations*. AdjustedEBITDA from discontinued operations increased $16.4 million over the prior yearprimarily due to losses incurred in 2005 related to capacity utilization issuesat the Rohner plant and losses on foreign currency derivatives in the yearended December 31, 2005.

 

***Actual year ended December 31, 2005 compared to actual year endedDecember 31, 2004***

 

Net sales increased $1,099.6 million for the year ended December 31,2005 compared to the same period in 2004 primarily as a result of theacquisitions made in 2004 ($1,016.3 million). The sales improvement was also aresult of increases in all segments. In particular, our Specialty Compounds segmenthad solid sales growth primarily due to higher selling prices to offsetincreased raw material costs and increased volumes of wire and cable products.In addition, our Specialty Chemicals segment had increased sales on increasedvolumes and higher selling prices to offset higher raw material costs. Netsales in our Titanium Dioxide Pigments segment were also up due to increasedvolumes of our titanium dioxide products in rutile grade and higher volumes ofcertain recycling products. Sales in our Advanced Ceramics segment were up onincreased volumes of medical products and a favorable mix of Piezoapplications.

 

We also experienced increased operating income and Adjusted EBITDA in2005 primarily due to the acquisitions made in 2004. Operating income was up$190.9 million and Adjusted EBITDA was up $238.5 million from the prior year.Operating income and Adjusted EBITDA results were negatively impacted by risingraw material costs in several businesses including among others, PVC resin andother raw material cost increases in the Specialty Compounds segment and thecost of copper in the Timber Treatment Chemicals business of the PerformanceAdditives segment. Operating income and Adjusted EBITDA were also negativelyimpacted by higher energy costs in the Color Pigments and Services andClay-based Additives businesses of our Performance Additives segment and in ourTitanium Dioxide Pigments segment.

 

Net income from continuing operations increased $351.2 million for theyear ended December 31, 2005 compared with the same period in the prior yearprimarily due to an increase in foreign currency gains reflecting the non-cashcurrency impact on our euro-denominated debt due to the weaker euro as ofDecember 31, 2005 versus December 31, 2004 (versus losses recorded in the sameperiod in the prior year).

 

Loss from discontinued operations, net of tax and minority interest,increased $39.3 million for the year ended December 31, 2005 compared with thesame period in the prior year primarily due to losses incurred in 2005 relatedto capacity utilization issues at the Rohner plant and an impairment charge of$44.7 million recorded in 2005 related to the downsizing of the Rohnermanufacturing facility. See Note 2, “Discontinued Operations,” for furtherdetails.

 

Net income increased $311.9 million for the year ended December 31,2005 compared with the same period in the prior year primarily due to reasonsnoted above.

 

**Net sales**

 

Net sales increased to $2,742.1 million, or 67% in 2005 from $1,642.5million in 2004, primarily due to the acquisitions made in 2004 ($1,016.3million). Net sales were also up in all segments, as discussed below.

 

*Specialty Chemicals*.   Netsales for our Specialty Chemicals segment increased $520.9 million over theprior year primarily due to acquisitions in 2004 ($505.7 million), partiallyoffset by the impact of currency changes ($9.6 million). The remaining increasewas primarily due to higher volumes and higher selling prices to offset higherraw material costs in both the Fine Chemicals and Surface Treatment businesses.Sales in the Surface Treatment business were favorably impacted by growth inmost markets and regions served, particularly in Europe in the aerospace andautomotive industries. Strong Lithium applications, particularly in the glass,pharmaceutical and cosmetics industries, continued to have a favorable impacton sales in the Fine Chemicals business.

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*Performance Additives*.   Netsales for our Performance Additives segment increased $49.8 million over theprior year primarily due to acquisitions in 2004 ($42.4 million). The remainingincrease was due to higher selling prices ($18.4 million) to offset higher rawmaterial costs. This was partially offset by lower volumes, primarily in theTimber Treatment Chemicals business on soft demand in the treated wood market,in the Color Pigments and Services business on lower demand for constructionproducts in Europe and in the Clay-based Additives business on lower sales tothe carbonless copy paper market in Europe.

 

*Titanium Dioxide Pigments*.   Netsales for our Titanium Dioxide Pigments segment increased $254.8 million versusthe prior year primarily due to acquisitions in 2004 ($249.0 million),partially offset by the impact of currency changes ($9.6 million). Theremaining increase was primarily due to increased volumes of our titaniumdioxide products in rutile grade and higher volumes of certain recyclingproducts, partially offset by decreased volumes of our titanium dioxideproducts in anatase grade due to weaker demand in the synthetic fiber market asa result of historically low cotton prices.

 

*Advanced Ceramics*.   Netsales for our Advanced Ceramics segment increased $223.3 million over the prioryear primarily due to acquisitions in 2004 ($219.2 million), partially offsetby the impact of currency changes ($6.0 million). The remaining increase wasprimarily due to increased volumes of medical products due to higher demand forceramic hip replacement components and a better mix of Piezo applications,partially offset by selling price declines in electronic applications.

 

*Specialty Compounds.*   Netsales for our Specialty Compounds segment increased $37.1 million over theprior year primarily due to higher selling prices ($20.8 million) to offsethigher raw material costs and stronger sales volume in our wire and cablecompounds business.

 

*Electronics*.   Net sales forour Electronics segment increased $13.7 million over the prior year with $1.7million due to currency changes. The remaining increase was primarily due toincreased sales volumes in the Electronic Chemicals business on sales to theprinted circuit board and semiconductor markets, as well as increased demandfor cell phone and personal computer products, partially offset by $2.6 millionin selling price declines and lower volumes in the Wafer Reclaim business.

 

**Gross profit**

 

Gross profit increased $408.3 million primarily due to acquisitions in2004 ($358.8 million), partially offset by the impact of currency changes ($8.0million). The remaining increase of $57.5 million was primarily due to thesales increases noted above and a $53.8 million charge to cost of products sold(inventory write-up reversal) in 2004 related to the portion of the purchaseprice allocated to inventory to reflect manufacturing profit in inventory onthe date the Dynamit Nobel Acquisition was consummated. This was partiallyoffset by raw material cost increases, including $20.3 million in the SpecialtyCompounds segment primarily due to PVC resin and AOM cost increases and $18.4million in the Performance Additives segment, including higher copper costs. Inaddition, higher manufacturing costs of $5.3 million in the Electronics segmenthad a negative impact on gross profit.

 

Gross profit as a percentage of net sales was 31.5% for 2005 versus27.8% for 2004 due to the inventory write-up reversal of $53.8 million recordedin 2004 related to acquisitions and the inclusion of the Dynamit Nobelbusinesses which have a higher average gross margin percentage than thehistorical Rockwood businesses, offset by higher selling, general andadministrative expenses as a percentage of net sales in the Dynamit Nobelbusinesses versus the historical Rockwood businesses. This was partially offsetby the impact of the higher raw material and manufacturing costs.

**Selling, general and administrative expenses**

Selling, general and administrative expenses, orSG&A, increased $208.1 million primarily due to acquisitions in 2004($213.0 million), partially offset by the impact of currency changes ($6.5million). The remaining increase was primarily due to higher central costs tooperate the significantly larger business resulting from the acquisitions asdiscussed above, higher special charges including CCA litigation ($1.2 million)and higher cancelled acquisition and disposition costs ($0.7 million). SG&Aexpenses as a percentage of net sales were 19.1% for 2005 and 19.2% for 2004.

**Impairment charges**

In the fourth quarter of 2005, we recorded animpairment charge of $0.4 million for a plant closure in our Color Pigments andServices business within our Performance Additives segment.

As part of our annual goodwill impairment testing in2004, we determined there was a goodwill impairment of $4.0 million in certainbusiness lines within our Electronics segment. This impairment resulted from asignificant decrease in earnings and operating cash flows during the year of theapplicable charge and estimated prospective earnings and operating cash flowsbased on projections prepared late in the same year. The decline inprofitability and cash flows was due to global economic conditions common tosignificant competitors, including significant pricing pressure in part basedon current industry overcapacity and eroding competitive position. We alsoreviewed these business lines for impairment of property, plant and equipment.As a result, we recorded an 

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impairment charge of $7.0 million in 2004 in ourElectronics segment.

**Restructuring charges, net**

We recorded $15.4 million of restructuring charges in 2005 formiscellaneous restructuring actions, primarily in the Electronics segmentrelating to the wafer reclaim restructuring and in the Performance Additivessegment related to the closure of the Baulking, United Kingdom facility in theClay-based Additives business. In addition, restructuring charges were recordedin the Performance Additives, Advanced Ceramics and Specialty Chemicalssegments for miscellaneous headcount reductions. In addition, inventorywritedowns of $0.5 million were recorded in cost of products sold in 2005related to the restructuring of the Wafer Reclaim business in our Electronicssegment. We recorded $1.1 million of restructuring charges in 2004 formiscellaneous restructuring actions.

 

**Management services agreement termination fee**

 

In connection with the IPO, we recorded an expense of $10.0 million inthe third quarter of 2005 to terminate the management services agreement withaffiliates of KKR and DLJMB.

 

**Other, net**

 

We recorded income of $4.4 million for the year ended December 31, 2005related to asset sales. This included a gain of $1.7 million related to thesale and leaseback of a facility in our Specialty Chemicals segment. See Note19, “Sale and Leaseback,” for further details.

 

**Operating income**

 

*Specialty Chemicals*.   Operatingincome for our Specialty Chemicals segment increased $111.3 million over theprior year primarily due to acquisitions in 2004 ($77.3 million). The remainingincrease of $34.0 million was primarily due to higher sales volumes and sellingprices in both the Fine Chemicals and Surface Treatment businesses and aninventory write-up reversal charge of $25.4 million recorded in 2004, partiallyoffset by higher raw material costs and the impact of currency changes ($1.0million).

 

*Performance Additives*.   Operatingincome decreased $8.9 million despite the favorable impact of acquisitions in2004 ($3.6 million) and the impact of currency changes ($1.6 million). Theremaining decrease was primarily due to higher raw material costs of $18.4million, including higher copper costs, lower sales volumes of $10.6 million,an increase of $6.2 million of restructuring and impairment charges and higherenergy costs. This was partially offset by increased sales on higher sellingprices of $18.4 million and lower selling, general and administrative expensesof $5.3 million.

 

*Titanium Dioxide Pigments*.   Operatingincome for our Titanium Dioxide Pigments segment increased $34.4 million versusthe prior year primarily due to acquisitions in 2004 ($28.7 million). Increasedvolumes of our titanium dioxide products in rutile grade, higher volumes ofcertain recycling products and an inventory write-up reversal charge of $6.6million recorded in 2004 were partially offset by decreased volumes of ourtitanium dioxide products in anatase grade and the impact of currency changesof $1.1 million.

 

*Advanced Ceramics*.   Operatingincome for our Advanced Ceramics segment increased $61.3 million over the prioryear primarily due to acquisitions in 2004 ($36.2 million). The remainingincrease was primarily due to increased volumes of medical products, a bettermix of Piezo applications and an inventory write-up reversal charge of $20.8million recorded in 2004, partially offset by selling price declines, increasedmanufacturing and raw material costs, higher depreciation and amortizationcosts of $5.0 million and increased restructuring costs of $2.6 million.

 

*Specialty Compounds*.   Operatingincome increased $0.6 million primarily due to the impact of higher sellingprices ($20.8 million) and stronger sales volume in our wire and cablecompounds business, partially offset by higher raw material costs of $20.3million primarily due to PVC resin and AOM cost increases, and highermanufacturing costs.

 

*Electronics*.   Operatingincome increased $11.7 million primarily due to higher sales volumes and afavorable product mix in the Electronic Chemicals business on sales to theprinted circuit board and semiconductor markets (aggregating $5.6 million), theabsence of goodwill and property, plant and equipment impairment chargesrecorded in 2004 ($11.0 million) and lower material costs. This was partiallyoffset by increased manufacturing costs of $5.3 million primarily in the WaferReclaim and Photomasks businesses and selling price declines of $2.6 million.

 

*Corporate*.   Operating lossat Corporate increased $19.5 million primarily due to the management servicesagreement termination fee of $10.0 million recorded in the third quarter of2005 and higher central costs to operate the significantly larger businessresulting from the acquisitions.

 

**Other income (expenses)**

 

*Interest expense, net*.   In2005, interest expense, net, increased $48.2 million. The years ended December31, 2005 and 2004 included

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gains of $22.4 million and $6.0 million, respectively, representing themovement in the mark-to-market valuation of our interest rate and cross-currencyhedging instruments as well as $10.7 million and $7.4 million, respectively, ofamortization expense related to deferred financing costs. The remainingincrease of $61.3 million was primarily due to higher debt levels from theacquisitions made in 2004. This was partially offset by a reduction in interestexpense from the debt paid off in the third quarter of 2005 with IPO proceedsand $3.9 million of cash received in the fourth quarter of 2005 related tointerest income on a note receivable in connection with the sale of a businessby Dynamit Nobel prior to the Dynamit Nobel Acquisition.

 

*Loss on early extinguishment of debt*.   Inthe third quarter of 2005, we paid redemption premiums of $13.2 million toredeem debt and wrote off $13.4 million of deferred financing costs associatedwith the debt repaid in connection with the IPO.

 

*Refinancing expenses*.   InDecember 2005, we expensed $1.0 million related to the third amendment of thesenior secured credit agreement resulting in a 25 basis point interest ratereduction on each of our tranche E and tranche F term loans. In 2004, we wroteoff $27.1 million of deferred financing costs in connection with debt repaymentand refinancing.

 

*Foreign exchange gain (loss), net*.   Foreignexchange gains of $114.5 million were recorded in 2005 primarily reflecting thenon-cash currency impact on our euro-denominated debt due to the weaker euro asof September 30, 2005 versus December 31, 2004. This debt was designated as anet investment hedge as of October 1, 2005. The increase of $240.7 million from2004 was due to a foreign exchange loss of $126.2 million recorded in 2004. Theforeign exchange loss in 2004 included a $10.9 million mark-to-market realizedloss on certain foreign currency call options.

 

*Other, net*.   The Companyrecorded income of $2.6 million in 2005 primarily related to the reversal of abad debt reserve of $2.9 million related to a note receivable from the buyer inconnection with the sale of a business by Dynamit Nobel prior to the DynamitNobel Acquisition, which was collected from the buyer in 2005. The loss of $2.8million in 2004 primarily relates to a stamp duty tax paid on certain assetstransferred to the United Kingdom in connection with the KKR Acquisition.

 

**Provision for income taxes**

 

The effective income tax rate for the year ended December 31, 2005 was31.9% and was favorably impacted by the reversal of valuation allowances primarilyrelated to the U.S. and the U.K. The effective tax rate for 2004 was 14.5% andwas negatively impacted by the recording of valuation allowances relating to expectedinability to realize tax benefits on losses incurred in the United States,Italy and the United Kingdom.

 

**Net income (loss) from continuing operations**

 

Net income from continuing operations for the year ended December 31,2005 was $137.0 million as compared to a net loss of $214.2 million for theyear ended December 31, 2004 for the reasons described above.

 

**Income (loss) from discontinued operations, net oftax**

 

Loss from discontinued operations increased to $44.2 million for theyear ended December 31, 2005 compared to a loss of $1.9 million for the yearended December 31, 2004 primarily due to losses incurred in 2005 related tocapacity utilization issues at the Rohner plant and an impairment charge of$44.7 million recorded in 2005 related to the downsizing of the Rohnermanufacturing facility.

 

**Minority Interest from discontinued operations**

** **

Minority interest from discontinued operations represents the minorityinterest portion of the Groupe Novasep net loss.

 

**Net income (loss)**

 

Net income for the year ended December 31, 2005 was $95.8 million ascompared to a net loss of $216.1 million for the year ended December 31, 2004for the reasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.   AdjustedEBITDA for our Specialty Chemicals segment increased $114.2 million over theprior year, including $105.2 million related to acquisitions in 2004. Theremaining increase was primarily due to higher volumes and selling prices inboth the Fine Chemicals and Surface Treatment businesses, partially offset byhigher raw material costs and the impact of currency changes ($2.1 million).

 

*Performance Additives*.   AdjustedEBITDA for our Performance Additives segment decreased $0.9 million over theprior year primarily due to higher raw material costs of $18.4 million,including higher copper costs, lower sales volumes of $10.6 million and highermanufacturing and energy costs. This was partially offset by increased sales onhigher selling prices of $18.4 million, lower selling, general andadministrative expenses of $5.3 million, the favorable impact of acquisitionsin 2004 ($5.8 million) and the impact of currency changes ($1.0 million).

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*Titanium Dioxide Pigments*.   AdjustedEBITDA for our Titanium Dioxide Pigments segment increased $48.8 million overthe prior year due to acquisitions in 2004 ($50.3 million). Also, increasedvolumes of our titanium dioxide products in rutile grade and higher volumes ofcertain recycling products were partially offset by decreased volumes of ourtitanium dioxide products in anatase grade and the impact of currency changes($1.9 million).

 

*Advanced Ceramics*.   AdjustedEBITDA for our Advanced Ceramics segment increased $58.0 million over the prioryear primarily due to acquisitions in 2004 ($53.3 million). The remainingincrease was primarily due to increased volumes of medical products and abetter mix of Piezo applications, partially offset by selling price declines,increased manufacturing and raw material costs and the impact of currencychanges ($2.1 million).

 

*Specialty Compounds*.   AdjustedEBITDA for our Specialty Compounds segment increased $0.7 million over theprior year primarily due to higher selling prices ($20.8 million) and strongersales volume in our wire and cable compounds business, partially offset byhigher raw material costs of $20.3 million primarily due to PVC resin and otherkey raw material cost increases and higher manufacturing costs.

 

*Electronics*.   AdjustedEBITDA for our Electronics segment decreased $2.0 million as highermanufacturing costs in the Wafer Reclaim and Photomasks businesses and lowervolumes in the Wafer Reclaim business were partially offset by higher salesvolumes to the printed circuit board and semiconductor markets.

 

*Corporate*.   Adjusted EBITDAloss at Corporate increased $11.6 million due to higher central costs tooperate the significantly larger business resulting from the acquisitions andcosts for initial compliance with Sarbanes-Oxley.

 

*Discontinued operations*.   AdjustedEBITDA from discontinued operations increased $31.3 million over the prior yeardue to acquisitions ($36.5 million), partially offset by continued capacityutilization issues at the Rohner plant including the loss of customers duringthe prior year that were not replaced, the impact of currency changes ($1.7million) and losses on foreign currency derivatives in the year ended December31, 2005.

 

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***Reconciliation of Net Income(Loss) to Adjusted EBITDA***

 

Because we view Adjusted EBITDA on both a consolidatedbasis and segment basis as an operating performance measure, we use net income(loss) as the most comparable U.S. GAAP measure on a consolidated basis. Thefollowing table, which sets forth the applicable components of Adjusted EBITDA,presents a reconciliation of net income (loss) to Adjusted EBITDA on aconsolidated basis:

 
| ** **                                              | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                           | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                       |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) |
| (Income) loss from  discontinued operations, net of tax |       | (27.9                                      | )          | 44.2 |   | 1.9 |   |
| Minority interest in  discontinued operations           |       | 5.2                                        |       | (3.0 | ) | — |   |
| Net income (loss) from  continuing operations           |       | 80.3                                       |       | 137.0 |   | (214.2 | ) |
| Income tax provision                                    |       | 72.6                                       |       | 64.2 |   | 27.1 |   |
| Income (loss) before  taxes                             |       | 152.9                                      |       | 201.2 |   | (187.1 | ) |
| Interest expense, net  (a)                              |       | 195.7                                      |       | 209.3 |   | 161.1 |   |
| Depreciation and  amortization                          |       | 191.0                                      |       | 170.6 |   | 106.6 |   |
| Impairment  charges                                     |       | 2.2                                        |       | 0.4 |   | 11.0 |   |
| Restructuring  and related charges (b)                  |       | 5.6                                        |       | 15.9 |   | 1.1 |   |
| CCA litigation  defense costs                           |       | 0.8                                        |       | 1.2 |   | — |   |
| Systems/organization  establishment expenses            |       | 10.7                                       |       | 3.9 |   | 4.8 |   |
| Cancelled  acquisition and disposal costs               |       | 2.5                                        |       | 1.2 |   | 0.5 |   |
| Cost incurred  related to debt modifications            |       | —                                     |       | 1.0 |   | 2.0 |   |
| Stamp duty tax                                          |       | —                                     |       | — |   | 4.0 |   |
| Inventory  write-up reversal                            |       | 1.1                                        |       | — |   | 53.8 |   |
| Management  services agreement termination fee (c)      |       | —                                     |       | 10.0 |   | — |   |
| Loss on early  extinguishment of debt (c)               |       | —                                     |       | 26.6 |   | — |   |
| Write-off of  deferred debt issuance costs              |       | —                                     |       | — |   | 25.1 |   |
| Gains related to  asset sales                           |       | (0.2                                       | )          | (4.4 | ) | — |   |
| Foreign exchange  (gain) loss                           |       | (8.6                                       | )          | (114.5 | ) | 126.2 |   |
| Other                                                   |       | (0.5                                       | )          | (3.4 | ) | 2.7 |   |
| Adjusted EBITDA from continuing operations              |       | 553.2                                      |       | 519.0 |   | 311.8 |   |
| Discontinued  operations (d)                            |       | 68.3                                       |       | 51.9 |   | 20.6 |   |
| Total Adjusted  EBITDA                                  |       | $                                          | 621.5      |   | $ | 570.9 |   | $ | 332.4 |   |
|                                                         |            |                                            |            |  |  |  |  |  |  |  |  |  |

----

(a) Includes gains of $7.2 million, $22.4 million and $6.0 million forthe years ended December 31, 2006, 2005 and 2004, respectively, representingthe movement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

 

(b) Includes inventory writedowns of $0.4 million and $0.5 millionrecorded in cost of products sold for the years ended December 31, 2006 and2005, respectively.

 

(c) In connection with the IPO, the management services agreement withthe affiliates of KKR and DLJMB was terminated for $10.0 million. In addition,a redemption premium of $13.2 million was paid in connection with the repaymentof long-term debt and deferred financing costs of $13.4 million were writtenoff.

64

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(d) The following table, which sets forth the applicable components ofAdjusted EBITDA, presents a reconciliation of net income (loss) to AdjustedEBITDA for our discontinued operations:

 
| ** **                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                     | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                 |       | $                                          | 22.7       |   | $ | (41.2 | ) | $ | (1.9 | ) |
| Income tax (benefit)  provision                   |       | (12.1                                      | )          | 7.6 |   | 5.2 |   |
| Minority interest                                 |       | 5.2                                        |       | (3.0 | ) | — |   |
| Income (loss) before  taxes and minority interest |       | 15.8                                       |       | (36.6 | ) | 3.3 |   |
| Interest expense, net                             |       | 4.1                                        |       | 6.3 |   | 1.0 |   |
| Depreciation and  amortization                    |       | 32.8                                       |       | 35.8 |   | 8.6 |   |
| Impairment charges                                |       | —                                     |       | 44.7 |   | — |   |
| Restructuring and  related charges                |       | —                                     |       | (1.5 | ) | — |   |
| Systems/organization  establishment expenses      |       | —                                     |       | 0.2 |   | — |   |
| Inventory write-up  reversal                      |       | —                                     |       | 3.1 |   | 7.3 |   |
| Loss on sale of  business                         |       | 11.5                                       |       | — |   | — |   |
| Losses related to asset  sales                    |       | 0.2                                        |       | — |   | 0.8 |   |
| Fees/expenses related  to sale of Groupe Novasep  |       | 4.8                                        |       | — |   | — |   |
| Foreign exchange (gain)  loss                     |       | (0.7                                       | )          | (0.1 | ) | 0.2 |   |
| Other                                             |       | (0.2                                       | )          | — |   | (0.6 | ) |
| Adjusted EBITDA from  discontinued operations     |       | $                                          | 68.3       |   | $ | 51.9 |   | $ | 20.6 |   |
|                                                   |            |                                            |            |  |  |  |  |  |  |  |  |  |

**Pro Forma Net Sales, Income (Loss) Before Taxes andAdjusted EBITDA**

Our Company has changed significantly since the Dynamit NobelAcquisition. Our historical results of operations on an actual basis for theyear ended December 31, 2004, presented immediately prior to this pro formainformation, include only the results of operations for the four segmentsacquired as part of the Dynamit Nobel Acquisition since the consummation dateof July 31, 2004 in accordance with accounting principles generally accepted inthe United States, which we refer to as U.S. GAAP in this report. Ourconsolidated financial statements have been reclassified to reflect the GroupeNovasep subsidiary that was sold on January 9, 2007 as a discontinued operationfor all periods presented. We believe the following supplemental unaudited proforma information is helpful in highlighting trends by segment and on aconsolidated basis.

 

The following supplemental unaudited pro forma net sales, net income(loss) before taxes and Adjusted EBITDA for the year ended December 31, 2004 isprepared on a pro forma basis as if the Dynamit Nobel Acquisition and relatedequity and debt financings and debt refinancings in the fall of 2004, and thepigments and dispersions acquisition and related financing had occurred atJanuary 1, 2004.

 

The following supplemental unaudited pro forma information is providedfor informational purposes only and is not intended to be indicative of theresults that would have actually been attained had the Dynamit NobelAcquisition and related equity and debt financings and debt refinancings in thefall of 2004, and the pigments and dispersions acquisition and relatedfinancing, occurred as of January 1, 2004 or that may be attained in thefuture. The supplemental unaudited pro forma information has been preparedbased upon currently available information and assumptions that we believe arereasonable. Such currently available information and assumptions may prove tobe inaccurate over time.

 

 

65

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The following tables present a comparison of net sales, income (loss)before taxes, and Adjusted EBITDA for the year ended December 31, 2005 on anactual basis and for the year ended December 31, 2004 on a pro forma basis:

** **
| ** **                                 | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| **($in millions)**                    | ** ** | ** **                                 | ** ** | **(Actual)** | ** ** | **(Pro Forma)** | ** ** |
| **Net  sales:**                            |       |                                       |       |   |   |
| Specialty  Chemicals                       |       | $                                          | 842.0      |   | $ | 759.6 |   |
| Performance  Additives                     |       | 680.7                                      |       | 674.8 |   |
| Titanium Dioxide  Pigments                 |       | 430.5                                      |       | 422.0 |   |
| Advanced  Ceramics                         |       | 369.6                                      |       | 349.5 |   |
| Specialty Compounds                        |       | 237.5                                      |       | 200.4 |   |
| Electronics                                |       | 181.8                                      |       | 168.1 |   |
| Total                                      |       | $                                          | 2,742.1    |   | $ | 2,574.4 |   |
| **Income  (loss) before taxes:**           |       |                                       |       |   |   |
| Specialty  Chemicals                       |       | $                                          | 89.4       |   | $ | 34.0 |   |
| Performance  Additives                     |       | 85.9                                       |       | 88.6 |   |
| Titanium Dioxide  Pigments                 |       | 20.2                                       |       | 21.1 |   |
| Advanced  Ceramics                         |       | 34.1                                       |       | 3.3 |   |
| Specialty  Compounds                       |       | 22.3                                       |       | 20.8 |   |
| Electronics                                |       | 5.2                                        |       | (11.3 | ) |
| Corporate                                  |       | (55.9                                      | )          | (297.9 | ) |
| Total                                      |       | $                                          | 201.2      |   | $ | (141.4 | ) |
| **Adjusted  EBITDA:**                      |       |                                       |       |   |   |
| Specialty  Chemicals                       |       | $                                          | 174.2      |   | $ | 141.4 |   |
| Performance  Additives                     |       | 148.3                                      |       | 154.9 |   |
| Titanium Dioxide  Pigments                 |       | 86.6                                       |       | 84.6 |   |
| Advanced  Ceramics                         |       | 93.8                                       |       | 80.3 |   |
| Specialty  Compounds                       |       | 29.5                                       |       | 28.8 |   |
| Electronics                                |       | 26.9                                       |       | 28.9 |   |
| Corporate                                  |       | (40.3                                      | )          | (40.1 | ) |
| Adjusted EBITDA from continuing operations |       | 519.0                                      |       | 478.8 |   |
| Discontinued  operations                   |       | 51.9                                       |       | 61.1 |   |
| Total Adjusted  EBITDA                     |       | $                                          | 570.9      |   | $ | 539.9 |   |
|                                            |            |                                            |            |  |  |  |  |  |  |

 

66

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| ** **                                 | ** ** | **Change: Actual Year Ended December 31, 2005 vs. Pro Forma Year Ended December 31, 2004** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **($ in millions)**              | ** ** | ** **                                                                                                                                                       | ** ** | **Total Change In $** | ** ** | **Total Change in%** | ** ** | **Foreign  Exchange  Effect  in $** | ** ** | **Organic  Change in $** | ** ** | **Organic Change  in %** | ** ** |
| **Net  sales:**                            | ** ** | ** **                                                                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                       |       | $                                                                                                                                                                | 82.4       |   | 10.8 | % | $ | 6.2 |   | $ | 76.2 |   | 10.0 | % |
| Performance  Additives                     |       | 5.9                                                                                                                                                              |       | 0.9 |   | 0.9 |   | 5.0 |   | 0.7 |   |
| Titanium Dioxide  Pigments                 |       | 8.5                                                                                                                                                              |       | 2.0 |   | (0.6 | ) | 9.1 |   | 2.2 |   |
| Advanced  Ceramics                         |       | 20.1                                                                                                                                                             |       | 5.8 |   | 1.3 |   | 18.8 |   | 5.4 |   |
| Specialty  Compounds                       |       | 37.1                                                                                                                                                             |       | 18.5 |   | 0.7 |   | 36.4 |   | 18.2 |   |
| Electronics                                |       | 13.7                                                                                                                                                             |       | 8.1 |   | 1.7 |   | 12.0 |   | 7.1 |   |
| Total                                      |       | $                                                                                                                                                                | 167.7      |   | 6.5 | % | $ | 10.2 |   | $ | 157.5 |   | 6.1 | % |
| **Income  (loss) before taxes:**           |       |                                                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                       |       | $                                                                                                                                                                | 55.4       |   | 162.9 | % |   |   |   |   |   |   |
| Performance  Additives                     |       | (2.7                                                                                                                                                             | )          | (3.0 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                 |       | (0.9                                                                                                                                                             | )          | (4.3 | ) |   |   |   |   |   |   |
| Advanced  Ceramics                         |       | 30.8                                                                                                                                                             |       | 933.3 |   |   |   |   |   |   |   |
| Specialty  Compounds                       |       | 1.5                                                                                                                                                              |       | 7.2 |   |   |   |   |   |   |   |
| Electronics                                |       | 16.5                                                                                                                                                             |       | 146.0 |   |   |   |   |   |   |   |
| Corporate                                  |       | 242.0                                                                                                                                                            |       | (81.2 | ) |   |   |   |   |   |   |
| Total                                      |       | $                                                                                                                                                                | 342.6      |   | 242.3 | % |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                      |       |                                                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                       |       | $                                                                                                                                                                | 32.8       |   | 23.2 | % | $ | 1.4 |   | $ | 31.4 |   | 22.2 | % |
| Performance  Additives                     |       | (6.6                                                                                                                                                             | )          | (4.3 | ) | 1.1 |   | (7.7 | ) | (5.0 | ) |
| Titanium Dioxide  Pigments                 |       | 2.0                                                                                                                                                              |       | 2.4 |   | (0.1 | ) | 2.1 |   | 2.5 |   |
| Advanced  Ceramics                         |       | 13.5                                                                                                                                                             |       | 16.8 |   | (0.1 | ) | 13.6 |   | 16.9 |   |
| Specialty  Compounds                       |       | 0.7                                                                                                                                                              |       | 2.4 |   | 0.2 |   | 0.5 |   | 1.7 |   |
| Electronics                                |       | (2.0                                                                                                                                                             | )          | (6.9 | ) | — |   | (2.0 | ) | (6.9 | ) |
| Corporate                                  |       | (0.2                                                                                                                                                             | )          | 0.5 |   | (0.1 | ) | (0.1 | ) | 0.2 |   |
| Adjusted EBITDA from continuing operations |       | 40.2                                                                                                                                                             |       | 8.4 |   | 2.4 |   | 37.8 |   | 7.9 |   |
| Discontinued  operations                   |       | (9.2                                                                                                                                                             | )          | (15.1 | ) | 0.2 |   | (9.4 | ) | (15.4 | ) |
| Total Adjusted  EBITDA                     |       | $                                                                                                                                                                | 31.0       |   | 5.7 | % | $ | 2.6 |   | $ | 28.4 |   | 5.3 | % |
|                                            |            |                                                                                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

***Actual year ended December 31,2005 compared with pro forma year ended December 31, 2004***

**Overview**

Net sales increased $167.7 million on a pro formabasis over the prior year with $10.2 million due to currency changes. Theremaining sales improvement of $157.5 million was attributable to increases inall segments, particularly in the Specialty Compounds, Specialty Chemicals andAdvanced Ceramics segments.

Income (loss) before taxes on a pro forma basisincreased by $342.6 million over the prior year due to the sales increasesnoted above, an increase in foreign exchange gains primarily recorded withinCorporate reflecting the non-cash impact of our euro-denominated debt due to aweaker euro as of September 30, 2005 versus December 31, 2004 (versus lossesrecorded in the same period in the prior year) and a $53.8 million charge tocost of products sold (inventory write-up reversal) in 2004 related to theportion of the purchase price allocated to inventory to reflect manufacturingprofit in inventory on the date the Dynamit Nobel Acquisition was consummated.The euro-denominated debt was designated as a net investment hedge as ofOctober 1, 2005. This was partially offset by higher raw material,manufacturing costs, restructuring costs, higher selling, general and administrativeexpenses and costs incurred of $36.6 million in the third quarter of 2005related to the IPO.

Adjusted EBITDA increased $31.0 million on a pro formabasis over the prior year with $2.6 million due to currency changes. Theremaining increase of $28.4 million was due to the sales increases noted above,partially offset by higher raw material, manufacturing costs and higherselling, general and administrative expenses.

***Pro Forma Net Sales***

*Specialty Chemicals*.   Netsales on a pro forma basis for our Specialty Chemicals segment increased $82.4million over the prior year, including $6.2 million related to currencychanges. The remaining increase of $76.2 million was primarily due to highervolumes and higher selling prices to offset higher raw material costs in boththe Fine Chemicals and Surface Treatment businesses. Sales in the SurfaceTreatment business were favorably impacted by growth in most markets andregions served, particularly in Europe in the Aerospace and Automotiveindustries. Strong Lithium applications, particularly in the glass,pharmaceutical and cosmetics industries, continued to have a favorable impacton sales in the Fine Chemicals business.

*Performance Additives*.   Netsales on a pro forma basis for our Performance Additives segment increased $5.9million primarily due to higher selling prices to offset higher raw materialcosts, partially offset by lower volumes, primarily in the Timber TreatmentChemicals business on soft demand in the treated wood market, in the ColorPigments and Services business on lower demand for construction products inEurope and in the Clay-based Additives business on lower sales to thecarbonless copy paper market in Europe.

*Titanium Dioxide Pigments*.   Netsales for our Titanium Dioxide Pigments segment increased $8.5 million on a proforma basis versus the prior year due to increased volumes of our titaniumdioxide products in rutile grade and higher volumes of certain recyclingproducts, partially offset by decreased volumes of our titanium dioxideproducts in anatase grade due to weaker demand in the synthetic fiber market asa result of historically low cotton prices and the unfavorable impact ofcurrency changes.

67

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*Advanced Ceramics*.   Netsales for our Advanced Ceramics segment increased $20.1 million on a pro formabasis over the prior year, including $1.3 million related to currency changes.The remaining increase of $18.8 million was primarily due to increased volumesof medical products, due to higher demand for ceramic hip replacementcomponents, and a better mix of Piezo applications, partially offset by sellingprice declines primarily in electronic applications.

*Specialty Compounds*.   Netsales for our Specialty Compounds segment increased $37.1 million over theprior year primarily due to higher selling prices to offset higher raw materialcosts and stronger sales volume in our wire and cable compounds business.

*Electronics*.   Net sales forour Electronics segment increased $13.7 million over the prior year with $1.7million due to currency changes. The remaining increase of $12.0 million wasprimarily due to increased sales volumes in the Electronic Chemicals businesson sales to the printed circuit board and semiconductor markets, as well asincreased demand for cell phone and personal computer products, partiallyoffset by selling price declines and lower volumes in the Wafer Reclaimbusiness.

***Pro Forma Adjusted EBITDA***

*Specialty Chemicals*.   AdjustedEBITDA for our Specialty Chemicals segment increased $32.8 million on a proforma basis over the prior year, including $1.4 million related to currencychanges. The remaining increase of $31.4 million was primarily due to highervolumes and selling prices in both the Fine Chemicals and Surface Treatmentbusinesses, partially offset by higher raw material costs.

*Performance Additives*.   AdjustedEBITDA on a pro forma basis for our Performance Additives segment decreased$6.6 million despite $1.1 million of favorable currency changes. The remainingdecrease of $7.7 million was primarily due to higher raw material and energycosts and lower sales volumes, partially offset by higher selling prices andlower selling, general and administrative expenses.

*Titanium Dioxide Pigments*.   AdjustedEBITDA for our Titanium Dioxide Pigments segment increased $2.0 million on apro forma basis over the prior year, primarily due to increased volumes of ourtitanium dioxide products in rutile grade, higher volumes of certain recyclingproducts, partially offset by decreased volumes of our titanium dioxideproducts in anatase grade and higher raw material and energy costs.

*Advanced Ceramics*.   AdjustedEBITDA for our Advanced Ceramics segment increased $13.5 million on a pro formabasis over the prior year primarily due to increased volumes of medicalproducts and a better mix of Piezo applications, partially offset by sellingprice declines and increased manufacturing and raw material costs.

*Specialty Compounds*.   AdjustedEBITDA for our Specialty Compounds segment increased $0.7 million primarily dueto higher selling prices and stronger sales volume in our wire and cablecompounds business, partially offset by higher raw material costs primarily dueto PVC resin and other key raw material cost increases and higher manufacturingcosts.

*Electronics*.   AdjustedEBITDA for our Electronics segment decreased $2.0 million primarily due tohigher manufacturing costs in the Wafer Reclaim and Photomasks businesses andlower volumes and selling prices in the Wafer Reclaim business, partiallyoffset by higher sales volumes to the printed circuit board and semiconductormarkets.

*Discontinued operations*.   AdjustedEBITDA from discontinued operations decreased $9.2 million on a pro forma basisas compared to the prior year primarily due to continued capacity utilizationissues at the Rohner plant including the loss of customers in the prior yearthat have not been replaced, while higher sales at the remaining facilities didnot yield a proportionate increase in Adjusted EBITDA as the higher sales levelstemmed from lower margin business. In addition, 2005 Adjusted EBITDA wasimpacted by losses on foreign currency derivatives.

*Corporate*.   Adjusted EBITDAloss at Corporate increased $0.2 million as higher central costs to operate thesignificantly larger business due to the Dynamit Nobel Acquisition werepartially offset by savings from headcount reductions at the former DynamitNobel corporate headquarters.

***Reconciliation of Pro FormaIncome (Loss) before taxes to Pro Forma Adjusted EBITDA for the year endedDecember 31, 2004***

68

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Becausewe view Adjusted EBITDA on both a consolidated and segment basis as anoperating performance measure, we use net income (loss) as the most comparableU.S. GAAP measure on a consolidated basis and income (loss) before taxes andminority interest as the most comparable U.S. GAAP measure on a segment basis.The following table, which sets forth the applicable components of AdjustedEBITDA, presents a reconciliation of pro forma income (loss) before taxes andminority interest to pro forma Adjusted EBITDA on a consolidated and segment basisfor the year ended December 31, 2004:
| **($ in millions)**                 | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Discontinued  Operations** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-----------------|------------|------------------------------|------------|---------------|------------|------------------|------------|
| Year ended  December 31, 2004            |       |                     |       |                       |       |                            |       |                   |       |                     |       |            |       |                         |       |          |       |             |       |
| Income (loss) before  taxes                   |       | $                        | 34.0       |                       | $          | 88.6                            |       | $                      | 21.1       |                     | $          | 3.3             |       | $                            | 20.8       |          | $          | (11.3            | )          | $ | — |   | $ | (297.9 | ) | $ | (141.4 | ) |
| Interest expense, net                         |       | 43.9                     |       | 30.0                       |       | 28.3                            |       | 30.0                   |       | (0.5                     | )          | 6.6             |       | —                       |       | 96.1          |       | 234.4            |       |
| Depreciation and  amortization                |       | 38.1                     |       | 34.2                       |       | 28.4                            |       | 25.5                   |       | 7.7                      |       | 20.8            |       | —                       |       | 1.0           |       | 155.7            |       |
| Impairment charges                            |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | 11.0            |       | —                       |       | —        |       | 11.0             |       |
| Restructuring and  related charges            |       | 0.3                      |       | 0.5                        |       | —                          |       | —                 |       | 0.3                      |       | —          |       | —                       |       | —        |       | 1.1              |       |
| Systems/organization  establishment expenses  |       | 0.1                      |       | 0.2                        |       | —                          |       | —                 |       | —                   |       | 0.2             |       | —                       |       | 4.3           |       | 4.8              |       |
| Cancelled acquisition  and disposal costs     |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | 0.2             |       | —                       |       | 0.3           |       | 0.5              |       |
| Costs incurred related  to debt modifications |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | —          |       | —                       |       | 2.0           |       | 2.0              |       |
| Stamp duty tax                                |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | —          |       | —                       |       | 4.0           |       | 4.0              |       |
| Inventory write-up  reversal                  |       | 25.4                     |       | 1.0                        |       | 6.6                             |       | 20.8                   |       | —                   |       | —          |       | —                       |       | —        |       | 53.8             |       |
| Write-off of deferred  debt issuance costs    |       | —                   |       | 0.4                        |       | —                          |       | —                 |       | 0.2                      |       | 0.1             |       | —                       |       | 24.4          |       | 25.1             |       |
| Foreign exchange (gain)  loss                 |       | (0.9                     | )          | 0.3                        |       | —                          |       | —                 |       | —                   |       | 1.4             |       | —                       |       | 124.0         |       | 124.8            |       |
| Other                                         |       | 0.5                      |       | (0.3                       | )          | 0.2                             |       | 0.7                    |       | 0.3                      |       | (0.1            | )          | —                       |       | 1.7           |       | 3.0              |       |
| Adjusted  EBITDA from continuing operations   |       | 141.4                    |       | 154.9                      |       | 84.6                            |       | 80.3                   |       | 28.8                     |       | 28.9            |       | —                       |       | (40.1         | )          | 478.8            |       |
| Discontinued operations                       |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | —          |       | 61.1                         |       | —        |       | 61.1             |       |
| Total Adjusted EBITDA                         |       | $                        | 141.4      |                       | $          | 154.9                           |       | $                      | 84.6       |                     | $          | 80.3            |       | $                            | 28.8       |          | $          | 28.9             |       | $ | 61.1 |   | $ | (40.1 | ) | $ | 539.9 |   |

 

The following table, which sets forth the applicablecomponents of Adjusted EBITDA, presents a reconciliation of pro forma net loss topro forma Adjusted EBITDA on a consolidated basis for the year endedDecember 31, 2004:

| ($ in millions)                          | ** ** | ** ** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|
| Net loss                                           |       | $          | (190.1     | )                                                |
| Net loss from  discontinued operations, net of tax |       | 5.3        |       |
| Net loss from  continuing operations               |       | (184.8     | )          |
| Income tax  provision                              |       | 43.4       |       |
| Loss before  taxes                                 |       | (141.4     | )          |
| Interest  expense, net                             |       | 234.4      |       |
| Depreciation and  amortization                     |       | 155.7      |       |
| Impairment  charges                                |       | 11.0       |       |
| Restructuring  and related charges                 |       | 1.1        |       |
| Systems/organization  establishment expenses       |       | 4.8        |       |
| Cancelled  acquisition and disposal costs          |       | 0.5        |       |
| Costs incurred  related to debt modifications      |       | 2.0        |       |
| Stamp duty tax                                     |       | 4.0        |       |
| Inventory  write-up reversal                       |       | 53.8       |       |
| Write-off of  deferred debt issuance costs         |       | 25.1       |       |
| Foreign exchange  loss                             |       | 124.8      |       |
| Other                                              |       | 3.0        |       |
| Adjusted EBITDA from continuing operations         |       | 478.8      |       |
| Discontinued  operations                           |       | 61.1       |       |
| Total Adjusted  EBITDA                             |       | $          | 539.9      |                                             |

 

**Liquidity andCapital Resources**

**Cash Flows**

*Unless otherwise noted, all amounts below which aredenominated in currencies other than the U.S. dollar are converted atDecember 31, 2006 exchange rates.*

*Operating Activities.*   Netcash provided by operating activities was $302.6 million, $257.6 millionand $162.3 million in 2006, 2005 and 2004, respectively. Net cash providedby operating activities increased in 2006 primarily from lower cash interestexpense and higher operating income, partially offset by higher operatingworking capital. Net cash provided by operating activities increased in 2005over 2004 primarily from higher operating income, partially offset by anincrease in working capital primarily due to higher sales levels in 2005 andcertain one-time payments in 2005.

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*Investing Activities*.   Netcash used in investing activities was $248.8 million, $276.6 millionand $2,232.9 million in 2006, 2005 and 2004, respectively. Net cash usedfor investing activities for the year ended December 31, 2006 and 2005 wasprimarily comprised of capital expenditures and acquisitions. Net cash used foracquisitions in 2006 was related to businesses acquired in our AdvancedCeramics and Specialty Compounds segments. In 2005, we acquired the Süd-Chemiebusinesses that are part of the Clay-based Additives business in ourPerformance Additives segment. Net cash used for investing activities in 2004 wasprimarily related to the Dynamit Nobel Acquisition and also included net cashused for the acquisition of the pigments and dispersions business of JohnsonMatthey Plc. and the Groupe Novasep combination. Net cash used in investingactivities of discontinued operations was comprised primarily of capital expendituresfor 2006 and 2005.

*FinancingActivities.*   Net cash used in financing activities was $102.7 millionin 2006. Net cash provided by financing activities was $8.9 million and$2,134.4 million in 2005 and 2004, respectively. This included scheduledpayments for long-term debt for all years provided. Net cash provided byfinancing activities for the year ended December 31, 2005 included theissuance of common stock in connection with the IPO and the repayment of long-termdebt and redeemable convertible preferred stock. Net cash provided by financingactivities was $2,134.4 million for 2004 due to net financing proceeds forthe acquisitions discussed above of $2,137.9 million (primarily the DynamitNobel Acquisition), equity contributions of $425.0 million for the DynamitNobel Acquisition, as well as management equity contributions of $7.0 million.Net cash used in financing activities of discontinued operations was comprisedprimarily of payments of long-term debt for all years presented.

**Liquidity**

Our primary source of liquidity has been and willcontinue to be cash generated from the operations of our subsidiaries. Inaddition, the following events are also sources of liquidity:

·                           OnJanuary 2, 2007, our wholly-owned subsidiary and Rohm and Haas Company formed Viance,LLC, a joint venture company. We received cash proceeds of $67.6 million andused approximately $1.0 million to pay fees and expenses associated with thistransaction. The remainder was used for general corporate purposes.

·                           OnJanuary 9, 2007, we sold our Groupe Novasep subsidiary and received net cashproceeds of $423.3 million. We expect to use a portion of the proceeds to repayindebtedness, which should cause interest expense to be lower than it was priorto the sale. We expect the interest savings associated with the reduction ofdebt to largely offset the historic cash flow from this subsidiary. Under theterms of the Company’s senior secured credit facility, the Company is generallynot permitted to repay any subordinated debt unless it repays an equal amountof term loans. The company is currently seeking an amendment of its seniorsecured credit facility, among other things, to permit the redemption in May2007 of its outstanding 2011 Notes without a concurrent term loan repayment.

·                           OnFebruary 12, 2007, we completed the sale of our United States Wafter Reclaimbusiness for approximately $11.0 million. We expect to use the proceeds forgeneral corporate purposes.

           SeeNote 22, “Subsequent Events,” for further details on the above events.

·                           OnAugust 22, 2005, we completed an IPO of 23,469,387 shares of our common stock,which included 3,061,224 shares issued and sold as a result of the underwriters’exercise of the over-allotment option. As a result, we received net proceeds ofapproximately $435.7 million (net of underwriting discounts and commissions andestimated offering expenses aggregating $33.6 million). The net proceeds wereprimarily used to repay indebtedness. See Note 10, “Long Term Debt,” and Note15, “Redeemable Convertible Preferred Stock,” for further details.

Ourprimary liquidity requirements are working capital, debt service, capitalexpenditures and acquisitions. Our debt service requirements and other contractualobligations and commitments over the next several years are significant and aresubstantially higher than historical amounts. We believe that our currentlyavailable sources of liquidity will be sufficient for these needs. Furthermore,any future major acquisitions, business combinations or similar transactionswill likely require additional capital resources. If our present operating performanceand current market conditions continue, we believe that such resources will beavailable to us for certain transactions. We would need access to alternativesources of liquidity for larger acquisitions such as through additional borrowings,equity issuances or other sources. We may not have access to these sources ofcash for a variety of reasons. See Item 1, “Business,” and Item 1A, “Risk Factors.”

We believe that based on current and anticipatedlevels of operations and conditions in our industry and markets, cash flowsfrom operations and borrowings available under our revolving credit facilitywill be adequate for 2007 and the foreseeable future to make required paymentsof principal and interest on our debt and fund our working capital and capitalexpenditure requirements. We are taking actions to reduce overhead and excessor unprofitable manufacturing capacity, in part to improve our long-termliquidity. As noted in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” “General,” above, we are alsoapplying the same initiatives used after the KKR Acquisition—reducing networking capital as a percentage of net sales through improved systems andmanager incentives as well as implementation of stringent controls to help ensurethat maintenance capital expenditures are appropriate and that expansioncapital expenditures are in line with both capacity and market demands. Weexpect this to further improve our short and long-term liquidity. If our cashflow from operations and borrowings under our revolving credit facility areinsufficient to fund our currently existing liquidity requirements, we may beforced to use other means available to us, such as reduce or delay capitalexpenditures and seek additional capital. We may not have adequate capital for futureacquisitions, business combinations or similar transactions.

As of December 31, 2006, we had actual totalindebtedness of $2,838.7 million. As of December 31, 2006, therevolving credit facility under the senior secured credit facilities providedfor additional borrowings of up to $186.5 million, after giving effect to$26.5

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million of letters of credit issued on our behalf and outstandingborrowings of $37.0 million under the revolving credit facility.

We incurred substantial amounts of debt in connectionwith the Dynamit Nobel Acquisition. Specifically, we entered into new seniorsecured credit facilities of approximately $1,454.2 million and a newsenior subordinated loan facility of $854.5 million (based on the exchangerate at July 31, 2004). We also received an equity contribution of$425.0 million from affiliates of KKR and DLJMB. The proceeds from theacquisition financings were used at the closing of the Dynamit NobelAcquisition to finance the purchase price of the businesses acquired in theDynamit Nobel Acquisition, repay all amounts outstanding under our old seniorcredit facilities (which totaled approximately $442.2 million), repayassumed debt of approximately $129.0 million, fund approximately$20.0 million of cash settlement of derivative transactions related to theDynamit Nobel Acquisition and pay related fees and expenses. We also assumedcertain standby letters of credit and comparable obligations.

In connection with the Dynamit Nobel Acquisition, wealso received equity contributions of approximately $7.0 million frommanagement and certain other employees. Specifically, from September 2004 toDecember 2004, we sold 477,428 shares of our common stock to members of ourmanagement and certain other employees for gross proceeds of $7.0 million.In connection with the sale of these shares, pursuant to the stock plan, wegranted stock options to purchase an aggregate of 2,091,852 shares of commonstock to these members of our management and certain other employees.

Subsequentto the closing of the Dynamit Nobel Acquisition, on September 27, 2004, wedrew the remaining $50.4 million of the term loans in connection with theacquisition of the pigments and dispersions business of Johnson Matthey Plc. Inaddition, on October 8, 2004, we amended the senior secured creditfacilities to borrow an additional $160.0 million and €52.7 million(or $225.5 million in aggregate) of term loans and used the additionalborrowings to repay a portion of our senior subordinated loan and to payrelated fees. On November 10, 2004, we issued the 2014 Notes and used thenet proceeds to repay the remaining outstanding borrowings under the seniorsubordinated loan facility of $260.1 million and €313.2 million (or$664.9 million in the aggregate), plus accrued interest on the remainingoutstanding borrowings and pay related fees and expenses and fund generalcorporate purposes. On December 10, 2004, we refinanced all outstandingborrowings under the tranche B term loans with new tranche D term loans inorder to reduce interest expense.

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

·                           trancheA-1 term loans in an aggregate principal amount of €35.2 million (orapproximately $46.5 million at December 31, 2006) and tranche A-2term loans in an aggregate principal amount of €153.4 million (or approximately$202.4 million at December 31, 2006), each maturing on July 30,2011 and bearing interest at Adjusted EURIBOR plus 2.25%;

·                           trancheE term loans in an aggregate principal amount of $1,127.8 million atDecember 31, 2006, maturing on July 30, 2012 and bearing interest atthe Company’s option of either (i) Adjusted LIBOR plus 2.00% or (ii) ABRplus 0.75%;

·                           tranche Fterm loans in an aggregate principal amount of €270.7 million (orapproximately $357.3 million at December 31, 2006), maturing onJuly 30, 2012 and bearing interest at Adjusted EURIBOR plus 2.75%; and

·                           arevolving credit 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 ofDecember 31, 2006, we had borrowings of $37.0 million outstandingunder this facility and had outstanding letters of credit of $26.5 millionthat reduced our availability under the credit facility.

The U.S. dollar equivalents of term loans denominatedin euros are shown based on the exchange rate on Friday, December 29, 2006of €1.00 = $1.3199. In each case, the interest rates per year are subjectto step-downs determined by reference to a performance test. Adjusted LIBOR isthe London inter-bank offered rate adjusted for statutory reserves. ABR is thealternate base rate, which is the highest of Credit Suisse First Boston’s primerate and the federal funds effective rate plus 0.5%. Tranche A-1 and A-2term loans are payable in January and July of each year at escalatingpercentages of the original principal amount. Tranche E and tranche Fterm loans are payable in January and July of each year at amounts equal to0.5% of the principal amount of the former tranche C term loans andtranche D term loans, respectively, with the remainder due at the finalmaturity date.

TheCompany’s borrowings and the borrowings of Rockwood Specialties Limited underthe senior secured credit facilities are guaranteed and secured by assets andpledges of capital stock.

Inaddition to the financial covenants described below under “Covenant Compliance,”the Company’s senior secured credit facilities contain various affirmative andrestrictive covenants. The restrictive covenants limit our ability to, amongother things, incur indebtedness and other liabilities; create liens; merge orconsolidate; dispose of assets; make investments; pay dividends and makepayments to shareholders; make payments on certain indebtedness or to amenddocuments related to certain indebtedness and to enter into sale leasebacktransactions.

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*2011 Notes and 2014 Notes.*   The2011 Notes had an aggregate principal amount of $273.4 million, at December 31,2006, and mature on May 15, 2011 and the 2014 Notes have an aggregateprincipal amount of €375.0 million ($495.0 million) in the case ofthe euro notes and $200.0 million in the case of the dollar notes, andmature on November 15, 2014. We redeemed $101.6 million, or 27%, ofthe 2011 Notes as part of the IPO. Interest on both the 2011 Notes and 2014Notes is payable semi-annually on May 15 and November 15. Interest onthe 2011 Notes accrues at the rate of 10.625% per year, and interest on the2014 Notes accrues at the rate of 7.625% in the case of euro notes and 7.500%in the case of dollar Notes. Certain of our domestic subsidiaries guarantee the2011 Notes and 2014 Notes on a senior subordinated unsecured basis. The Companymay redeem the 2011 Notes in whole or in part, at a premium, which declinesannually through maturity.

The 2011 Notes and 2014 Notes contain variousaffirmative and restrictive covenants. The restrictive covenants limit ourability, and the ability of our restricted subsidiaries, to, among otherthings, incur or guarantee additional indebtedness (as described below under “CovenantCompliance”); pay dividends or make other equity distributions or repurchasecapital stock; make investments or other restricted payments; create liens;transfer or sell assets; restrict dividends or other payments to us; engage intransactions with affiliates; and merge or consolidate with other companies orsell substantially all of our assets.

*Covenantcompliance.*   In addition to the affirmative andrestrictive covenants, the senior secured credit agreement contains thefollowing financial covenants that are determined based on our Adjusted EBITDA,which reflects management’s interpretations thereof, including treatment ofdiscontinued operations:

·                           amaximum total leverage ratio: for the twelve-month period ended December 31,2006, net debt to Adjusted EBITDA must be less than 5.75 to 1; for such period,our ratio equaled 4.51 to 1; and

·                           aminimum interest coverage ratio: for the twelve-month period endedDecember 31, 2006, Adjusted EBITDA to cash interest expense (interestexpense, net excluding deferred debt issuance cost amortization and themovements in the mark-to market value of our interest rate and cross-currencyinterest rate derivatives) must be at least 1.75 to 1; for such period, our ratio equaled 3.14 to 1.

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

Theindentures governing the 2011 Notes and 2014 Notes prohibit us from incurringadditional debt, subject to certain permitted incurrences, unless the fixedcharge coverage ratio, which is the ratio of Adjusted EBITDA (as definedtherein excluding certain adjustments permitted under the senior secured creditagreement) to fixed charges (as defined therein), for the most recently endedfour fiscal quarters is at least 2.00 to 1. In addition, the 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 ended December 31, 2006, thefixed charge coverage ratio equaled 3.14. This covenant is a material term ofthe indentures governing the 2011 Notes and 2014 Notes.

Wewere in compliance with all of the above covenants as of December 31, 2006and 2005.

Given our use of Adjusted EBITDA (see “Special NoteRegarding Non-GAAP Financial Measures” for the definition of Adjusted EBITDAand management’s uses of adjusted EBITDA) as a liquidity measure, the followingtable presents a reconciliation of net cash provided by operating activities toAdjusted EBITDA:

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| ** **                                                                                                             | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                                                                          | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                                          | 279.1      |   | $ | 260.7 |   | $ | 123.9 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 28.8                                       |       | 6.5 |   | 28.3 |   |
| Current portion  of income tax provision                                                                               |       | 32.4                                       |       | 31.5 |   | 20.2 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 193.2                                      |       | 196.9 |   | 127.1 |   |
| Restructuring  and related charges (a)                                                                                 |       | 5.6                                        |       | 15.9 |   | 1.1 |   |
| CCA litigation  defense costs                                                                                          |       | 0.8                                        |       | 1.2 |   | — |   |
| Systems/organization  establishment expenses                                                                           |       | 10.7                                       |       | 3.9 |   | 4.8 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 2.5                                        |       | 1.2 |   | 0.5 |   |
| Costs incurred  related to debt modifications                                                                          |       | —                                     |       | 1.0 |   | 2.0 |   |
| Stamp duty tax                                                                                                         |       | —                                     |       | — |   | 4.0 |   |
| Inventory  write-up reversal                                                                                           |       | 1.1                                        |       | — |   | — |   |
| Management  services agreement termination fee                                                                         |       | —                                     |       | 10.0 |   | — |   |
| Bad debt  provision                                                                                                    |       | (0.3                                       | )          | (2.0 | ) | (2.8 | ) |
| Gains related to  asset sales                                                                                          |       | (0.2                                       | )          | (4.4 | ) | — |   |
| Other                                                                                                                  |       | (0.5                                       | )          | (3.4 | ) | 2.7 |   |
| Adjusted EBITDA from continuing operations                                                                             |       | 553.2                                      |       | 519.0 |   | 311.8 |   |
| Discontinued  operations                                                                                               |       | 68.3                                       |       | 51.9 |   | 20.6 |   |
| Total Adjusted  EBITDA                                                                                                 |       | $                                          | 621.5      |   | $ | 570.9 |   | $ | 332.4 |   |
|                                                                                                                        |            |                                            |            |  |  |  |  |  |  |  |  |  |

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(a) Includesinventory writedowns of $0.4 million and $0.5 million recorded in cost ofproducts sold for the years ended December 31, 2006 and 2005, respectively.

 

***Contractual Obligations***

The following table details Rockwood’s fixedcontractual cash obligations as of December 31, 2006:
| **($ in millions)**             | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5 years** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------|------------|---------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| Debt, including  current portion (a) |       | $          | 3,897.1    |      | $          | 322.2                           |       | $              | 547.0      |           | $          | 768.6                   |       | $ | 2,259.3 |   |
| Operating leases                          |       | 96.2       |       | 22.1      |       | 26.9                            |       | 14.2           |       | 33.0           |       |
| Purchase  obligations (b)            |       | 252.6      |       | 139.8     |       | 112.6                           |       | —         |       | 0.2            |       |
| Total (c)(d)                         |       | $          | 4,245.9    |      | $          | 484.1                           |       | $              | 686.5      |           | $          | 782.8                   |       | $ | 2,292.5 |   |

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(a)Amounts represent the expected principal payments of our long-term debt and donot include any fair value adjustments or bond premiums or discounts. Thisamount also includes estimated scheduled cash interest payments totaling$1,058.4 million. A portion of the debt balance outstanding as ofDecember 31, 2006 contained a variable interest rate component. Therefore,interest was calculated on this portion based upon the average of the rates ineffect as of December 31, 2006. See Note 10, “Long-Term Debt.”

(b)Purchase obligations consist of agreements to purchase goods or services thatare enforceable and legally binding and that specify all significant terms,including: fixed or minimum quantities to be purchased; fixed, minimum orvariable price provisions; and the approximate timing of the transaction.Purchase obligations exclude agreements that are cancelable without penalty.

(c)Statutory minimum funding requirements for 2007 for defined benefit pensionplans are not included as such amounts have not been determined. For 2007, theCompany expects to make contributions of approximately $6.2 million topension trusts and $16.5 million directly to plan participants as benefitpayments. Future contributions are not included, as they are not fixed eitheras to timing or amount.

***(d) Obligations relating to eventual settlement of derivativecontracts are not included as the timing and amounts are not fixed. Thesecontracts are marked to market with the related liabilities or assets dependingon the mark to market position. At December 31, 2006, the mark to marketposition of obligations relating to derivative contracts was an asset and wasrecorded in “Other Assets” in the consolidated balance sheet.***

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***Capital Expenditures***

Rockwood’scapital expenditures in 2006 consisted primarily of replacements of worn,obsolete or damaged equipment as well as investments in new equipment, mostlyfor our Specialty Chemicals, Advanced Ceramics, and Titanium Dioxide Pigmentssegments. Capital expenditures in our Advanced Ceramics segment primarilyrelated to expanding our medical products production facility. In our SpecialtyChemicals segment, we made a significant investment in connection with Lithiumproduction. In addition, capital expenditures in our Titanium Dioxide Pigmentssegment were primarily at our existing manufacturing facilities.

For the year ended December 31, 2006, capitalexpenditures, excluding capital leases, were $171.9 million. Capitalexpenditures for 2007 are expected to be approximately the same as 2006expenditures. For the years ended December 31, 2005 and 2004, our capitalexpenditures, excluding capital leases, amounted to $163.5 million and $81.0 million,respectively.

We mayincur future costs for capital improvements and general compliance underSafety, Health and Environmental (“SHE”) laws. For the year endedDecember 31, 2006, our capital expenditures for SHE matters totaledapproximately $35.3 million, excluding costs to maintain and repairpollution control equipment. For 2006, we estimate capital expenditures forcompliance with SHE laws to be at similar levels; however, because capitalexpenditures for these matters are subject to changes in and new SHE laws, wecannot provide assurance that our recent expenditures will be indicative offuture amounts required to comply with these laws.

We areapplying our capital discipline and stringent controls to reduce our futurecapital expenditures. Our annual capital expenditures could increase in amount,but we do not believe they will change significantly from current levels inproportion to the size of the combined entity or as a percentage of net sales.

***Foreign currency related transactions***

As of December 31, 2006, based on the Friday,December 29, 2006 exchange rate of €1.00 = $1.3199, $1,174.4 millionof the debt outstanding is denominated in euros (€889.8 million). SeeItem 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

***Management and transaction fees***

KKR and DLJ Merchant Banking III, Inc. previouslyprovided us with consulting and management advisory services for an aggregateannual fee of $2.1 million, increasing 5% annually. In connection with theIPO, the parties agreed to terminate the management services agreement for an aggregateconsideration of $10.0 million.

***Commitments and Contingencies***

See Note 21, “Commitments and Contingencies,” fora discussion of the Company’s Commitments and Contingencies.

**Off-Balance SheetArrangements**

See Note 10, “Long-Term Debt,” for guaranteesrelated to contract completion, regulatory compliance and product performance.

**CriticalAccounting Policies and Estimates**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with U.S. GAAP. The preparation of theseconsolidated financial statements requires us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and the related disclosure of contingent assets and liabilities. Theseestimates include assessing, among other things:

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

·                           the useand 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.

Weevaluate our estimates on an ongoing basis, based on historical experience andvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

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SeeNote 1, “Description of Business and Summary of Significant AccountingPolicies” for a summary of our significant accounting policies. We believe thefollowing to be the most critical accounting policies and estimates affectingpreparation of our consolidated financial statements:

*Revenue Recognition.*   Werecognize revenue when the earnings process is complete. Product sales arerecognized when products are shipped to the customer in accordance with the termsof the contract of sale, title and risk of loss have been transferred and collectibilityis reasonably assured. We believe that we have adequate credit grantingprocedures in place and operating effectively so that collectibility isreasonably assured. We have a low incidence of uncollectible accounts.Additionally, credit insurance is purchased at times by certain of ourbusinesses, particularly in Europe, to protect against collection risk. Accrualsare made for sales returns based on our experience and for other allowancesbased on the terms of allowance programs put in place. Although we believe thatsufficient experience and history exists to make reasonable estimates as tosuch accruals and allowances, actual results can differ depending on marketconditions.

*ImpairmentAccounting.*   The recoverability of goodwill is reviewedon an annual basis during the fourth quarter. Additionally, the recoverabilityof goodwill, long-lived tangible, and certain intangible assets is reviewedwhen events or changes in circumstances occur indicating that the carryingvalue of the assets may not be recoverable.

Initial goodwill impairment review begins with theestimate of fair value of each reporting unit generally based on an industrymetric such as the ratio of enterprise value (commonly defined as marketcapitalization, plus long-term debt, less cash) to Adjusted EBITDA of thereporting unit for the current year and the following year budget. If potentialimpairment is identified, we may expand the review to take into accountexpected future cash flows in subsequent years. Similarly, when we test forimpairment of long-lived assets other than goodwill we initially review theestimated future undiscounted cash flows to be derived from the asset or assetgroup (collectively “asset”). If it appears that the asset is impaired based onundiscounted cash flows, the estimated fair value of the asset is calculated ona present value basis by multiplying the estimated future annual cash flows ofthe asset by the then current enterprise value ratio (a discounted measure) orby a discount factor appropriate to the related reporting unit, in accordancewith paragraph 23 of SFAS 144. An impairment loss is recognized whenthe carrying value of the asset or goodwill exceeds the discounted cash flow(or other measure of) fair value. We did not recognize a goodwill impairment lossfor the years ended December 31, 2006 and 2005 as a result of theimpairment analysis that was performed. For the year ended December 31,2004, we did recognize a goodwill impairment loss of $4.0 million in ourElectronics segment as a result of the impairment analysis that was completed.

Thesecalculations are based on inherent assumptions and estimates about future cashflows and appropriate benchmark peer companies or groups. Subsequent changes inthese assumptions could result in future impairment. Although we consistentlyuse the same methods in developing the assumptions and estimates underlying thefair value calculations, such estimates are uncertain by nature and can varyfrom actual results. For example, if the peer group multiples used in 2006 hadbeen 10% lower, we might have had a potential goodwill impairment of $5.1 millionin one of our reporting units. If the peer group multiples used in 2005 hadbeen 10% lower, we might have had a potential goodwill impairment of$29.0 million in one of our reporting units. If the peer group multiplesused in 2004 had been 10% lower, no additional potential goodwill impairmentwould have been identified. As noted above, if we had discovered such apotential impairment we might have expanded the review to prepare more detailedestimates of future cash flows in subsequent years, which might have resultedin a different impairment assessment.

During the fourth quarter of 2006, managementperformed an impairment review of a business within the Fine Chemicals divisionof the Specialty Chemicals segment due to poor profitability. Based on thisreview, an impairment charge of $2.2 million was recorded to write-downthe full value of machinery and equipment.

In 2005, we reviewed for impairment the assets of ourRohner AG facility within our former Groupe Novasep reporting unit (SeeNote 2, “Discontinued operations,” for further details). Based on thisreview, it was determined that an impairment charge of $44.4 million tothe remaining amount of property, plant and equipment of the Rohner facilityshould be recorded. As discussed, our Groupe Novasep subsidiary was sold inJanuary 2007 and the results of this subsidiary are reported as Discontinuedoperations in the accompanying consolidated statements of operations. During2005, we did not have any other circumstances that caused us to review thevalues of any other individual long-lived assets for impairment. In 2004, wealso reviewed for impairment the assets of an entire reporting unit within ourElectronics segment as goodwill impairment charges were recorded. Had thefuture cash flow estimates in 2004 been 10% lower, we would have recorded anadditional impairment in this reporting unit of approximately $1.1 millionin 2004.

*Business Combinations.*   Weaccount for business combinations using the purchase method of accounting asrequired by SFAS 141, *Business Combinations.*Under the purchase method of accounting, we are required to allocate thepurchase price to the estimated fair value of assets acquired and liabilitiesassumed. Examples of material estimates from our previous acquisitions are:

·                           Thefair values of work-in-process and finished goods inventories are estimatedbased on selling price less selling profit. The calculation of selling profitrequires a judgment on the relative margins derived from manufacturing vs.marketing efforts.

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·                           Thefair value of property, plant and equipment can be estimated by a variety ofmethods taking into account market values, replacement cost, and remaininguseful life. Although market value and replacement cost is sometimes readilyobtainable, often this requires judgment, as does determining the estimatedremaining useful life. When we believe that property, plant and equipmentacquired will be material to our overall balance sheet, or that fair valuemight represent a significant difference from the historical cost (net ofaccumulated depreciation) of such assets, we have engaged an independent appraiserto provide us with expert advice on such estimates, as we have done in ourrecent acquisitions. However, it is not uncommon for appraisers to differ onthe valuation of items (such as manufacturing equipment) where a readysecondary market does not exist.

·                           Thefair value of identifiable intangible assets such as patents and otherintellectual property, customer lists, and trademarks, can be estimated bydiscounted cash flow and return on royalties. The process utilized to identifyintangible assets is consistent with the requirements of SFAS 141. Whenconsidered material, we have engaged an independent appraiser to provide expertadvice in the identification of intangible assets acquired, valuation of suchassets and determination of the estimated useful life. An independentappraiser, with management’s oversight and input, is required to make judgmentsand estimates that could cause such appraisals to differ from those of otherappraisal experts.

·                           Inorder to determine the fair value of intangible assets and other long termassets, a discount rate and royalty rate is determined in conjunction with ourindependent appraiser. The royalty rate is based on professional judgment takinginto consideration the type of product, market and perceived strength. Thediscount rate and royalty rate has a material impact on the determination of the fair value.

·                           Purchaseaccounting often involves the same critical estimates that are required in ourordinary course of business including estimates deferred tax assets orliabilities, pension liabilities, restructuring liabilities and legal andenvironmental reserves.

Goodwill is an intangible asset that represents theexcess of the purchase price over the fair value of identifiable assetsacquired and liabilities assumed. While goodwill itself does not represent anestimate, under SFAS 141 we must assign goodwill to one or more reportingunits. Allocation of goodwill to reporting units requires judgments about therelative fair values of reporting units including the fair value of their identifiableassets and estimates as to the present value of future cash flows expected fromthe reporting units as adjusted by weighted average and or risk-adjusted costsof capital. Goodwill is assessed for impairment at least annually.

Some of our business combinations have complex termsthat may result in conflicting claims between buyer and seller concerning thepurchase price itself. Management is required to assess the probability andamount (or range of amounts) of such claims, and, where possible, determine themost likely amount due.

*LegalMatters.*   We are involved in various legal proceedings,including commercial, product liability, intellectual property and environmentalmatters, of a nature that can be expected in our business. It is our policy toaccrue for amounts related 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. Theprobability that a contingent liability has been incurred is regularly assessedby our legal staff, based on periodic reviews of available facts andcircumstances for our legal matters, with senior operating and financemanagement both at the business accountable for the potential liability and atour corporate offices. This is supplemented where applicable by consultationwith outside counsel. We do not believe it is informative to quantify pastexperience at assessing probability or estimating exposure since materialmatters of this nature at Rockwood often represent unique situations withlittle applicability to the assessment of probability or estimation ofpotential liability regarding other legal matters. It is our policy to disclosesuch matters when there is at least a reasonable possibility that a loss mayhave been incurred.

*EnvironmentalMatters.*   We accrue costs of a non-capital naturerelated to environmental clean-up when those costs are believed to be probableand can be reasonably estimated. Expenditures that extend the life of therelated property or mitigate or prevent future environmental contamination arecapitalized, and expenditures related to existing conditions resulting frompast or present operations and from which no current or future benefit isdiscernible are immediately expensed. The quantification of environmentalexposures requires an assessment of many factors, including changing laws andregulations, advancements in environmental technologies, the quality ofinformation available related to specific sites, the assessment stage of eachsite investigation and the length of time involved in remediation orsettlement. As such, it can be extremely difficult to accurately estimate suchcosts. We do not include anticipated recoveries from insurance carriers orother third parties in our accruals for environmental liabilities.

Wehave estimated and established financial reserves relating to anticipatedenvironmental cleanup obligations, site reclamation and remediation and closurecosts. On a consolidated basis, we have accrued approximately $37.0 millionfor known environmental liabilities as of December 31, 2006. Given thatthese obligations may be paid/relieved over extended time periods (30 yearsin some cases), charges or credits to operations may be required as informationis gathered and estimates refined.

We have evaluated our total environmental exposurebased on currently available data and believe that such environmental matterswill not have a material adverse impact on our financial position or results ofoperations. If matters previously identified by 

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management are resolved in a manner different fromoriginal estimates, there is the potential for a material adverse effect onoperating results or cash flows in any one accounting period. See Note 21,“Commitments and Contingencies.”

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

For example, we have accrued liabilities of$8.5 million as of December 31, 2006 to cover restructuringliabilities for employee severance, facility closure and relocation costs. Theportion of this accrued liability that was recorded as part of purchaseaccounting is not charged to operations, but was recorded as part of goodwill.In the event that our estimates of such costs are too low, an additional chargeto operations would be required.

*Deferred Taxes.*   We recordvaluation allowances to reduce our deferred tax assets to the amount that ismore likely than not to be realized based on available evidence weighted towardevidence that is objectively verifiable. While we consider future taxableincome and ongoing prudent and feasible tax planning strategies in assessingthe need for valuation allowances, if we were to determine that we would beable to realize deferred tax assets in the future in excess of our net recordedamount, an adjustment to the net deferred tax asset would increase income (ordecrease goodwill for any net deferred tax assets acquired in the Dynamit NobelAcquisition) in the period such determination was made. Likewise, should wedetermine that we would not be able to realize all or part of our recorded netdeferred tax assets in the future, an adjustment to the deferred tax assetwould decrease income in the period such determination was made.

Wehave cumulative net operating loss carry forwards in the U.S., Germany andItaly for which we have reserved. The valuation allowance also includes certainstates in the U.S. as we have concluded realizability of these net operatingloss carry forwards is not more likely than not. We have not recorded valuationallowances on a significant portion of our German net operating loss carryforwards as we have considered positive evidence such as forecasted futuretaxable income based on historical taxable income adjusted for charges whichare not indicative of future operations and as the carry forward period isindefinite.

SFAS 109,*Accounting for Income Taxes,* (“SFAS 109”)paragraph 105, “requires consideration of future taxable income and otheravailable evidence when assessing the need for a valuation allowance.” Variousassumptions and strategies (including elections for tax purposes) are implicitin estimates of forecasted future taxable income.

Webelieve that, in situations in which future realization of deferred tax assetsis dependent on taxable income from future operations, SFAS 109 requiresthe relative significance of cumulative losses be addressed within the guidanceprovided in paragraphs 24 and 103. Accordingly, in assessing the realizationof U.S. jurisdiction net operating loss carry forwards for the years endedDecember 31, 2006, 2005 and 2004, and, considering future taxable income,we have identified the key elements of both positive and negative evidence andevaluated such evidence by applying the guidance provided by paragraphs 24and 103 of SFAS 109.

Theworldwide valuation allowance increased by $49.2 million to$100.1 million at December 31, 2006, primarily due to the increase inU.S. deferred tax assets. Of this amount, $31.0 million has been recordedto other comprehensive income, $16.1 million as an increase to income taxexpense and $1.5 million as an increase to goodwill. The remainder relatesto foreign currency translation adjustments.

As ofDecember 31, 2006, we had three years of net cumulative losses in the U.K.As such, we evaluated the net deferred tax assets of approximately $22.1 millionrelated to our U.K. entities. Our policy to determine future income availableto realize the deferred tax assets is based on determining the normalizedannual taxable income. Based on our steady-state analysis prepared inaccordance with our policy, we had sufficient income available to utilize thedeferred tax assets. The steady-state analysis prepared includes material managementassumptions that relate to the appropriateness of including non-recurringpermanent cost reductions as well as the impact from recent acquisitions in theU.K. Furthermore, we have identified a tax planning strategy which would reducethe amount of future losses as part of our evaluation of evidence regarding theneed for a valuation allowance. Based on our steady-state analysis andavailable tax planning strategy, we have concluded that no valuation allowanceis needed as of December 31, 2006.

We arecommitted to buying and selling businesses within our portfolio of businessesas opportunities arise to enhance our overall results. We are committed toselling assets which are non-core and which would generate a taxable gain inthe event of expiring U.S. Federal NOL’s.

To theextent that the provision for income taxes increases/decreases by 1% of incomebefore taxes, consolidated net income would have declined/improved by$1.5 million in 2006.

*Stock-BasedCompensation.*   The sales of common stock and grants ofstock options during the year ended December 31, 2004 were made tomanagement and certain other employees in connection with the Dynamit NobelAcquisition. Accordingly, our board of

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directors determined that sales and grants would bemade at the same purchase price and related exercise price per share paid byKKR and DLJMB. We and KKR had negotiated this price with DLJMB on an arm’s-lengthbasis based on our financial condition, historical results of operations and forecastsof the combined entity resulting from the Dynamit Nobel Acquisition.

Determinationof Fair Value-At the time the shares of common stock were sold and the stockoptions were granted, our board of directors determined that the price pershare paid by DLJMB as part of the Dynamit Nobel Acquisition provided objectivein evidence of the fair value of the common stock sold and options granted inthe 2004 management equity program, and thus did not obtain a contemporaneousvaluation by an unrelated valuation specialist.

Ourboard of directors further determined the fair value of the common stock soldand options granted did not change from July 31, 2004 (the date ofconsummation of the Dynamit Nobel Acquisition) to November 30, 2004 (thedate the 2004 management equity program was substantially completed) because,among other reasons:

·                           ouroperations and forecasts had not changed in any material respect, largely dueto the proximity in time to the consummation of the Dynamit Nobel Acquisition;

·                           uncertaintyand risk surrounded the integration of the acquired Dynamit Nobel businesseswith our historical businesses; and

·                           at thetime of the sales of common stock and the grants of stock options, we had notyet completed the Groupe Novasep combination, which was subject to numerousclosing conditions.

Subsequently, we performed a valuation of our commonstock as of November 30, 2004 using a retrospective approach consistentwith the valuation techniques applied in connection with the July 2004 equityinvestment by KKR and DLJMB. The results of this valuation approach werematerially consistent with our board of director’s conclusion that the fairvalue of the common stock on the date of sale or grant was the same as theprice per share paid by DLJMB.

Additionally, we performed an implied market valueanalysis based on the stock price performance of our eight most comparablepeers. In calculating this implied market value, we applied the percentagechange in market value of these peers on a monthly basis beginning withJuly 31, 2004. The analysis further validated the conclusion that the fairvalue of the common stock on the date of sale or grant at $14.61 per share wasreasonable.

Based on an initial public offering price of $20.00per share, the intrinsic value of the options outstanding at December 31,2004 was $31.3 million, of which $7.5 million related to vestedoptions and $23.8 million related to unvested options.

Significant Factors, Assumptions, and MethodologiesUsed in Determining Fair Value-In determining the fair value of our commonstock prior to becoming a public company, we needed to make complex andsubjective judgments. This determination represented a critical accountingestimate. Specifically, we retrospectively determined fair value as of November 30,2004 by multiplying the Adjusted EBITDA of the combined company on a pro formalast twelve months basis by the same multiple at which KKR and DLJMB valued thecombined Rockwood and Dynamit Nobel businesses in July 2004. The enterprisevalue of the combined company was then determined by subtracting from thisamount the combined company’s long-term debt, net of cash and cash equivalents,as of November 30, 2004. This resulting enterprise value was then dividedby the outstanding number of shares as of November 30, 2004 to determinethe estimated fair value per share.

Significant Factors Contributing to the Differencebetween Fair Value as of the dates of each grant and IPO Price-During the yearended December 31, 2004, we granted 2,091,852 stock options, each with anexercise price of $14.61 per share, which we also determined to be the fairvalue of our common stock. We believe the difference between $14.61 per shareand the public offering price is due to several factors that were notanticipated on the dates of the common stock sales and stock option grants andcertain events that have occurred, and have resulted, in an increased fairvalue of our common stock in connection with the initial public offering. Theyinclude:

·                           *Market factors*

*SuccessfulInitial Public Offerings by Two Chemical Companies*—Twochemical companies successfully completed an initial public offering inNovember 2004 and January 2005. This return of chemical companies to the publicequity markets in an initial public offering context bolstered our equity valueby significantly increasing our chances of successfully completing an initialpublic offering. Based on the successful initial public offering in the UnitedStates of one of these companies, previously listed in Germany, the likelihoodof a successful U.S. initial public offering of a chemicals company withsignificant European operations, such as Rockwood, increased significantly.

*Completionof the Initial Public Offering*—The completion of the initialpublic offering in August 2005 increased the value of our common stock due tothe resulting significant increase in liquidity and marketability. In addition,due to the repayment 

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of our pay-in-kind loansand redemption of our pay-in-kind notes and senior discount notes, which had ahigh rate of interest and due to the significant reduction in the cost ofequity as a public company, we believe our weighted average cost of capital hasdeclined contributing to a higher valuation of our common stock.

·                                          *Business factors*

*Reduced Leverage*—Theapplication of a substantial portion of the net proceeds of the initial publicoffering to reduce our substantial leverage has improved our liquiditysignificantly. This positively affects the “net equity value,” increasing theoverall fair value of the common stock.

*Successful Integration of DynamitNobel.* The integration risk associated with the Dynamit NobelAcquisition has been largely eliminated since the time of the sales of commonstock and grants of stock options.

*Completion of the Groupe NovasepCombination.* On December 31, 2004, we completed the GroupeNovasep combination. We believe this combination improved the value of thisformer segment and our overall value.

During 2005 and 2006, we granted stock options for 57,000shares and 27,000 shares, respectively, of common stock. These options had anexercise price equal to the fair market value of our common stock on the dateof the grant. In accordance with SFAS No. 123R, “Share-Based Payment,” which weadopted on January 1, 2006, we are required to recognize the cost resultingfrom all share-based payment awards in our statement of operations beginning inthe first quarter of 2006. The adoption of this standard did not have amaterial impact on the Company in 2006. See Note 3, “Stock-Based Compensation,”for further details.

*Pensions, Postemployment andPostretirement Costs.* In connection with the KKR, DynamitNobel, and pigments and dispersion acquisitions as well as the Groupe Novasepcombination, Rockwood assumed responsibility for the pension and postretirementbenefits for substantially all of the employees of the businesses acquired thatwere active as of the date of the acquisition. For the KKR and pigments anddispersion acquisitions, obligations related to retired and terminated vestedemployees as of such date remained the responsibility of the seller, andaccordingly, these obligations are not reflected in our consolidated financial statements.Defined benefit costs and liabilities have been determined in accordance withSFAS 87, *Employers’ Accounting for Pensions* andSFAS 158, *Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,106, and 132 (R).* Postretirement benefit costs and liabilities havebeen determined in accordance with SFAS 106, Employers’ *Accountingfor Postretirement Benefits Other Than Pensions* and SFAS 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans,**an amendment of FASBStatements No. 87, 88, 106, and 132 (R).* Postemployment benefitcosts and liabilities have been determined in accordance with SFAS 112, *Employers’ Accounting for Postemployment Benefits.*

The measurement of our pension obligations, costs andliabilities is dependent on a variety of assumptions used by our actuaries.These assumptions include estimates of the present value of projected futurepension payments to all plan participants, with consideration to the likelihoodof potential future events such as salary increases (due to marketplaceconditions and/or inflation) and demographic experience (such as retirement andmortality rates). These assumptions may have an effect on the amount and timingof future contributions or benefit payments. For funded plans, the plan trusteeobtains an independent valuation of the fair value of pension plan assets andprepares estimates of expected returns based on target asset allocationsmultiplied by current marketplace rates of return for comparable assets. Webase the discount rate assumption on investment yields available at year-end onAA-rated corporate long-term bonds. The effects of actual results differingfrom our assumptions are accumulated and amortized over future periods andtherefore are likely to affect our recognized expense in those periods. Wecannot predict these bond yields or investment returns and therefore cannotreasonably estimate whether adjustments to our stockholders’ equity for minimumpension liability in subsequent years will be significant.

Estimated sensitivity of our pension funded status andstockholders’ equity and annual pension expense to a 0.25% increase/decrease inthe discount rate assumption is shown below as of and for the year endedDecember 31, 2006. The estimates were based on inquiries of the actuaries ofplans representing approximately 80% of total pension funded status as ofDecember 31, 2006. Remaining plans are assumed to have similar sensitivities.The December 31, 2006 funded status and stockholders’ equity are affected byassumptions as of December 31, 2006 while 2006 annual pension expense isaffected by December 31, 2005 assumptions:

|                                             | ** ** | **As of December 31, 2006** | ** **        | ** **              | ** **        |
|---------------------------------------------|------------|-------------------------------------------------|-------------------|-------------------------|-------------------|
| **($ in millions)**               | ** ** | **U.S. Plans**                             | ** **        | **Non-U.S. Plans** | ** **        | ** ** | ** ** | **2006 Pension** | ** ** |
| **Impact of a Change in Discount Rate (a)** | ** ** | ** **                                      | **Funded Status** | ** **              | **Funded Status** | ** ** | **Equity** | ** ** | **Expense** | ** ** |
| +25 basis points                            |       | 1.1                                             |              | 17.3                    |              | (18.4 | ) | (0.6 | ) |
| -25 basis points                            |       | (1.2                                            | )                 | (17.9                   | )                 | 19.1 |   | 1.0 |   |
|                                             |            |                                                 |                   |                         |                   |  |  |  |  |  |

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(a) Based on sensitivities provided by actuaries for the main Germanand U.K. schemes. Other countries’ plans are assumed to have similarsensitivities.

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As shown above, changes in the discount rate can havea significant effect on the funded status of our pension plans and stockholders’equity. As noted above, the funded status and stockholders’ equity of ourfunded plans might also be significantly affected by assumptions concerningexpected return of plan assets. However, given that most of our pensionobligations do not require funding, such sensitivity would be significantlyless.

*Useful lives of Plant and Equipment*.We determine the estimated useful lives and related depreciation charges forour plant and equipment. Depreciation is determined using the straight-linemethod over the various asset classes. Estimated lives range from 20-30 yearsfor buildings and improvements (including land improvements), 7-12 years formachinery and equipment, 3-5 years for furniture and fixtures and 14-50 yearsfor mining rights. To the extent actual lives are less than previouslyestimated lives, we will increase our depreciation charge or will write-off orwrite-down obsolete assets.

To the extent that our plant and equipment actualuseful lives differ from management’s estimates by 10 percent, consolidated netincome would be an estimated $13.9 million higher/lower based upon 2006results, depending upon whether the actual lives were longer/shorter,respectively, than the estimates.

*Useful lives of Other Intangible Assets.*We determine the estimated useful lives and related amortization charges forour other intangible assets. Other intangible assets primarily consist ofpatents and other intellectual property, trade names and trademarks, andcustomer relationships. Patents and other intellectual property are recorded attheir estimated fair values at the time of acquisition and are being amortizedover their estimated remaining useful lives, ranging from 4 to 20 years. Tradenames and trademarks are being amortized over 25 years, and customer relationshipsare amortized from 7 to 15 years. To the extent actual lives are less thanpreviously estimated lives, we will increase our amortization charge or willwrite-off or write-down obsolete other intangible assets.

To the extent that the actual useful lives of our other intangibleassets differ from management’s estimates by 10 percent, consolidated netincome would be an estimated $5.2 million higher/lower based upon 2006 results,depending upon whether the actual lives were longer/shorter, respectively, thanthe estimates.

**Recent Accounting Pronouncements**

See “Recent Accounting Pronouncements” section in Note1, “Description of Business and Summary of Significant Accounting Policies,”for discussion of recent accounting pronouncements.

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**Quarterly Financial Information(Unaudited)**

The followinginformation has been reclassified to reflect the sale of our Groupe Novasep segmentthat has been reported as a discontinued operation for all periods presented.
| **($ in millions, except per share amounts)** | ** ** | ** ** | **First  Quarter (1) (2)** | ** ** | **Second  Quarter (1)** | ** ** | **Third  Quarter (1)** | ** ** | **Fourth  Quarter (1)** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **2006**                                                                    | ** ** |       |                                 |       |                         |       |                        |       |                         |       |
| Net sales                                                                   |       | $          | 724.1                                |       | $                            | 771.5      |                        | $          | 739.8                        |       | $ | 739.8 |   |
| Gross profit                                                                |       | 225.8      |                                 | 242.9      |                         | 229.7      |                        | 231.6      |                         |
|                                                                        |       |       |                                 |       |                         |       |                        |       |                         |
| Net income from  continuing operations                                      |       | $          | 26.5                                 |       | $                            | 30.2       |                        | $          | 16.1                         |       | $ | 7.5 |   |
| Income from  discontinued operations, net of tax                            |       | 16.5       |                                 | 8.1        |                         | 1.9        |                        | 1.4        |                         |
| Minority  interest in discontinued operations                               |       | (3.0       | )                                    | (1.2       | )                            | 3.4        |                        | (4.4       | )                            |
| Net income                                                                  |       | $          | 40.0                                 |       | $                            | 37.1       |                        | $          | 21.4                         |       | $ | 4.5 |   |
|                                                                        |       |       |                                 |       |                         |       |                        |       |                         |
| Basic earnings  from continuing operations                                  |       | $          | 0.36                                 |       | $                            | 0.41       |                        | $          | 0.22                         |       | $ | 0.10 |   |
| Basic earnings  (loss) from discontinued operations                         |       | 0.18       |                                 | 0.09       |                         | 0.07       |                        | (0.04      | )                            |
| Basic earnings  per share                                                   |       | $          | 0.54                                 |       | $                            | 0.50       |                        | $          | 0.29                         |       | $ | 0.06 |   |
|                                                                        |       |       |                                 |       |                         |       |                        |       |                         |
| Diluted earnings  from continuing operations                                |       | $          | 0.35                                 |       | $                            | 0.40       |                        | $          | 0.21                         |       | $ | 0.10 |   |
| Diluted earnings  (loss) from discontinued operations                       |       | 0.18       |                                 | 0.09       |                         | 0.08       |                        | (0.04      | )                            |
| Diluted earnings per  share                                                 |       | $          | 0.53                                 |       | $                            | 0.49       |                        | $          | 0.29                         |       | $ | 0.06 |   |
|                                                                             |            |            |                                      |            |                              |            |                             |            |                              |            |  |  |  |  |  |

 
|                                                |       | **First****Quarter (3)** | ** ** | **Second  Quarter (3)** | ** ** | **Third  Quarter (3) (4)** | ** ** | **Fourth  Quarter (3) (5)** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|----------------------------|------------|-----------------------------|------------|
| **2005**                                            | ** ** |                     |       |                    |       |                       |       |                        |       |   |
| Net sales                                           |       | $                        | 676.8      |                    | $          | 722.4                      |       | $                           | 679.7      |   | $ | 663.2 |   |
| Gross profit                                        |       | 212.5                    |       | 234.0                   |       | 213.1                      |       | 205.5                       |       |
|                                                |       |                     |       |                    |       |                       |       |                        |       |
| Net income  (loss) from continuing operations       |       | $                        | 38.4       |                    | $          | 89.3                       |       | $                           | (13.5      | ) | $ | 22.8 |   |
| Loss from  discontinued operations, net of tax      |       | (0.9                     | )          | (1.6                    | )          | (0.4                       | )          | (41.3                       | )          |
| Minority  interest in discontinued operations       |       | 0.8                      |       | 0.9                     |       | 0.6                        |       | 0.7                         |       |
| Net income (loss)                                   |       | $                        | 38.3       |                    | $          | 88.6                       |       | $                           | (13.3      | ) | $ | (17.8 | ) |
|                                                |       |                     |       |                    |       |                       |       |                        |       |
| Basic earnings  (loss) from continuing operations   |       | $                        | 0.74       |                    | $          | 1.75                       |       | $                           | (0.25      | ) | $ | 0.31 |   |
| Basic loss from  discontinued operations            |       | —                   |       | (0.01                   | )          | —                     |       | (0.55                       | )          |
| Basic earnings (loss) per share                     |       | $                        | 0.74       |                    | $          | 1.74                       |       | $                           | (0.25      | ) | $ | (0.24 | ) |
|                                                |       |                     |       |                    |       |                       |       |                        |       |
| Diluted earnings  (loss) from continuing operations |       | $                        | 0.73       |                    | $          | 1.69                       |       | $                           | (0.25      | ) | $ | 0.31 |   |
| Diluted loss from  discontinued operations          |       | —                   |       | (0.01                   | )          | —                     |       | (0.55                       | )          |
| Diluted earnings  (loss) per share                  |       | $                        | 0.73       |                    | $          | 1.68                       |       | $                           | (0.25      | ) | $ | (0.24 | ) |
|                                                     |            |                          |            |                         |            |                            |            |                             |            |  |  |  |  |  |

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(1)    Results in 2006 includeforeign exchange (losses) gains of $(2.6) million, $5.5 million, $4.8 millionand $1.6 million for the first quarter, second quarter, third quarter andfourth quarter, respectively. This includes foreign exchange gains of$0.3 million and $0.4 million for the first and second quarters of2006, respectively, for the Groupe Novasep segment that was sold in January2007 and reported as part of income from discontinued operations.

(2)    Results inthe first quarter include a loss of $12.1 million related to the sale of RohnerAG in March 2006. This loss was reported as part of income from discontinuedoperations as Rohner AG was part of our Groupe Novasep segment that was sold inJanuary 2007.

(3)    Results in2005 include foreign exchange gains (losses) of $47.2 million, $66.8 million,$2.1 million and $(1.5) million for the first quarter, second quarter, third quarterand fourth quarter, respectively. This includes foreign exchange gains (losses)of $0.2 million, $(0.5) million, $0.2 million and$0.2 million for the first, second, third and fourth quarters of 2005,respectively, for the Groupe Novasep segment.

(4)    Results inthe third quarter of 2005 include IPO related charges of $36.6 millionconsisting of $10.0 million to terminate the management services agreement withaffiliates of KKR and DLJMB, redemption premiums of $13.2 million to redeemdebt and the write-off of $13.4 million of deferred financing costs associatedwith the debt repaid.

(5)    Results inthe fourth quarter of 2005 include impairment charges of $45.1 millionprimarily related to the downsizing of our manufacturing operations at ourRohner facility within the Groupe Novasep segment. The impairment charge of$44.7 million related to the Rohner facility was reported as part of loss fromdiscontinued operations as Rohner AG was part of our Groupe Novasep segmentthat was sold in January 2007.

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The basic and diluted earnings (loss) per common share amounts arecalculated independently for each of the quarters presented. The sum of thequarters may not equal the full year amounts.

**Item 7A.Quantitative and Qualitative Disclosures About Market Risk.**

We are exposed to market risk from changes in interestrates, foreign currency exchange rates and commodity prices. We manage ourexposure to these market risks through regular operating and financingactivities and through the use of derivatives. When used, derivatives areemployed as risk management tools and not for trading purposes.

**Interest Rate Risk**

We had $411.2 million and $439.2 million of variablerate debt (after hedging) outstanding as of December 31, 2006 and 2005,respectively, at the then applicable exchange rate. Any borrowings under ourrevolving credit facility will also be at a variable rate. Although we are notrequired under the terms of any of our long-term debt facilities to hedge, orotherwise protect against interest rate fluctuation in our variable rate debt,we have entered into interest rate swaps to manage our exposure to changes ininterest rates related to euro-denominated debt. At December 31, 2006, thesecontracts cover notional amounts of $736.3 million (at rates of 3.644% and4.499%) and €472.7 million (at rates ranging from 2.498% to 5.720%). As ofDecember 31, 2005, these contracts covered notional amounts of $749.0 million(at rates of 3.644% and 4.499%) and €478.4 million (at rates ranging from2.498% to 4.529%). These derivative contracts effectively convert the seniorsecured credit facilities to fixed rate obligations. The maturity dates of thehedges are between July 2007 and August 2008. We may in the future consideradjusting the amounts covered by these derivative contracts to better suit ourcapital structure. Each 0.125% increase or decrease in the assumed weightedaverage interest rate would change the annual interest expense by $0.5 millionand $0.5 million in 2006 and 2005, respectively.

**Foreign Currency Risk**

We conduct operations in many countries around theworld. Our results of operations are subject to both currency transaction riskand currency translation risk. We operate a geographically diverse business,with 49% of our net sales in 2006 generated from customers in Europe, 34% inNorth America (predominately in the United States) and 17% from the rest of theworld based upon customer ship to locations. For a geographic description ofthe origin of our net sales and location of our long-lived assets, see Note 4, “SegmentInformation.” Our diverse and extensive customer base is served by 88manufacturing facilities in 25 countries. Although we sell and manufacture ourproducts in many countries, our sales and production costs are mainlydenominated in U.S. dollars and euros. Our results of operations and financialcondition are therefore impacted by the fluctuation of the euro against ourreporting currency, the U.S. dollar. As a result of the Dynamit NobelAcquisition, a significantly larger portion of our sales and production costsis now denominated in euros. Approximately 48% of our 2006 net sales werederived from subsidiaries whose local currency is the euro. This increases theimpact of the fluctuation of the euro against the U.S. dollar.

We incur currency transaction risk whenever we enterinto either a purchase or sale transaction using a currency other than thelocal currency of the transacting entity. Gains and losses on currencytransactions are included in operating income and do impact our operatingmargins. With respect to currency translation risk, our financial condition andresults of operations are measured and recorded in the relevant domesticcurrency and then translated into U.S. dollars for inclusion in our consolidatedfinancial statements. Gains and losses on currency translations are recorded inour consolidated financial statements as a component of “other comprehensiveincome (loss)” and do not impact our operating margins. Exchange rates betweenthese currencies and U.S. dollars in recent years have fluctuated significantlyand may do so in the future.

Our financial results are subject to the effect ofcurrency fluctuations on the translation of our euro-denominated debt. As of December 31, 2006 and 2005, our total euro-denominated debt equaled €889.8million ($1,174.4 million based on the Friday, December 29, 2006 exchange rate of € 1.00=$1.3199) and €928.7 million ($1,095.5million based on the December 31, 2005 exchange rate of €1.00=$1.1796), respectively. A weakening or strengthening ofthe euro against the U.S. dollar by $0.01 would decrease or increase,respectively, by $8.9 million and $9.3 million in 2006 and 2005, respectively,the U.S. dollar equivalent of our total euro-denominated debt. Gains and losseson the translation of debt denominated in a currency other than the functionalcurrency of the borrower are included as a separate component of “other income(expenses)” in our statement of operations and “accumulated other comprehensiveincome” in our balance sheet.

In connection with the offering of the 2014 Notes, weentered into cross currency interest rate swaps with a five year term and anotional amount of €155.6 million that effectively convert the U.S. dollarfixed rate debt in respect of the 2014 dollar-denominated notes sold into eurofixed rate debt. We designated this contract as a hedge of the foreign currencyexposure of our net investment in our euro-denominated operations. In addition,we designated the remaining portion of our euro-denominated debt that isrecorded on our U.S. books as a net investment hedge of our euro-denominatedinvestments as of October 1, 2005 (euro debt of €680.9 million at December 31,2006; $898.7 million based on the Friday, December 29, 2006 exchange rate of €1.00=$1.3199).As a result, any foreign currency gains and losses resulting from theeuro-denominated debt discussed above is accounted for as a component ofaccumulated other comprehensive income.

**Commodity Price Risk**

We are subject to commodity price risk for certain ofour raw materials, such as copper and zinc. We have not materially hedged thiscommodity price exposure to date.

82

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**Item 8. Financial Statements andSupplementary Data.**

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of

Rockwood Holdings, Inc.

Princeton, New Jersey

We have audited the accompanying consolidated balancesheets of Rockwood Holdings, Inc. and subsidiaries (the “Company”) as ofDecember 31, 2006 and 2005, and the related consolidated statements ofoperations, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2006. Our audits also included thefinancial statement schedule listed in the Index at Item 15. These financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thefinancial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of RockwoodHoldings, Inc. and subsidiaries at December 31, 2006 and 2005, and the resultsof their operations and their cash flows for each of the three years in the periodended December 31, 2006, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein. 

As discussed in Note 1 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standard No.158, *Employers’**Accounting forDefined Benefit Pension and Other Postretirement Plans*.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, based on the criteria establishedin *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated March 16, 2007 expressed an unqualified opinion on management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

 
| /s/ Deloitte & Touche  LLP           |   |
|------------------------------------------|--------|
| Parsippany, New  Jersey   March 16, 2007 |
|                                     |
|                                     |
|                                     |

 

83

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin millions, except per share amounts; shares in thousands)**
| ** **                                                | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                 |       | $                                          | 2,975.2    |   | $ | 2,742.1 |   | $ | 1,642.5 |   |
| Cost of products sold                                     |       | 2,045.2                                    |       | 1,877.0 |   | 1,185.7 |   |
| Gross profit                                              |       | 930.0                                      |       | 865.1 |   | 456.8 |   |
| Selling, general and  administrative expenses             |       | 584.6                                      |       | 522.7 |   | 314.6 |   |
| Impairment charges                                        |       | 2.2                                        |       | 0.4 |   | 11.0 |   |
| Restructuring charges,  net                               |       | 5.2                                        |       | 15.4 |   | 1.1 |   |
| Management services  agreement termination fee            |       | —                                     |       | 10.0 |   | — |   |
| Other, net                                                |       | (0.2                                       | )          | (4.4 | ) | — |   |
| Operating income                                          |       | 338.2                                      |       | 321.0 |   | 130.1 |   |
| Other income  (expenses):                                 |       |                                       |       |   |   |   |   |
| Interest expense, net                                     |       | (195.7                                     | )          | (209.3 | ) | (161.1 | ) |
| Loss on early  extinguishment of debt                     |       | —                                     |       | (26.6 | ) | — |   |
| Refinancing expenses                                      |       | —                                     |       | (1.0 | ) | (27.1 | ) |
| Foreign exchange gain  (loss), net                        |       | 8.6                                        |       | 114.5 |   | (126.2 | ) |
| Other, net                                                |       | 1.8                                        |       | 2.6 |   | (2.8 | ) |
| Other income  (expenses), net                             |       | (185.3                                     | )          | (119.8 | ) | (317.2 | ) |
| Income (loss) before  taxes                               |       | 152.9                                      |       | 201.2 |   | (187.1 | ) |
| Income tax provision                                      |       | 72.6                                       |       | 64.2 |   | 27.1 |   |
| Net income  (loss) from continuing operations             |       | 80.3                                       |       | 137.0 |   | (214.2 | ) |
| Income (loss) from  discontinued operations, net of tax   |       | 27.9                                       |       | (44.2 | ) | (1.9 | ) |
| Minority interest in  discontinued operations             |       | (5.2                                       | )          | 3.0 |   | — |   |
| Net income  (loss)                                        |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) |
|                                                      |       |                                       |       |   |   |   |   |
| Basic earnings (loss)  per share:                         |       |                                       |       |   |   |   |   |
| Earnings (loss) from  continuing operations               |       | $                                          | 1.09       |   | $ | 2.24 |   | $ | (6.61 | ) |
| Earnings (loss) from  discontinued operations, net of tax |       | 0.31                                       |       | (0.69 | ) | (0.05 | ) |
| Basic earnings  (loss) per share                          |       | $                                          | 1.40       |   | $ | 1.55 |   | $ | (6.66 | ) |
|                                                      |       |                                       |       |   |   |   |   |
| Diluted earnings (loss)  per share:                       |       |                                       |       |   |   |   |   |
| Earnings (loss) from  continuing operations               |       | $                                          | 1.07       |   | $ | 2.21 |   | $ | (6.61 | ) |
| Earnings (loss) from  discontinued operations, net of tax |       | 0.30                                       |       | (0.69 | ) | (0.05 | ) |
| Diluted earnings  (loss) per share                        |       | $                                          | 1.37       |   | $ | 1.52 |   | $ | (6.66 | ) |
|                                                      |       |                                       |       |   |   |   |   |
| Weighted average number  of basic shares outstanding      |       | 73,782                                     |       | 59,133 |   | 33,054 |   |
| Weighted average number of diluted shares outstanding     |       | 75,044                                     |       | 60,002 |   | 33,054 |   |

 

See accompanyingnotes to consolidated financial statements.

84

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts; shares in thousands)**
| ** **                                                                                                                                                                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                           |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                |       | $                     | 27.7       |   | $ | 100.5 |   |
| Accounts  receivable, net                                                                                                                                                                                                                 |       | 463.4                 |       | 406.2 |   |
| Inventories                                                                                                                                                                                                                               |       | 445.4                 |       | 380.5 |   |
| Deferred income  taxes                                                                                                                                                                                                                    |       | 9.7                   |       | 24.7 |   |
| Prepaid expenses  and other current assets                                                                                                                                                                                                |       | 43.1                  |       | 57.1 |   |
| Assets of  discontinued operations                                                                                                                                                                                                        |       | 490.6                 |       | 441.8 |   |
| Total current assets                                                                                                                                                                                                                      |       | 1,479.9               |       | 1,410.8 |   |
| Property, plant  and equipment, net                                                                                                                                                                                                       |       | 1,374.9               |       | 1,237.6 |   |
| Goodwill                                                                                                                                                                                                                                  |       | 1,717.7               |       | 1,566.0 |   |
| Other intangible  assets, net                                                                                                                                                                                                             |       | 539.6                 |       | 506.3 |   |
| Deferred debt  issuance costs, net of accumulated amortization of $25.4 and $13.5,  respectively                                                                                                                                          |       | 51.6                  |       | 56.6 |   |
| Other assets                                                                                                                                                                                                                              |       | 56.1                  |       | 39.2 |   |
| Total assets                                                                                                                                                                                                                              |       | $                     | 5,219.8    |   | $ | 4,816.5 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                                                                     |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                          |       | $                     | 290.3      |   | $ | 255.3 |   |
| Income taxes  payable                                                                                                                                                                                                                     |       | 0.2                   |       | 17.3 |   |
| Accrued  compensation                                                                                                                                                                                                                     |       | 85.9                  |       | 76.3 |   |
| Restructuring  liability                                                                                                                                                                                                                  |       | 8.5                   |       | 13.4 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                           |       | 180.7                 |       | 147.5 |   |
| Senior secured  revolving credit facility                                                                                                                                                                                                 |       | 37.0                  |       | 30.0 |   |
| Long-term debt,  current portion                                                                                                                                                                                                          |       | 80.8                  |       | 69.8 |   |
| Liabilities of  discontinued operations                                                                                                                                                                                                   |       | 171.1                 |       | 244.7 |   |
| Total current liabilities                                                                                                                                                                                                                 |       | 854.5                 |       | 854.3 |   |
| Long-term debt                                                                                                                                                                                                                            |       | 2,720.9               |       | 2,661.4 |   |
| Pension and  related liabilities                                                                                                                                                                                                          |       | 353.0                 |       | 342.8 |   |
| Deferred income  taxes                                                                                                                                                                                                                    |       | 43.1                  |       | 9.9 |   |
| Other  liabilities                                                                                                                                                                                                                        |       | 94.2                  |       | 88.2 |   |
| Total liabilities                                                                                                                                                                                                                         |       | 4,065.7               |       | 3,956.6 |   |
| Minority  interest                                                                                                                                                                                                                        |       | 33.6                  |       | 25.2 |   |
|                                                                                                                                                                                                                                      |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                                                                                                                               |       |                  |       |   |   |
| Common stock  ($0.01 par value, 400,000 shares authorized, 73,879 shares issued and 73,785  shares outstanding at December 31, 2006; 400,000 shares authorized, 73,873  shares issued and 73,779 shares outstanding at December 31, 2005) |       | 0.7                   |       | 0.7 |   |
| Paid-in capital                                                                                                                                                                                                                           |       | 1,151.8               |       | 1,151.7 |   |
| Accumulated  other comprehensive income                                                                                                                                                                                                   |       | 234.0                 |       | 52.0 |   |
| Accumulated  deficit                                                                                                                                                                                                                      |       | (264.6                | )          | (367.6 | ) |
| Treasury stock,  at cost                                                                                                                                                                                                                  |       | (1.4                  | )          | (1.4 | ) |
| Other                                                                                                                                                                                                                                     |       | —                |       | (0.7 | ) |
| Total stockholders’ equity                                                                                                                                                                                                           |       | 1,120.5               |       | 834.7 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                          |       | $                     | 5,219.8    |   | $ | 4,816.5 |   |

 

See accompanyingnotes to consolidated financial statements.

85

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**ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in millions)**
| ** **                                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                               |       |                                       |       |   |   |   |   |
| Net income  (loss)                                                                                                       |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:                                |       |                                       |       |   |   |   |   |
| (Income) loss  from discontinued operations, net of tax                                                                  |       | (27.9                                      | )          | 44.2 |   | 1.9 |   |
| Minority  interest in discontinued operations                                                                            |       | 5.2                                        |       | (3.0 | ) | — |   |
| Depreciation and  amortization                                                                                           |       | 191.0                                      |       | 170.6 |   | 106.6 |   |
| Deferred  financing costs amortization                                                                                   |       | 9.7                                        |       | 10.7 |   | 7.4 |   |
| Refinancing  expenses                                                                                                    |       | —                                     |       | — |   | 25.1 |   |
| Loss on early  extinguishment of debt (including $13.4 million of non-cash write-offs  on deferred financing costs) |       | —                                     |       | 26.6 |   | — |   |
| Foreign exchange  (gain) loss                                                                                            |       | (8.6                                       | )          | (114.5 | ) | 126.2 |   |
| Non-cash  interest expense on pay-in-kind loans                                                                          |       | —                                     |       | 24.1 |   | 32.6 |   |
| Fair value  adjustment of derivatives                                                                                    |       | (7.2                                       | )          | (22.4 | ) | (6.0 | ) |
| Bad debt  provision                                                                                                      |       | 0.3                                        |       | 2.0 |   | 2.8 |   |
| Deferred income  taxes                                                                                                   |       | 40.2                                       |       | 32.7 |   | 6.9 |   |
| Impairment  charges and gains related to asset sales                                                                     |       | 2.0                                        |       | (0.9 | ) | 11.0 |   |
| Changes in assets and  liabilities, net of the effect of foreign currency translation and  acquisitions:                 |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                                                                     |       | (25.4                                      | )          | (37.5 | ) | 6.7 |   |
| Inventories,  including inventory write-up reversal                                                                      |       | (31.7                                      | )          | (23.9 | ) | 24.2 |   |
| Prepaid expenses  and other assets                                                                                       |       | 20.0                                       |       | 20.2 |   | 3.8 |   |
| Accounts payable                                                                                                         |       | 8.5                                        |       | 49.7 |   | (19.1 | ) |
| Income taxes  payable                                                                                                    |       | (3.5                                       | )          | 4.3 |   | 1.9 |   |
| Accrued expenses  and other liabilities                                                                                  |       | 3.5                                        |       | (18.0 | ) | 8.0 |   |
| Net cash provided by  operating activities of continuing operations                                                      |       | 279.1                                      |       | 260.7 |   | 123.9 |   |
| Net cash  provided by (used in) operating activities of discontinued operations                                          |       | 23.5                                       |       | (3.1 | ) | 38.4 |   |
| **Net  cash provided by operating activities**                                                                           |       | 302.6                                      |       | 257.6 |   | 162.3 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                                               |       |                                       |       |   |   |   |   |
| Acquisitions, including  transaction fees paid, net of cash acquired                                                     |       | (45.7                                      | )          | (76.5 | ) | (2,155.0 | ) |
| Post closing purchase  price consideration                                                                               |       | —                                     |       | (16.1 | ) | — |   |
| Capital expenditures,  excluding capital leases                                                                          |       | (171.9                                     | )          | (163.5 | ) | (81.0 | ) |
| Proceeds on sale of  property, plant and equipment                                                                       |       | 4.3                                        |       | 8.5 |   | 0.8 |   |
| Net cash used in  investing activities of continuing operations                                                          |       | (213.3                                     | )          | (247.6 | ) | (2,235.2 | ) |
| Net cash (used  in) provided by investing activities of discontinued operations                                          |       | (35.5                                      | )          | (29.0 | ) | 2.3 |   |
| **Net  cash used in investing activities**                                                                               |       | (248.8                                     | )          | (276.6 | ) | (2,232.9 | ) |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                               |       |                                       |       |   |   |   |   |
| Issuance of common  stock, net of fees                                                                                   |       | —                                     |       | 471.4 |   | 432.0 |   |
| Stock issuance                                                                                                           |       | 0.1                                        |       | (33.8 | ) | (0.1 | ) |
| Proceeds from senior  secured credit facilities                                                                          |       | 239.1                                      |       | 361.0 |   | 3,194.8 |   |
| Repayment of senior  secured credit facilities                                                                           |       | (275.6                                     | )          | (338.4 | ) | — |   |
| Long-term debt  repayments from IPO proceeds                                                                             |       | —                                     |       | (370.7 | ) | — |   |
| Payments on other  long-term debt                                                                                        |       | (20.1                                      | )          | (12.1 | ) | (1,481.6 | ) |
| Redemption of  redeemable convertible preferred stock from IPO proceeds                                                  |       | —                                     |       | (38.5 | ) | — |   |
| Financing costs                                                                                                          |       | —                                     |       | (1.4 | ) | — |   |
| Costs related to early  extinguishment of debt                                                                           |       | —                                     |       | (13.2 | ) | — |   |
| Other changes to  stockholders’ equity                                                                              |       | —                                     |       | — |   | (0.3 | ) |
| Net cash (used in) provided  by financing activities of continuing operations                                            |       | (56.5                                      | )          | 24.3 |   | 2,144.8 |   |
| Net cash used in  financing activities of discontinued operations                                                        |       | (46.2                                      | )          | (15.4 | ) | (10.4 | ) |
| **Net  cash (used in) provided by financing activities**                                                                 |       | (102.7                                     | )          | 8.9 |   | 2,134.4 |   |
| Effect of exchange rate  changes on cash                                                                                 |       | (13.8                                      | )          | 1.0 |   | 5.6 |   |
| Net (decrease)  increase in cash and cash equivalents                                                                    |       | (62.7                                      | )          | (9.1 | ) | 69.4 |   |
| Cash and cash  equivalents, beginning of year                                                                            |       | 102.2                                      |       | 111.3 |   | 41.9 |   |
| Cash and cash  equivalents, end of year                                                                                  |       | 39.5                                       |       | 102.2 |   | 111.3 |   |
| Less cash and cash  equivalents of discontinued operations                                                               |       | (11.8                                      | )          | (1.7 | ) | (20.0 | ) |
| Cash and cash  equivalents of continuing operations, end of year                                                         |       | $                                          | 27.7       |   | $ | 100.5 |   | $ | 91.3 |   |
| Supplemental  disclosures of cash flow information:                                                                      |       |                                       |       |   |   |   |   |
| Interest paid, net                                                                                                       |       | $                                          | 146.0      |   | $ | 203.1 |   | $ | 124.8 |   |
| Income taxes paid, net  of refunds                                                                                       |       | $                                          | 37.1       |   | $ | 26.0 |   | $ | 20.9 |   |
| Non-cash investing  activities:                                                                                          |       |                                       |       |   |   |   |   |
| Acquisition of  equipment under capital leases                                                                           |       | $                                          | 1.0        |   | $ | 9.3 |   | $ | — |   |
| Increase in liabilities for property, plant and equipment                                                                |       | $                                          | 0.8        |   | $ | 4.8 |   | $ | 14.0 |   |

 

See accompanying notes toconsolidated financial statements. 

86

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

**YEARSENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Dollars in millions; shares in thousands)**
| ** **                                             | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **        | ** ** | ** **             | ** ** | ** **   | ** ** | ** **             | ** ** | ** **                                                                                                | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|--------------|------------|------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                             | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **        | ** ** | ** **             | ** ** | **Treasury** | ** ** | ** **             | ** ** | ** **                                                                                                | ** ** |
| ** **                                             | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Comprehensive** | ** ** | **Stock**              | ** ** | ** **   | ** ** | **Stockholders’** | ** ** |
| ** **                                             | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Deficit**       | ** ** | **Income (Loss)** | ** ** | **Shares**   | ** ** | **Amount**             | ** ** | **Other**                                                                                                 | ** ** | **Equity** | ** ** |
| BALANCE, JANUARY  1, 2004                              |       | 20,740                |       | $           | 0.2        |              | $          | 291.2                  |       | $                 | 84.4       |                   | $          | (247.3       | )          |                   |       |                   94 |       | $          | (1.4       | ) | $ | (1.0 | ) | $ | 126.1 |   |
| Issuance of  common stock                              |       | 29,570                |       | 0.3         |       | 431.7             |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —                                                                                                    |       | 432.0      |       |
| Stock issuance  costs                                  |       | —                |       | —      |       | (0.1              | )          | —                 |       | —            |       |                   |       | —       |       | —                 |       | —                                                                                                    |       | (0.1       | )          |
| Deferred  compensation                                 |       | —                |       | —      |       | —            |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | 0.3                                                                                                       |       | 0.3        |       |
| Redeemable  convertible preferred redemption accretion |       | —                |       | —      |       | (4.2              | )          | —                 |       | —            |       |                   |       | —       |       | —                 |       | —                                                                                                    |       | (4.2       | )          |
| Minimum pension  liability, net of tax                 |       | —                |       | —      |       | —            |       | (14.3                  | )          | —            |       | $                      | (14.3      | )            | —     |                   | —     |                                                                                                      | —     |       | (14.3      | ) |
| Foreign currency  translation                          |       | —                |       | —      |       | —            |       | 150.0                  |       | —            |       | 150.0                  |       | —       |       | —                 |       | —                                                                                                    |       | 150.0      |       |
| Intercompany  foreign currency transactions            |       | —                |       | —      |       | —            |       | 163.4                  |       | —            |       | 163.4                  |       | —       |       | —       |       | —                                                                                                    |       | 163.4      |       |
| Net investment  hedge, net of tax                      |       | —                |       | —      |       | —            |       | (13.1                  | )          | —            |       | (13.1                  | )          | —       |       | —                 |       | —                                                                                                    |       | (13.1      | )          |
| Net loss                                               |       | —                |       | —      |       | —            |       | —                 |       | (216.1            | )          | (216.1                 | )          | —       |       | —                 |       | —                                                                                                    |       | (216.1     | )          |
| Comprehensive  income                                  |       |                  |       |        |       |              |       |                   |       |              |       | $                      | 69.9       |         |       |                   |       |                                                                                                      |       |       |       |   |
| BALANCE, DECEMBER  31, 2004                            |       | 50,310                |       | 0.5         |       | 718.6             |       | 370.4                  |       | (463.4            | )          |                   |       | 94           |       | (1.4                   | )          | (0.7                                                                                                      | )          | 624.0      |       |
| Issuance of  common stock                              |       | 23,469                |       | 0.2         |       | 471.2             |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —                                                                                                    |       | 471.4      |       |
| Stock issuance  costs                                  |       | —                |       | —      |       | (33.8             | )          | —                 |       | —            |       |                   |       | —       |       | —                 |       | —                                                                                                    |       | (33.8      | )          |
| Redeemable  convertible preferred redemption accretion |       | —                |       | —      |       | (4.3              | )          | —                 |       | —            |       |                   |       | —       |       | —                 |       | —                                                                                                    |       | (4.3       | )          |
| Minimum pension  liability, net of tax                 |       | —                |       | —      |       | —            |       | (16.1                  | )          | —            |       | $                      | (16.1      | )            | —     |                   | —     |                                                                                                      | —     |       | (16.1      | ) |
| Foreign currency  translation                          |       | —                |       | —      |       | —            |       | (163.4                 | )          | —            |       | (163.4                 | )          | —       |       | —                 |       | —                                                                                                    |       | (163.4     | )          |
| Intercompany  foreign currency transactions            |       | —                |       | —      |       | —            |       | (183.7                 | )          | —            |       | (183.7                 | )          | —       |       | —                 |       | —                                                                                                    |       | (183.7     | )          |
| Net investment  hedges, net of tax                     |       | —                |       | —      |       | —            |       | 45.4                   |       | —            |       | 45.4                   |       | —       |       | —                 |       | —                                                                                                    |       | 45.4       |       |
| Cash flow hedges,  net of tax                          |       | —                |       | —      |       | —            |       | (0.6                   | )          | —            |       | (0.6                   | )          | —       |       | —                 |       | —                                                                                                    |       | (0.6       | )          |
| Net income                                             |       | —                |       | —      |       | —            |       | —                 |       | 95.8              |       | 95.8                   |       | —       |       | —                 |       | —                                                                                                    |       | 95.8       |       |
| Comprehensive  loss                                    |       |                  |       |        |       |              |       |                   |       |              |       | $                      | (222.6     | )            |       |                   |       |                                                                                                      |       |       |       |   |
| BALANCE, DECEMBER  31, 2005                            |       | 73,779                |       | 0.7         |       | 1,151.7           |       | 52.0                   |       | (367.6            | )          |                   |       | 94           |       | (1.4                   | )          | (0.7                                                                                                      | )          | 834.7      |       |
| Issuance of  common stock                              |       | 6                     |       | —      |       | 0.1               |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —                                                                                                    |       | 0.1        |       |
| Deferred  compensation                                 |       | —                |       | —      |       | —            |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | 0.7                                                                                                       |       | 0.7        |       |
| Minimum pension  liability, net of tax                 |       | —                |       | —      |       | —            |       | 20.7                   |       | —            |       | 20.7                   |       | —       |       | —                 |       | —                                                                                                    |       | 20.7       |       |
| Effect of  adoption of SFAS No. 158, net of tax        |       | —                |       | —      |       | —            |       | (11.3                  | )          | —            |       | —                 |       | —       |       | —                 |       | —                                                                                                    |       | (11.3      | )          |
| Foreign currency  translation                          |       | —                |       | —      |       | —            |       | 147.4                  |       | —            |       | 147.4                  |       | —       |       | —                 |       | —                                                                                                    |       | 147.4      |       |
| Intercompany  foreign currency transactions            |       | —                |       | —      |       | —            |       | 131.7                  |       | —            |       | 131.7                  |       | —       |       | —                 |       | —                                                                                                    |       | 131.7      |       |
| Net investment  hedges, net of tax                     |       | —                |       | —      |       | —            |       | (107.1                 | )          | —            |       | (107.1                 | )          | —       |       | —                 |       | —                                                                                                    |       | (107.1     | )          |
| Cash flow hedges,  net of tax                          |       | —                |       | —      |       | —            |       | 0.6                    |       | —            |       | 0.6                    |       | —       |       | —                 |       |                                                                                                      |       | 0.6        |       |
| Net income                                             |       | —                |       | —      |       | —            |       | —                 |       | 103.0             |       | 103.0                  |       | —       |       | —                 |       | —                                                                                                    |       | 103.0      |       |
| Comprehensive  income                                  |       |                  |       |        |       |              |       |                   |       |              |       | $                      | 296.3      |         |       |                   |       |                                                                                                      |       |       |       |   |
| BALANCE DECEMBER 31,  2006                             |       | 73,785                |       | $           | 0.7        |              | $          | 1,151.8                |       | $                 | 234.0      |                   | $          | (264.6       | )          |                   |       | 94                                                                                                        |       | $          | (1.4       | ) | $ | — |   | $ | 1,120.5 |   |

 

See accompanying notes toconsolidated financial statements.

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**Notes To Consolidated FinancialStatements**

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

***BusinessDescription, Background***—Rockwood Holdings, Inc. andSubsidiaries (“Rockwood” or the “Company”) is a global developer, manufacturerand marketer of high value-added specialty chemicals and advanced materialsused for industrial and commercial purposes.

Rockwood was formed in connection with an acquisitionof certain assets, stock and businesses from Laporte plc (“Laporte”) onNovember 20, 2000 (the “KKR Acquisition”) by affiliates of Kohlberg KravisRoberts & Co. L.P. (“KKR”). The businesses acquired focused on specialtychemicals, iron-oxide pigments, timber-treatment chemicals, clay-based additives,pool and spa chemicals, and electronic chemicals in semiconductors and printedcircuit boards.

On July 31, 2004, theCompany completed the acquisition of four businesses of Dynamit Nobel from mgtechnologies ag, now known as GEA Group Aktiengesellschaft. The businessesacquired are focused on highly specialized markets and consist of: whitepigments; surface treatment and lithium chemicals; ceramics and customsynthesis. The custom sysnthesis business was sold on January 9, 2007 as partof the sale of our Groupe Novasep segment.

On August 22, 2005, the Company completed an initialpublic offering (“IPO”) of 23,469,387 shares of its common stock, whichincluded 3,061,224 shares issued and sold as a result of the underwriters’exercise of the over-allotment option. Rockwood is controlled by affiliates ofKKR.

***Basis of Presentation***—Theaccompanying financial statements of Rockwood are presented on a consolidatedbasis. All significant intercompany accounts and transactions have beeneliminated in consolidation. In the opinion of management, this informationcontains all adjustments necessary for a fair presentation of the results forthe periods presented.

The results of operationsand cash flows of the rheological additives and carbonless developers businessesof Süd-Chemie AG are not included in the twelve month period ended December 31,2005 as the acquisition was completed on December 30, 2005. The financialposition of these businesses are included in the consolidated balance sheets asof December 31, 2006 and 2005. See Note 5, “Acquisitions.”

The results of operations and cash flows of thebusinesses acquired in the Dynamit Nobel Acquisition and the pigments and dispersions business of Johnson Matthey Plc. are included in the consolidatedfinancial statements for the twelve-month period ended December 31, 2005. Theresults of the Dynamit Nobel businesses prior to the acquisition date of July31, 2004 are not included in the consolidated financial statements for thetwelve month period ended December 31, 2004. The results of the pigments anddispersions business of Johnson Matthey Plc. prior to the acquisition date ofSeptember 2, 2004 are not included in the consolidated financial statements in the twelve month period ended December 31, 2004. As noted above,Groupe Novasep was sold in January 2007. As a result, the Company’s financialstatements have been reclassified to reflect the Groupe Novasep subsidiary as adiscontinued operation for the periods presented.

Effective July 18, 2005, the Company’s board ofdirectors authorized a 34.22553019-for-one stock split of its common stock. Asa result of the stock split, the accompanying consolidated financial statementsreflect an increase in the number of outstanding shares of common stock and thetransfer of the additional paid-in-capital to par value. All share amounts havebeen restated to reflect the retroactive effect of the stock split for allperiods presented.

***Nature of Operations/SegmentReporting***—The Company is a global developer, manufacturerand marketer of high value-added specialty chemicals and advanced materials.The Company operates in various business lines within its six reportablesegments consisting of: (1) Specialty Chemicals, which includes lithiumcompounds and chemicals, metal surface treatment chemicals, and synthetic metalsulfides, (2) Performance Additives, which includes color pigments andservices, timber treatment chemicals, clay-based additives, and watertreatment chemicals, (3) Titanium Dioxide Pigments, which consists of titaniumdioxide pigments, and zinc- and barium-based compounds, (4) Advanced Ceramics,which includes ceramic-on-ceramic ball head and liner components used inhip-joint prostheses systems, ceramic cutting tools and a range of otherceramic components, (5) Specialty Compounds, which consists of plasticcompounds and (6) Electronics, which consists of electronic chemicals 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.

***Useof Estimates***—The preparation of financial statements andrelated disclosures in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements, andrevenue and expenses during the

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periods reported. These estimates include, among otherthings, assessing the collectibility of accounts receivable, the use and recoverability of inventory, the valuation of deferred tax assets, impairmentof goodwill as well as property, plant and equipment and other intangibleassets, and the useful lives of tangible and intangible assets, among others. Actualresults 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. See Note 5, “Acquisitions.”

***Major Customers and Concentrationof Credit***—The Company has a number of major end-user,retail and OEM customers, with the largest concentration in Europe, and theUnited States. No single customer accounted for more than 2% of net salesduring any of the periods presented. The Company does not believe a materialpart of its business is dependent upon any single customer, the loss of whichwould have a material long-term impact on the business of the Company. However,the loss of one or more of the Company’s largest customers would most likelyhave a negative short-term impact on the Company’s results of operations.Financial instruments which potentially subject the Company to concentrationsof credit risk consist primarily of accounts receivable and derivativecontracts. See Note 10, “Long-Term Debt,” and “Critical Accounting Policies andEstimates” in Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” for further discussion of estimates used.

***Accounts Receivable***—Theallowance for doubtful accounts is estimated at each reporting date based onfactors such as receivable age, customer liquidity status and previouswrite-off history. The Company performs ongoing credit evaluations of customersand generally does not require collateral. Credit insurance is maintained bycertain of the Company’s businesses. Allowance is maintained for aggregateexpected credit losses. Write-offs are charged to the allowance when taken, netof recoveries. Allowance for doubtful account activity is as follows:
| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**  | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance, January  1            |       | $                                          | 10.7       |   | $ | 9.9 |   |
| Additions  charged to expense  |       | 1.6                                        |       | 4.0 |   |
| Write-offs, net  of recoveries |       | (1.3                                       | )          | (2.0 | ) |
| Other (a)                      |       | 0.2                                        |       | (1.2 | ) |
| Balance,  December 31          |       | $                                          | 11.2       |   | $ | 10.7 |   |
|                                |            |                                            |            |  |  |  |  |  |  |

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(a)             Primarilythe impact of currency changes.

***Risks Associated withInternational Operations and Currency Risk***—The Company’sinternational operations are subject to risks normally associated with foreignoperations, including, but not limited to, the disruption of markets, changesin export or import laws, restrictions on currency exchanges and themodification or introduction of other governmental policies with potentiallyadverse effects. A majority of the Company’s sales and expenses are denominatedin currencies other than U.S. dollars. Changes in exchange rates may have amaterial effect on the Company’s reported results of operations and financialposition. In addition, a significant portion of the Company’s indebtedness isdenominated in euros.

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

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

***Accretion on Senior DiscountNotes***—The Company’s senior discount notes accretedprincipal value for a portion of their term. The Company recorded suchaccretion as interest expense for financial reporting purposes. As a result ofthe completion of the IPO, the Company used $89.2 million of the proceeds toredeem the outstanding principal amount of the senior discount notes (includingaccreted and unpaid interest).

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***Advertising***—TheCompany expenses advertising costs as incurred.

***Researchand Development***—Research and development costs arecharged to expense, as incurred. Such costs were $41.5 million in 2006, $43.5million in 2005 and $19.0 million in 2004.

***Accountingfor Shipping and Handling Costs***—The Company recordsshipping and handling costs in cost of products sold and records shipping andhandling costs billed to customers in net sales in accordance with the EmergingIssues Task Force’s (“EITF”) guidance (EITF 00-10: *Classificationof Shipping and Handling Costs*).

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

***Inventories***—Inventoriesare stated at the lower of cost or market. Cost is determined primarily onaverage cost or the first-in, first-out method. Inventory quantities on handare regularly reviewed, and where necessary, provisions for excess and obsoleteinventory are recorded based primarily on either the Company’s estimatedforecast of product demand and production requirements or historical usage. SeeNote 6, “Inventories.”

***Property,Plant and Equipment***—Property, plant and equipment arestated at cost less accumulated depreciation. Depreciation is determined usingthe straight-line method over the various asset classes. Estimated lives rangefrom 20-30 years for buildings and improvements (including land improvements),7-12 years for machinery and equipment, 3-5 years for furniture and fixturesand 14-50 years for mining rights. See Note 7, “Property, Plant and Equipment.”

The estimated useful lives of leasehold improvementsare the lesser of the estimated life of the improvement or the term of thelease.

Major renewals andimprovements are capitalized and minor replacements, maintenance and repairsare charged to current operations as incurred. Upon retirement or disposal ofassets, the cost and related accumulated depreciation are removed from thebalance sheet and any gain or loss is reflected in the statement of operations.

***Deferred Debt Issuance Costs***—Costsrelated to the July 2003 refinancing, the Acquisition Financing and twoadditional refinancings completed during the fourth quarter of 2004 have beencapitalized and are being amortized using the effective interest rate methodover the term of the debt outstanding. This amortization is reflected ininterest expense. See Note 10, “Long-Term Debt.”

***Loss on Early Extinguishment of Debt***—Inthe third quarter of 2005, the Company paid a redemption premium of $13.2million to redeem long-term debt and wrote off $13.4 million of deferredfinancing costs associated with the debt repaid in connection with the IPO.

***Goodwill***—Goodwillrepresents the cost in excess of fair value of net assets acquired fortransactions accounted for using the purchase method of accounting. See Note 8,“Goodwill,” for details of goodwill activity by segment.

***Other Intangible Assets***—Otherintangible assets primarily consists of patents and other intellectualproperty, trade names and trademarks, and customer relationships. Patents andother intellectual property are recorded at their estimated fair values at thetime of acquisition and are being amortized over their estimated remaininguseful lives, ranging from 4 to 20 years. Trade names and trademarks are beingamortized over 25 years, and customer relationships are being amortized overperiods ranging from 7 to 15 years. See Note 9, “Other Intangible Assets.”

***ImpairmentAccounting***—The recoverability of goodwill is reviewed onan annual basis during the fourth quarter. Additionally, the recoverability ofgoodwill, long-lived tangible, and certain intangible assets is reviewed whenevents or changes in circumstances occur indicating that the carrying value ofthe assets may not be recoverable. See Note 17, “Impairment Charges.”

The Company’s initial goodwill impairment reviewbegins with the estimate of fair value of each reporting unit generally basedon an industry metric such as the ratio of enterprise value (commonly definedas market capitalization plus long-term debt less cash) to Adjusted EBITDA ofthe reporting unit. This calculation is performed on both the current yearactual results and on the budgeted amounts for the following year. Similarly,when testing for impairment of long-lived assets other than goodwill, theCompany initially reviews the estimated future undiscounted cash flows to bederived from the asset or asset group (collectively “asset”). If it appearsthat the asset is impaired based on undiscounted cash flows, the estimated fairvalue of the asset is calculated on a present value basis by multiplying theestimated future annual cash flows of the asset by the then current enterprisevalue ratio (a discounted measure) or by a discount factor appropriate to therelated reporting unit, in accordance with paragraph 23 of Statement ofFinancial Accounting Standards (“SFAS”) No. 144. An impairment loss isrecognized when the carrying value of the asset or goodwill exceeds the discountedcash flow (or other measure of) fair value.

These calculations arebased on inherent assumptions and estimates about future cash flows andappropriate benchmark peer 

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companies or groups. Subsequent changes in these assumptionscould result in future impairment. Although the Company consistently uses thesame methods in developing the assumptions and estimates underlying the fairvalue calculations, such estimates are uncertain by nature and can vary fromactual results.

***FinancialInstruments***—Management believes the carrying amount offinancial instruments, including accounts receivable, accounts payable anddebt, approximates fair value, except as described in Note 10, “Long-Term Debt.”

***Derivatives***—TheCompany accounts for derivatives based on SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended andinterpreted. SFAS 133 requires that all derivatives be recognized as eitherassets or liabilities at fair value. Changes in the fair value of derivativesnot designated as hedging instruments are recognized currently in earnings. TheCompany uses derivative instruments to manage its exposure to market risksassociated with fluctuations in interest rates and foreign currency exchangerates. See the “Comprehensive Income” section of this Note and Note 20, “AccumulatedOther Comprehensive Income,” for the impact of the Company’s net investmenthedges. The Company does not enter into derivative contracts for tradingpurposes nor does it use leveraged or complex instruments.

***Pension, Postemployment andPostretirement Costs***—Defined benefit costs andliabilities have been determined in accordance with SFAS 87, *Employers’ Accounting for Pensions* and SFAS 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)*. Other postretirement benefit costs and liabilities have beendetermined in accordance with SFAS 106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions* and SFAS 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).* Postemployment benefit costs and liabilities have beendetermined in accordance with SFAS 112, *Employers’ Accounting forPostemployment Benefits.*

***Related Party Transactions***—Inthe ordinary course of business, Rockwood has engaged in transactions withcertain related parties including KKR and DLJMB and affiliates of each. SeeNote 5, “Acquisitions” and Note 10, “Long-Term Debt” for additional informationconcerning these transactions. In addition, see discussion of “Redeemableconvertible preferred stock” below.

Through the date of theDynamit Nobel Acquisition, KKR provided consulting and management advisoryservices to Rockwood for an annual fee of $0.6 million. From the date of theDynamit Nobel Acquisition through the IPO date, KKR and DLJMB provided theCompany with consulting and management advisory services for an annual fee of$2.1 million, increasing 5% annually. In connection with the IPO, the partiesagreed to terminate the management services agreement for an aggregateconsideration of $10.0 million.

Further, the 12% senior discount notes, issued by ourindirect subsidiary, Rockwood Specialties International, Inc., were held byaffiliates of KKR. As a result of the completion of the IPO, the Company used$89.2 million of the proceeds to redeem the outstanding principal amount of thesenior discount notes (including accreted and unpaid interest). Interest on thesenior discount notes was $6.5 million and $9.1 million for the years endedDecember 31, 2005 and 2004, respectively.

***Income Taxes***—Incometaxes are determined in accordance with SFAS 109, *Accountingfor Income Taxes.* Deferred tax assets and liabilities are recognizedfor future tax consequences attributable to differences between the financialstatement carrying amounts and the corresponding tax carrying amounts of assetsand liabilities. Deferred tax assets are also recognized for tax loss and taxcredit carryforwards. A valuation allowance is recorded to reduce deferred tax assetswhen it is more likely than not that a tax benefit will not be realized basedon available evidence weighted toward evidence that is objectively verifiable.Deferred taxes are not provided on the undistributed earnings of subsidiariesas such amounts are considered to be permanently invested or could bedistributed to the parent company in a tax free manner.

Future realization of the tax benefit of an existingdeductible temporary difference or carryforward ultimately depends on theexistence of sufficient taxable income of the appropriate character (forexample, ordinary income or capital gain) within the carryforward periodavailable under the tax law. The Company’s policy is to consider the followingsources of taxable income, which may be available under the tax law to realizea tax benefit for deductible temporary differences and carryforwards:

·                  Future reversalsof existing taxable temporary differences.

·                  Future taxableincome exclusive of reversing temporary differences and carryforwards.

·                  Taxable incomein prior carry back year(s) if carry back is permitted under the tax law.

·                  Taxplanning strategies that would, if necessary, be implemented to:

(1)                 Acceleratetaxable amounts to utilize expiring carryforwards.

 

(2)                 Change thecharacter of taxable or deductible amounts from ordinary income or loss tocapital gain or loss.

 

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(3)                 Switchfrom tax-exempt to taxable investments.

Evidence available about each of those possiblesources of taxable income will vary between tax jurisdictions and, possibly,from year to year. To the extent evidence about one or more sources of taxableincome is sufficient to support a conclusion that a valuation allowance is notnecessary, the Company’s policy is that other sources need not be considered.Consideration of each source is required, however, to determine the amount ofthe valuation allowance that may be required to be recognized for deferred taxassets.

For any specific jurisdiction where a history of threeyears of cumulative losses has occurred or where there has been a substantialchange in the business (e.g., a major acquisition or divestiture), the Companydoes not rely on projections of future taxable income as described above.Instead, the Company determines its need for a valuation allowance on deferredtax assets, if any, by determining an average steady-state normalized taxableincome amount over the last three years, adjusted for acquisitions or divestituresif necessary.

The Company will also consider the following positiveevidence in the above scenarios, if present:

·                  Existingcontracts or firm sales backlog that will produce more than enough taxableincome to realize the deferred tax asset based on existing sales prices andcost structures.

·                  Anexcess of appreciated asset value over the tax basis of the entity’s net assetsin an amount sufficient to realize the deferred tax asset.

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature,minimum pension liability adjustments that are recorded directly into aseparate section of stockholders’ equity in the balance sheets and netinvestment hedges. Foreign currency translation amounts are not adjusted forincome taxes since they relate to indefinite length investments in non-U.S.subsidiaries and certain intercompany debt. See Note 20, “Accumulated Other ComprehensiveIncome.”

***Accounting for EnvironmentalLiabilities***—In the ordinary course of business, Rockwoodis subject to extensive and changing federal, state, local and foreignenvironmental laws and regulations, and has made provisions for the estimatedfinancial impact of environmental cleanup related costs. Rockwood’s policy hasbeen to accrue costs of a non-capital nature related to environmental clean-upwhen those costs are believed to be probable and can be reasonably estimated.If the aggregate amount of the obligation and the amount and timing of the cashpayments for a site are fixed or reliably determinable, the liability isdiscounted. Expenditures that extend the life of the related property ormitigate or prevent future environmental contamination are capitalized andexpenditures related to existing conditions resulting from past or presentoperations and from which no current or future benefit is discernible areimmediately expensed. The quantification of environmental exposures requires anassessment of many factors, including changing laws and regulations,advancements in environmental technologies, the quality of information availablerelated to specific sites, the assessment stage of each site investigation andthe length of time involved in remediation or settlement. In some matters,Rockwood may share costs with other parties. Rockwood does not includeanticipated recoveries from insurance carriers or other third parties in itsaccruals for environmental liabilities.

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

***RecentAccounting Pronouncements***—The Company implemented thefinancial accounting standards listed below on January 1, 2006. The adoption ofthese standards did not have a material impact on the Company’s financialposition, results of operations, or cash flows.

SFAS 123R                                 ShareBased Payment

SFAS 151                                         InventoryCosts

SFAS 153                                         Exchangesof Nonmonetary Assets

SFAS 154                                         AccountingChanges and Error Corrections

 

SFAS 123R revises SFAS 123, *Accountingfor Stock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and its relatedimplementation guidance. SFAS 123R requires entities to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award. These costs are recognized over theperiod during which the employee is required to provide services in exchangefor the award. This standard eliminates the use of the intrinsic value methodof accounting for share-based payments as previously provided in APB 25. TheCompany is applying SFAS 123R on a modified prospective basis. In accordancewith SFAS 123R, beginning in the first quarter of 2006, the Company recordedcompensation cost for the unvested portion of awards issued after February2005, which is the date it first filed its registration statement with theSecurities and Exchange Commission (“SEC”), and for any awards modified,repurchased or cancelled after this date. See Note 3, “Stock-BasedCompensation,” for further details of the impact of adopting this standard.

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SFAS 151 clarifies the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage), requiring that such items be recognized as current-period charges.This statement eliminates a narrow difference between the Financial AccountingStandards Board (“FASB”) and International Accounting Standards Board (“IASB”)accounting standards to improve the comparability of cross-border financialreporting.

SFAS 153 eliminates theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave 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 APB Opinion No. 20, *Accounting Changes*, and SFAS Statement No. 3, *Reporting Accounting Changes in Interim Financial Statements*,and changes the requirements for the accounting and reporting of a change inaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 also requires that (1) a change in depreciation,amortization, or depletion method for long-lived, non-financial assets beaccounted for as a change in accounting estimate affected by a change inaccounting principle and (2) correction of errors in previously issuedfinancial statements should be termed a “restatement.” This statementeliminates a narrow difference between the FASB and IASB accounting standardsto improve the comparability of cross-border financial reporting.

In September 2006, SFAS No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R),* wasissued. This statement requires an employer to recognize the overfunded orunderfunded status of a single-employer defined benefit postretirement plan asan asset or liability in its statement of financial position and to recognizechanges in that funded status in comprehensive income in the year in which thechanges occur. In addition, employers are required to measure the funded statusof a plan as of the date of its year-end statement of financial position, withlimited exceptions. SFAS No. 158 also has expanded the disclosure requirementsfor pension plans and other postretirement plans. This statement provides differenteffective dates for the recognition and related disclosure provisions and forthe required change to a fiscal year-end measurement date. The Company adoptedthe recognition provisions of SFAS No. 158 and initially applied them to thefunded status of its defined benefit postretirement plans as of December 31,2006. See Note 13, “Employee Benefit Plans,” for additional disclosuresrequired and the impact of adopting SFAS No. 158.

The requirement tomeasure plan assets and benefit obligations as of the date of the employer’sfiscal year-end statement of financial position is effective for the Companyfor the fiscal year ended December 31, 2008. The Company currently measures itsfunded status as of the date of the Company’s fiscal year-end consolidated balancesheet for most of its plans.

In September 2006, the SEC issued Staff AccountingBulletin (“SAB”) No. 108, which provides interpretive guidance on howregistrants should quantify financial statement misstatements. Prior to SAB108, there were two methods most commonly used to quantify misstatements: the “rollover”method, which focused primarily on the income statement impact ofmisstatements, and the “iron curtain” method, which focused primarily on thebalance sheet impact of misstatements. Under SAB 108, registrants will berequired to consider both the rollover and iron curtain methods (i.e., dualapproach) when evaluating the materiality of financial statement errors. SAB108 was effective for the Company for its financial statements for the year endedDecember 31, 2006. The adoption of this SAB did not have a material impact onthe Company’s financial statements for the year ended December 31, 2006.

The Company will adopt the following in the firstquarter of 2007:

In June 2006, a final consensus was reached on EITFIssue No. 06-3, *How Taxes Collected From Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross Versus Net Presentation).* The scope ofthis 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 is not limited to, sales, use, value added, andsome excise taxes. This Issue affirms that the presentation of taxes in theincome statement should be on either a gross (included in revenues and costs)or a net (excluded from revenues) basis and that this is an accounting policydecision that should be disclosed pursuant to APB Opinion No. 22. In addition,if such taxes are significant and reported on a gross basis, the amounts ofthose taxes should be disclosed in interim and annual financial statements. TheCompany will adopt this EITF in the first quarter of 2007 and has adopted anaccounting policy that requires taxes collected from customers and remitted togovernmental authorities to be reported on a net basis (excluded fromrevenues). The adoption of this EITF is not expected to have a material impacton the Company’s financial statements.

In July 2006, FASB Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes - An Interpretation of FASBStatement No. 109*, was issued. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109. FIN 48 also prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.The provisions of FIN 48 are effective for fiscal years beginning afterDecember 15, 2006. The Company will adopt this interpretation in the firstquarter of 2007 and is currently evaluating the impact it will have on itsfinancial statements.

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In September 2006, the FASB issued FASB Staff Position(“FSP”) No. AUG AIR-1, *Accounting for PlannedMajor Maintenance Activities*. This FSP prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activitiesin annual and interim financial reporting periods. It continues to permit theapplication of three alternative methods of accounting for planned maintenanceactivities: direct expense, built-in-overhaul and deferral methods. Inaddition, this FSP requires disclosure of the method of accounting for plannedmaintenance activities selected. The Company will adopt this FSP in the firstquarter of 2007 and has adopted an accounting policy that requires plannedmajor maintenance activities to be accounted for under the direct-expensemethod. The adoption of this FSP is not expected to have a material impact onthe Company’s financial statements.

The Company will adopt the following standards onJanuary 1, 2008:

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

In February 2007, SFASNo. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* — *Including an Amendment ofFASB Statement No. 115*. This standard permits an entity to chose tomeasure many financial instruments and certain other items at fair value. Thefair value option established by this standard permits all entities to chooseto measure eligible items at fair value at specified election dates. Thisstatement is effective for the Company as of January 1, 2008. The Company iscurrently evaluating the impact this statement will have on its financialstatements.

***Redeemableconvertible preferred stock***—During 2003, the Companyissued redeemable convertible preferred stock to an affiliate of KKR. As aresult of the completion of the IPO, the Company used $38.5 million of theproceeds to redeem all outstanding shares of the redeemable convertiblepreferred stock, including a redemption premium and accumulated and unpaiddividends. See Note 15, “Redeemable Convertible Preferred Stock.”

***Stock-Based Compensation***—Effective January 1, 2006, the Company adopted SFAS No. 123R, *Share-Based Payment*, and related interpretations and beganexpensing the grant-date fair value of stock options. Prior to January 1, 2006,the Company applied the recognition and measurement principles of APB Opinion25, *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.

As noted above under “Recent Accounting Pronouncements,”the Company adopted SFAS No. 123R using the modified prospective approach andtherefore has not restated prior periods. As a result, the Company is recordingcompensation cost for the unvested portion of awards issued after February 2005and for any awards modified, repurchased or cancelled after this date. In theyear ended December 31, 2006, the adoption of SFAS No. 123R resulted inincremental stock-based compensation expense of $0.1 million. The incrementalstock-based compensation expense caused income before taxes to decrease by $0.1million, net income to decrease by $0.1 million and basic and diluted earningsper share to decrease by less than $0.01 per share for the year ended December31, 2006.

For stock options granted prior to the adoption ofSFAS No. 123R, the Company applied APB Opinion 25 to account for its stock-basedawards. If compensation cost for the Company’s stock option plans had beendetermined based on the fair value at grant date consistent with the provisionsof SFAS No. 123 as amended by SFAS No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure*, the Company’s net earningsand earnings per share would have been as follows:

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** **
| ** **                                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions, except per share amounts)**                            | ** ** | ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss), as reported                                                                        |       | $                                          | 95.8       |   | $ | (216.1 | ) |
| Add: Stock-based  compensation expense included in reported net loss, net of tax                       |       | —                                     |       | 0.2 |   |
| Less:  Stock-based employee compensation expense determined under fair value based  method, net of tax |       | (1.7                                       | )          | (0.8 | ) |
| Pro forma net  income (loss)                                                                           |       | 94.1                                       |       | (216.7 | ) |
| Redeemable  convertible preferred stock dividends                                                      |       | (4.3                                       | )          | (4.2 | ) |
| Pro forma net  income (loss) applicable to common shareholders                                         |       | $                                          | 89.8       |   | $ | (220.9 | ) |
|                                                                                                   |       |                                       |       |   |   |
| Earnings (loss)  per common share, as reported:                                                        |       |                                       |       |   |   |
| Basic                                                                                                  |       | $                                          | 1.55       |   | $ | (6.66 | ) |
| Diluted                                                                                                |       | $                                          | 1.52       |   | $ | (6.66 | ) |
|                                                                                                   |       |                                       |       |   |   |
| Pro forma  earnings (loss) per common share:                                                           |       |                                       |       |   |   |
| Basic                                                                                                  |       | $                                          | 1.52       |   | $ | (6.68 | ) |
| Diluted                                                                                                |       | $                                          | 1.50       |   | $ | (6.68 | ) |
|                                                                                                        |            |                                            |            |  |  |  |  |  |  |

 

**2. DISCONTINUED OPERATIONS:**

On January 9, 2007, theCompany completed the sale of its Groupe Novasep subsidiary. The transactionwas valued at approximately €425 million, which included the repayment of thirdparty and intercompany indebtedness. As of December 31, 2006, the Company metthe criteria for reporting the pending sale of its Groupe Novasep subsidiary asan asset held for sale and discontinued operations pursuant to SFAS No. 144, *“Accounting for the Impairment or Disposal of Long-Lived Assets.”*As a result, the Company’s financial statements have been reclassified toreflect the Groupe Novasep subsidiary as a discontinued operation for allperiods presented.

Operating results of the discontinued operations areas follows:
| ** **                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                     | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                         |       | $                                          | 355.7      |   | $ | 379.1 |   | $ | 101.0 |   |
| Cost of products  sold                            |       | 266.0                                      |       | 290.3 |   | 81.9 |   |
| Gross profit                                      |       | 89.7                                       |       | 88.8 |   | 19.1 |   |
| Selling, general  and administrative expenses     |       | 54.3                                       |       | 75.9 |   | 13.1 |   |
| Impairment  charges                               |       | —                                     |       | 44.7 |   | — |   |
| Restructuring  charges, net                       |       | —                                     |       | (1.5 | ) | — |   |
| Other, net                                        |       | (0.2                                       | )          | — |   | 0.8 |   |
| Operating income (loss)                           |       | 35.6                                       |       | (30.3 | ) | 5.2 |   |
| Other income  (expenses):                         |       |                                       |       |   |   |   |   |
| Interest  expense, net                            |       | (4.1                                       | )          | (6.3 | ) | (1.0 | ) |
| Foreign exchange  gain (loss), net                |       | 0.7                                        |       | 0.1 |   | (0.2 | ) |
| Loss on sale of  business                         |       | (11.5                                      | )          | — |   | — |   |
| Other, net                                        |       | (4.9                                       | )          | (0.1 | ) | (0.7 | ) |
| Other income (expenses), net                      |       | (19.8                                      | )          | (6.3 | ) | (1.9 | ) |
| Income (loss)  before taxes and minority interest |       | 15.8                                       |       | (36.6 | ) | 3.3 |   |
| Income tax  (benefit) provision                   |       | (12.1                                      | )          | 7.6 |   | 5.2 |   |
| Net income (loss) before minority interest        |       | 27.9                                       |       | (44.2 | ) | (1.9 | ) |
| Minority interest                                 |       | (5.2                                       | )          | 3.0 |   | — |   |
| Net income  (loss)                                |       | $                                          | 22.7       |   | $ | (41.2 | ) | $ | (1.9 | ) |
|                                                   |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

The carrying values ofthe assets and liabilities of the discontinued operation included in theconsolidated balance sheets at 

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December 31, 2006 and2005 are as follows:
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| **($ in millions)**                   | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **ASSETS**                                      |       |                  |       |   |   |
| Cash and cash  equivalents                      |       | $                     | 11.8       |   | $ | 1.7 |   |
| Accounts  receivable, net                       |       | 82.5                  |       | 78.0 |   |
| Inventories                                     |       | 79.3                  |       | 77.7 |   |
| Deferred income  taxes                          |       | (12.5                 | )          | (6.1 | ) |
| Prepaid expenses  and other current assets      |       | 13.2                  |       | 11.0 |   |
| Property, plant  and equipment, net             |       | 203.7                 |       | 164.8 |   |
| Goodwill                                        |       | 28.6                  |       | 33.2 |   |
| Other intangible  assets, net                   |       | 79.2                  |       | 76.7 |   |
| Other assets                                    |       | 4.8                   |       | 4.8 |   |
| Total assets to be disposed                     |       | $                     | 490.6      |   | $ | 441.8 |   |
| **LIABILITIES**                                 |       |                  |       |   |   |
| Accounts payable                                |       | $                     | 34.3       |   | $ | 40.4 |   |
| Income taxes  payable                           |       | 6.6                   |       | 1.6 |   |
| Accrued  compensation                           |       | 18.8                  |       | 15.7 |   |
| Restructuring  liability                        |       | —                |       | 0.2 |   |
| Accrued expenses  and other current liabilities |       | 38.3                  |       | 43.6 |   |
| Long-term debt,  including current portion      |       | 45.6                  |       | 82.6 |   |
| Pension and  related liabilities                |       | 14.3                  |       | 18.8 |   |
| Deferred income  taxes                          |       | 7.5                   |       | 23.7 |   |
| Other  liabilities                              |       | 5.7                   |       | 18.1 |   |
| Total  liabilities to be disposed               |       | $                     | 171.1      |   | $ | 244.7 |   |
|                                                 |            |                       |            |  |  |  |  |  |  |

 

The net gain on the saleto be recorded in the first quarter of 2007 is approximately $120.0 million(net of $1.5 million of taxes based on German tax law).

In late 2005, Rockwood decided to substantiallydownsize the operations of Rohner AG (“Rohner”). This decision was driven by anumber of factors, including, in particular, continued capacity utilizationissues as a result of the loss of a key customer in 2003 and the inability toreplace this lost volume with comparable profitable volume. The downsizingincluded a review of Rockwood’s strategic options for this business includingpotential sale or closure. The Company recorded a full impairment charge at theend of 2005 with respect to Rohner’s long-term assets, primarily property,plant and equipment, totaling $44.7 million due to these actions. On March 9,2006, after exploring several alternatives, the Company sold all of the capitalstock of Rohner for a nominal price. Until that time, Rohner, had been asubsidiary in the Company’s Groupe Novasep segment.

In addition, in connection with this downsizing, theCompany recorded during the year ended December 31, 2005 a minority interestcharge of $13.9 million related to a guarantee, in an amount up to €55.0million, entered into in May 2005 by one of the Company’s wholly-ownedsubsidiaries that was the 78.6% owner of Groupe Novasep SAS, of loans made by aGroupe Novasep SAS subsidiary to Rohner. At the time of the guarantee, theCompany concluded the likelihood of having to fulfill this guarantee obligationwas remote based on the limited term of the guarantee, the fact that theCompany indirectly controlled the subsidiary receiving the guarantee and theexpectation of continuing operations at Rohner. In connection with thepreparation of the Company’s 2005 financial statements, the Company concludedthat it was probable that it would have to fulfill this guarantee obligation.Accordingly, the Company recorded the minority interest charge, based on the21.4% minority interest in Groupe Novasep SAS not held by the Company. InOctober 2006, this guarantee obligation was settled for €35.0 million. As aresult, minority interest income of approximately $3.3 million ($5.5 millionbefore taxes) was recorded in the third quarter of 2006 as the final negotiatedguarantee settlement was less than the amount that was originally contractuallyagreed upon.

The Company recorded anet pre-tax loss of $11.5 million on the sale of Rohner in 2006, representingconsideration given less the remaining net liabilities of Rohner, which weretransferred to the purchaser.

**3. STOCK-BASED COMPENSATION:**

**Rockwood Plan**

The Company has in place the 2005 Amended and RestatedStock Purchase and Option Plan of Rockwood Holdings, Inc. and Subsidiaries (the“Plan”). Under the Plan, the Company may grant stock options, restricted stockand other stock-based awards to the Company’s employees and directors and allowemployees and directors to purchase shares of its common stock. There are10,000,000 authorized shares available for grant under the Plan.

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***Restricted Stock***—Restrictedstock of the Company can be granted with or without payment of considerationwith restrictions on the recipient’s right to transfer or sell the stock.During 2006, the Company granted 1,207 shares of restricted stock which vest overfive years. The compensation cost related to this restricted stock causedincome before taxes to decrease by less than $0.1 million and net income todecrease by less than $0.1 million for year ended December 31, 2006. Theweighted average grant date fair value of the restricted shares granted in thethird quarter of 2006 was $20.70. As of December 31, 2006, there was less than$0.1 million of unrecognized compensation cost related to restricted stockawards determined in accordance with SFAS No. 123R, which is expected to berecognized over a weighted-average period of approximately 4.7 years.

***Stock Purchase***—Eligibleemployees and directors can purchase shares of the Company’s common stock atprices as determined by its board of directors. Under the Plan, the Companysold 4,106 shares during the year ended December 31, 2006 at the fair marketvalue of the stock ($20.70 per share) based on the closing price of the stockon the New York Stock Exchange on the date of purchase for gross proceeds ofapproximately $0.1 million.

***Boardof Directors Stock Options***—Stock options granted todirectors under this Plan shall have an exercise price at least equal to thefair market value of the Company’s common stock on the date of grant. Optionsavailable for grant under this Plan are time options which have a life of tenyears from the date of grant and vest in three equal annual installments oneach of the first three anniversaries of the grant date.

***Stock Options***—Stockoptions granted under the Plan shall have an exercise price at least equal tothe fair market value of the Company’s common stock on the date of grant. There are two types of optionsavailable for grant under the Plan. Time options have a life of ten years fromthe date of grant and vest as follows: time options granted prior to 2004 vest10% 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 ofthe first five anniversaries of the grant date. Performance options have a lifeof ten years and become exercisable with respect to 20% of the totalperformance 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 the Company 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 Adjusted EBITDA.

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

The compensation cost charged against income under thePlan in accordance with SFAS No. 123R in the year ended December 31, 2006 forshare-based compensation programs was $0.1 million before taxes. As noted inNote 1, “Description of Business and Summary of Recent Accounting Policies,”the Company is recording compensation cost for the unvested portion of awardsissued after February 2005, which is the date the Company first filed aregistration statement with the SEC, and for any awards modified, repurchasedor cancelled after this date.

The fair value of stockoptions granted in the years ended December 31, 2006, 2005 and 2004 areestimated on the date of grant using the Black-Scholes option pricing modelthat used the assumptions noted in the following table:
| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected term  (in years) |       | 6.8                                        |       | 6.7 |   | 6.6 |   |
| Expected  volatility      |       | 30                                         | %          | 35 | % | 35 | % |
| Risk-free rate            |       | 4.8                                        | %          | 4.3 | % | 3.5 | % |
| Expected dividends        |       | N/A                                        |       | N/A |   | 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 SAB No. 107). As Rockwood became apublic company in August 2005, there is not a long period of history of theCompany’s share price. As a result, the Company’s expected volatility is

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based on the expectedvolatilities of comparable peer companies that are publicly traded. Therisk-free rate is based on the U.S. Treasury yield curve in effect at the timeof grant. Expected dividends are not applicable as the Company currently doesnot pay a dividend on its shares.

As of December 31, 2006, there was $0.3 million ofunrecognized compensation cost related to nonvested stock options determined inaccordance with SFAS No. 123R, which is expected to be recognized over aweighted-average period of approximately 3.3 years. As of January 1, 2006 andDecember 31, 2006, the number of nonvested stock options determined inaccordance with SFAS No. 123R was 53,800 and 47,814, respectively, and theweighted-average grant date fair value of nonvested stock options was $8.68 and$8.88, respectively.

The total intrinsic value of stock options exercisedduring the year ended December 31, 2006 was less than $0.1 million. Cashreceived from option exercises during 2006 was less than $0.1 million. Thetotal tax benefit realized from options exercised in 2006 was less than $0.1million. The total fair value of shares vested during the year ended December31, 2006 was $0.9 million.

A summary of the statusof the Company’s options granted pursuant to the Plan at December 31, 2006,2005 and 2004, and changes during the period ended on that date is presentedbelow:
| ** **                                                     | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **                    | ** ** |
|----------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                     | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **                    | ** ** |
| ** **                                                     | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**                 | ** ** |
| ** **                                                     | ** ** | ** **      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**                 | ** ** |
| ** **                                                     | ** ** | **Shares**      | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**                     | ** ** |
| ** **                                                     | ** ** | **(‘000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **($ in millions)** | ** ** |
| Outstanding at December  31, 2003                              |       | 1,810           |       | $            | 14.61      |            |       |                          |       |   |
| Granted                                                        |       | 2,092           |       | 14.61        |       |            |       |                          |       |
| Forfeited                                                      |       | (14             | )          | 14.61        |       |            |       |                          |       |
| Outstanding at December  31, 2004                              |       | 3,888           |       | 14.61        |       |            |       |                          |       |
| Granted                                                        |       | 57              |       | 19.76        |       |            |       |                          |       |
| Forfeited                                                      |       | (63             | )          | 14.61        |       |            |       |                          |       |
| Outstanding at December  31, 2005                              |       | 3,882           |       | 14.69        |       |            |       |                          |       |
| Granted                                                        |       | 27              |       | 21.87        |       |            |       |                          |       |
| Exercised                                                      |       | (2              | )          | 14.61        |       |            |       |                          |       |
| Forfeited                                                      |       | (69             | )          | 17.11        |       |            |       |                          |       |
| Outstanding at December  31, 2006                              |       | 3,838           |       | $            | 14.69      |            | 6.25       |                          | $          | 40.6 |   |
|                                                           |       |            |       |         |       |            |       |                          |       |
| Options vested or expected  to vest at December 31, 2006  |       | 3,690           |       | $            | 14.69      |            | 6.23       |                          | $          | 39.0 |   |
|                                                           |       |            |       |         |       |            |       |                          |       |
| Options exercisable at  December 31, 2006                      |       | 2,044           |       | $            | 14.63      |            | 5.76       |                          | $          | 21.7 |   |
|                                                           |       |            |       |         |       |            |       |                          |       |
| Weighted-average fair value of options granted during the year |       | $               | 9.46       |         |       |            |       |                          |       |   |
|                                                                |            |                 |            |              |            |                 |            |                               |            |  |  |  |

 

**Subsidiary Plan**

*Stock Options* — In September2005, Groupe Novasep SAS (“Groupe Novasep”), a former subsidiary of the Company,approved a stock option plan for certain of its employees. Under this plan,there were 24,543 authorized shares of Groupe Novasep stock available forgrant. Compensation cost charged against income under the Subsidiary Plan forthe options in accordance with SFAS No. 123R in the year ended December 31,2006 for share-based compensation programs of $0.1 million before taxes wasreported in discontinued operations in the consolidated statements ofoperations. See Note 2, “Discontinued Operations,” for further details. Allstock options under this subsidiary plan were cancelled as a result of the saleof Groupe Novasep in January 2007.

**4. SEGMENT INFORMATION:**

Rockwood operates in six reportable segments accordingto the nature and economic characteristics of its products and services as wellas the manner in which the information is used internally by the Company’s keydecision maker, who is the Company’s Chief Executive Officer. The six segmentsare: (1) Specialty Chemicals, which consists of the surface treatment and finechemicals business lines; (2) Performance Additives, which consists of colorpigments and services, timber treatment chemicals, clay-based additives andwater treatment chemicals business lines; (3) Titanium Dioxide Pigments; (4)Advanced Ceramics; (5) Specialty Compounds; and (6) Electronics, which consistsof electronic chemicals and photomasks business lines.

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Items that cannot be readilyattributed to individual segments have been classified as “Corporate.” Corporateoperating loss primarily represents payroll, professional fees and otheroperating expenses of centralized functions such as treasury, legal, internalauditing and consolidation accounting as well as the cost of operating ourcentral offices (including some costs 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 (described more fully below)include systems/organization establishment expenses such as outside consultingcosts for Sarbanes-Oxley initial documentation and fees relating to theimplementation of a new consolidation software system, interest expense onexternal debt, foreign exchange losses or gains, refinancing expenses relatedto external debt and initial public offering related expenses. Corporateidentifiable assets primarily represent deferred financing costs that have beencapitalized in connection with corporate external debt financing, deferredincome tax assets and cash balances maintained in accordance with centralizedcash management techniques. The corporate classification also includes theresults of operations, assets (primarily real estate) and liabilities(including pension and environmental) of legacy businesses formerly belongingto Dynamit Nobel. These operations are substantially unrelated by nature tobusinesses currently within the Company’s operating segments.

Summarized financial information for each of thereportable segments is provided in the following table:
| ** **                        | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium**  | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **         | ** ** | ** **     | ** ** | ** **    | ** ** |
|-----------------------------------|------------|---------------|------------|-----------------|------------|---------------|------------|--------------|------------|---------------|------------|---------------|------------|--------------------|------------|----------------|------------|---------------|------------|
| ** **                        | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**   | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **    | ** ** | **Discontinued**   | ** ** | ** **     | ** ** | ** **    | ** ** |
| **($ in millions)**     | ** ** | ** **    | ** ** | **Chemicals**   | ** ** | **Additives** | ** ** | **Pigments** | ** ** | **Ceramics**  | ** ** | **Compounds** | ** ** | **Electronics**    | ** ** | **Operations** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Year  Ended December 31, 2006** |       |          |       |            |       |          |       |         |       |          |       |          |       |               |       |           |       |          |       |
| Net sales                         |       | $             | 918.3      |            | $          | 766.3         |       | $            | 441.1      |          | $          | 389.6         |       | $                  | 251.0      |           | $          | 208.9         |       | $ | — |   | $ | — |   | $ | 2,975.2 |   |
| Total Adjusted EBITDA             |       | 206.6         |       | 134.1           |       | 88.5          |       | 104.8        |       | 31.7          |       | 36.5          |       | 68.3               |       | (49.0          | )          | 621.5         |       |
| Capital expenditures              |       | 52.7          |       | 26.2            |       | 36.5          |       | 32.5         |       | 3.8           |       | 7.4           |       | —             |       | 12.8           |       | 171.9         |       |
| **Year  Ended December 31, 2005** |       |          |       |            |       |          |       |         |       |          |       |          |       |               |       |           |       |          |       |
| Net sales                         |       | $             | 842.0      |            | $          | 680.7         |       | $            | 430.5      |          | $          | 369.6         |       | $                  | 237.5      |           | $          | 181.8         |       | $ |   |   | $ | — |   | $ | 2,742.1 |   |
| Total Adjusted EBITDA             |       | 174.2         |       | 148.3           |       | 86.6          |       | 93.8         |       | 29.5          |       | 26.9          |       | 51.9               |       | (40.3          | )          | 570.9         |       |
| Capital expenditures (a)          |       | 39.6          |       | 21.8            |       | 36.5          |       | 46.0         |       | 4.1           |       | 4.6           |       | —   |       | 10.9           |       | 163.5         |       |
| **Year  Ended December 31, 2004** |       |          |       |            |       |          |       |         |       |          |       |          |       |               |       |           |       |          |       |
| Net sales                         |       | $             | 321.1      |            | $          | 630.9         |       | $            | 175.7      |          | $          | 146.3         |       | $                  | 200.4      |           | $          | 168.1         |       | $ | — |   | $ | — |   | $ | 1,642.5 |   |
| Total Adjusted EBITDA             |       | 60.0          |       | 149.2           |       | 37.8          |       | 35.8         |       | 28.8          |       | 28.9          |       | 20.6               |       | (28.7          | )          | 332.4         |       |
| Capital  expenditures             |       | 11.5          |       | 19.6            |       | 11.8          |       | 27.5         |       | 2.3           |       | 6.7           |       | —             |       | 1.6            |       | 81.0          |       |
|                                   |            |               |            |                 |            |               |            |              |            |               |            |               |            |                    |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Discontinued** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Operations**   | ** ** | **(b)**       | ** ** | **(c)**          | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |            |       |             |       |          |       |             |       |             |       |
| December 31, 2006           |       | $             | 1,624.8    |            | $          | 1,041.8      |       | $            | 738.2      |          | $          | 749.5           |       | $                | 272.2      |          | $          | 306.3            |       | $                | 490.6      |   | $ | 133.0 |   | $ | (136.6 | ) | $ | 5,219.8 |   |
| December 31, 2005           |       | 1,501.6       |       | 1,011.5         |       | 644.8        |       | 653.3        |       | 221.9         |       | 323.6           |       | 441.8            |       | 219.4         |       | (201.4           | )          | 4,816.5          |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |                 |            |                  |            |               |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |

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(a)             Thisincludes the purchase of $7.0 million and $6.7 million of other intangibleassets in 2006 and 2005, respectively.

(b)            Thisincludes $41.0 million and $39.7 million of assets from the legacy businessesformerly belonging to Dynamit Nobel at December 31, 2006 and 2005,respectively.

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

The following table represents summarized geographicinformation with net sales based on seller’s location:
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)** | ** ** | ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  sales:**               |       |                                       |       |   |   |   |   |
| United States                 |       | $                                          | 965.3      |   | $ | 903.3 |   | $ | 741.0 |   |
| Germany                       |       | 1,140.6                                    |       | 1,062.6 |   | 443.6 |   |
| Rest of Europe                |       | 577.6                                      |       | 535.5 |   | 330.8 |   |
| Rest of World                 |       | 291.7                                      |       | 240.7 |   | 127.1 |   |
|                          |       | $                                          | 2,975.2    |   | $ | 2,742.1 |   | $ | 1,642.5 |   |
|                               |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

The increase in net salesin 2005 compared to the same period in the prior year is primarily due to theacquisitions made in 2004 (see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” for further details).

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The following table presents our long-lived assetslocated in the regions indicated:
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Long-lived  assets:**       |       |                  |       |   |   |
| United States                 |       | $                     | 228.8      |   | $ | 232.5 |   |
| Germany                       |       | 700.3                 |       | 595.6 |   |
| Rest of Europe                |       | 277.5                 |       | 247.5 |   |
| Rest of World                 |       | 168.3                 |       | 162.0 |   |
|                          |       | $                     | 1,374.9    |   | $ | 1,237.6 |   |
|                               |            |                       |            |  |  |  |  |  |  |

 

On a segment basis, the Company defines AdjustedEBITDA as operating income excluding depreciation and amortization, certain non-cashgains and charges, certain other special gains and charges deemed by our seniormanagement to be non-recurring gains and charges and certain items deemed bysenior management to have little or no bearing on the day-to-day operatingperformance of its business segments and reporting units. The adjustments madeto operating income directly correlate with the adjustments to net income incalculating Adjusted EBITDA on a consolidated basis pursuant to the seniorsecured credit agreement, which reflects management’s interpretations thereof,including treatment of discontinued operations. The indentures governing the2011 Notes and the 2014 Notes exclude certain adjustments permitted under thesenior credit agreement. Senior management uses Adjusted EBITDA on a segmentbasis as the primary measure to evaluate the ongoing performance of the Company’sbusiness segments and reporting units.

The Company uses Adjusted EBITDA on a segment basis toassess its operating performance. Because the Company views Adjusted EBITDA ona segment basis as an operating performance measure, the Company uses incomebefore taxes as the most comparable GAAP measure.

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The following tablepresents a reconciliation of income before taxes to Adjusted EBITDA on asegment GAAP basis:
| ** **                                         | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** **    | ** ** | ** **       | ** ** |
|----------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------------|------------|---------------|------------|------------------|------------|
| ** **                                         | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | **Discontinued** | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**                      | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Operation**    | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Year Ended  December 31, 2006**                  |       |          |       |            |       |         |       |         |       |          |       |            |       |             |       |          |       |             |       |
| Income  (loss) before taxes                        |       | $             | 110.1      |            | $          | 73.1         |       | $            | 23.1       |          | $          | 36.4            |       | $                | 12.5       |          | $          | 16.0             |       | $ | — |   | $ | (118.3 | ) | $ | 152.9 |   |
| Interest  expense, net (a)                         |       | 44.7          |       | 13.2            |       | 28.8         |       | 31.5         |       | 9.4           |       | 1.4             |       | —           |       | 66.7          |       | 195.7            |       |
| Depreciation  and amortization                     |       | 47.5          |       | 42.5            |       | 38.2         |       | 33.1         |       | 8.7           |       | 16.9            |       | —           |       | 4.1           |       | 191.0            |       |
| Impairment  charges                                |       | 2.2           |       | —          |       | —       |       | —       |       | —        |       | —          |       | —           |       | —        |       | 2.2              |       |
| Restructuring  and related charges (b)             |       | 2.0           |       | 1.2             |       | —       |       | 1.1          |       | —        |       | 1.1             |       | —           |       | 0.2           |       | 5.6              |       |
| CCA  litigation defense costs                      |       | —        |       | 0.8             |       | —       |       | —       |       | —        |       | —          |       | —           |       | —        |       | 0.8              |       |
| Systems/organization  establishment expenses       |       | 0.1           |       | 1.3             |       | —       |       | 1.3          |       | 0.9           |       | —          |       | —           |       | 7.1           |       | 10.7             |       |
| Cancelled  acquisition and disposal costs          |       | 1.0           |       | 0.1             |       | —       |       | —       |       | —        |       | 1.0             |       | —           |       | 0.4           |       | 2.5              |       |
| Inventory  write-up reversal                       |       | —        |       | 0.8             |       | —       |       | 0.1          |       | 0.2           |       | —          |       | —           |       | —        |       | 1.1              |       |
| Losses  (gains) related to asset sales             |       | 0.3           |       | 0.4             |       | 0.1          |       | 0.1          |       | —        |       | 0.1             |       | —           |       | (1.2          | )          | (0.2             | )          |
| Foreign  exchange loss (gain)                      |       | 0.4           |       | 0.1             |       | —       |       | —       |       | —        |       | —          |       | —           |       | (9.1          | )          | (8.6             | )          |
| Other                                              |       | (1.7          | )          | 0.6             |       | (1.7         | )          | 1.2          |       | —        |       | —          |       | —           |       | 1.1           |       | (0.5             | )          |
| Adjusted  EBITDA from continuing operations        |       | 206.6         |       | 134.1           |       | 88.5         |       | 104.8        |       | 31.7          |       | 36.5            |       | —           |       | (49.0         | )          | 553.2            |       |
| Discontinued  operations                           |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | 68.3             |       | —        |       | 68.3             |       |
| Total  Adjusted EBITDA                             |       | 206.6         |       | $               | 134.1      |         | $          | 88.5         |       | $             | 104.8      |            | $          | 31.7             |       | $             | 36.5       |             | $          | 68.3 |   | $ | (49.0 | ) | $ | 621.5 |   |
| **Year Ended  December 31, 2005**                  |       |          |       |            |       |         |       |         |       |          |       |            |       |             |       |          |       |             |       |
| Income  (loss) before taxes                        |       | $             | 89.4       |            | $          | 85.9         |       | $            | 20.2       |          | $          | 34.1            |       | $                | 22.3       |          | $          | 5.2              |       | $ | — |   | $ | (55.9 | ) | $ | 201.2 |   |
| Interest  expense, net (a)                         |       | 36.2          |       | 20.6            |       | 30.8         |       | 30.1         |       | (1.6          | )          | 5.3             |       | —           |       | 87.9          |       | 209.3            |       |
| Depreciation  and amortization                     |       | 44.7          |       | 33.2            |       | 36.2         |       | 29.8         |       | 8.3           |       | 15.3            |       | —           |       | 3.1           |       | 170.6            |       |
| Impairment  charges                                |       | —        |       | 0.4             |       | —       |       | —       |       | —        |       | —          |       | —           |       | —        |       | 0.4              |       |
| Restructuring  and related charges (b)             |       | 4.2           |       | 6.3             |       | —       |       | 2.6          |       | (0.1          | )          | 3.0             |       | —           |       | (0.1          | )          | 15.9             |       |
| CCA  litigation defense costs                      |       | —        |       | 1.1             |       | —       |       | —       |       | —        |       | —          |       | —           |       | 0.1           |       | 1.2              |       |
| Systems/organization  establishment expenses       |       | (0.1          | )          | 0.3             |       | —       |       | 0.1          |       | —        |       | —          |       | —           |       | 3.6           |       | 3.9              |       |
| Cancelled  acquisition and disposal costs          |       | —        |       | 0.2             |       | —       |       | —       |       | —        |       | 0.1             |       | —           |       | 0.9           |       | 1.2              |       |
| Cost  incurred related to debt modifications       |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | —           |       | 1.0           |       | 1.0              |       |
| Management  services agreement termination fee (c) |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | —           |       | 10.0          |       | 10.0             |       |
| Loss  on early extinguishment of debt (c)          |       | —        |       | 1.1             |       | —       |       | —       |       | 0.6           |       | 0.3             |       | —           |       | 24.6          |       | 26.6             |       |
| (Gains)  losses related to asset sales             |       | (1.7          | )          | 0.2             |       | —       |       | (2.9         | )          | —        |       | —          |       | —           |       | —        |       | (4.4             | )          |
| Foreign  exchange loss (gain)                      |       | 1.9           |       | (1.0            | )          | —       |       | —       |       | —        |       | (2.3            | )          | —           |       | (113.1        | )          | (114.5           | )          |
| Other                                              |       | (0.4          | )          | —          |       | (0.6         | )          | —       |       | —        |       | —          |       | —           |       | (2.4          | )          | (3.4             | )          |
| Adjusted  EBITDA from continuing operations        |       | 174.2         |       | 148.3           |       | 86.6         |       | 93.8         |       | 29.5          |       | 26.9            |       | —           |       | (40.3         | )          | 519.0            |       |
| Discontinued  operations                           |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | 51.9             |       | —        |       | 51.9             |       |
| Total  Adjusted EBITDA                             |       | $             | 174.2      |            | $          | 148.3        |       | $            | 86.6       |          | $          | 93.8            |       | $                | 29.5       |          | $          | 26.9             |       | $ | 51.9 |   | $ | (40.3 | ) | $ | 570.9 |   |
| **Year Ended  December 31, 2004**                  |       |          |       |            |       |         |       |         |       |          |       |            |       |             |       |          |       |             |       |
| (Loss)  income before taxes                        |       | $             | (7.1       | )               | $          | 88.3         |       | $            | 0.3        |          | $          | (13.8           | )          | $                | 21.0       |          | $          | (10.1            | )          | $ | — |   | $ | (265.7 | ) | $ | (187.1 | ) |
| Interest  expense, net (a)                         |       | 24.3          |       | 26.8            |       | 15.7         |       | 16.6         |       | (0.7          | )          | 5.4             |       | —           |       | 73.0          |       | 161.1            |       |
| Depreciation  and amortization                     |       | 17.4          |       | 32.0            |       | 15.0         |       | 11.5         |       | 7.7           |       | 20.8            |       | —           |       | 2.2           |       | 106.6            |       |
| Impairment  charges                                |       | —        |       | —          |       | —       |       | —       |       | —        |       | 11.0            |       | —           |       | —        |       | 11.0             |       |
| Restructuring  and related charges                 |       | 0.3           |       | 0.5             |       | —       |       | —       |       | 0.3           |       | —          |       | —           |       | —        |       | 1.1              |       |
| Systems/organization  establishment expenses       |       | 0.1           |       | 0.2             |       | —       |       | —       |       | —        |       | 0.2             |       | —           |       | 4.3           |       | 4.8              |       |
| Cancelled  acquisition and disposal costs          |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.2             |       | —           |       | 0.3           |       | 0.5              |       |
| Cost  incurred related to debt modifications       |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | —           |       | 2.0           |       | 2.0              |       |
| Stamp  duty tax                                    |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | —           |       | 4.0           |       | 4.0              |       |
| Inventory  write-up reversal                       |       | 25.4          |       | 1.0             |       | 6.6          |       | 20.8         |       | —        |       | —          |       | —           |       | —        |       | 53.8             |       |
| Write-off  of deferred debt issuance costs         |       | —        |       | 0.4             |       | —       |       | 0.2          |       | —        |       | 0.1             |       | —           |       | 24.4          |       | 25.1             |       |
| Foreign  exchange (gain) loss                      |       | (0.9          | )          | 0.3             |       | —       |       | —       |       | —        |       | 1.4             |       | —           |       | 125.4         |       | 126.2            |       |
| Other                                              |       | 0.5           |       | (0.3            | )          | 0.2          |       | 0.7          |       | 0.3           |       | (0.1            | )          | —           |       | 1.4           |       | 2.7              |       |
| Adjusted  EBITDA from continuing operations        |       | 60.0          |       | 149.2           |       | 37.8         |       | 35.8         |       | 28.8          |       | 28.9            |       | —           |       | (28.7         | )          | 311.8            |       |
| Discontinued  operations                           |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | 20.6             |       | —        |       | 20.6             |       |
| Total Adjusted EBITDA                              |       | $             | 60.0       |            | $          | 149.2        |       | $            | 37.8       |          | $          | 35.8            |       | $                | 28.8       |          | $          | 28.9             |       | $ | 20.6 |   | $ | (28.7 | ) | $ | 332.4 |   |

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(a)             Includes gains of$7.2 million, $22.4 million and $6.0 million for the years ended December 31,2006, 2005 and 2004, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

(b)            Includes inventorywritedowns of $0.4 million and $0.5 million recorded in cost of products soldfor the years ended December 31, 2006 and 2005, respectively.

(c)             In connection withthe IPO, the management services agreement with the affiliates of KKR and DLJMBwas terminated for $10.0 million. In addition, a redemption premium of $13.2million was paid in connection with the repayment of long-term debt anddeferred financing costs of $13.4 million were written off.

The summary of segmentinformation above includes “Adjusted EBITDA,” a financial measure used by theCompany’s chief decision maker and senior management to evaluate the operatingperformance of each segment.

*Itemsexcluded from Adjusted EBITDA*

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition 

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corporate entity, along with the impact of the DynamitNobel Acquisition and the Company’s initial public offering, resulted in anumber of charges that have affected Rockwood’s historical results. Thesecharges, along with certain other items, are added to or subtracted from income(loss) before taxes to derive Adjusted EBITDA, as defined below. These itemsinclude the following:

·                      *Impairment charges:  *In 2006, the Company recorded animpairment charge of $2.2 million related to the writedown of property, plantand equipment within the Fine Chemicals business of the Specialty Chemicalssegment. In 2005, the Company recorded an impairment charge of $0.4 million toproperty, plant and equipment in the Color Pigments and Services businesswithin the Performance Additives segment.

As part of the Company’s annual impairment testing in2004, it was determined that there were asset impairments in certain businesseswithin our Electronics segment. These impairments resulted from a significantdecline in earnings and operating cash flows, both historical and prospective,based on global economic conditions common to significant competitors,including overcapacity, as well as the erosion of the Electronics segment’sbusiness lines’ relative competitive position due to continued industryconcentration and resulting pricing pressure. Accordingly, the Company recordednon-cash asset impairment charges to goodwill of $4.0 million in 2004. Also,the Company recorded non-cash impairment charges to property, plant andequipment of $7.0 million in 2004.

·                      *Restructuring and related charges:  *Restructuringcharges of $5.6 million, $15.9 million and $1.1 million (including $0.4 millionand $0.5 million of charges recorded in cost of products sold in theconsolidated statements of operations in 2006 and 2005, respectively) wererecorded in 2006, 2005 and 2004, respectively, for miscellaneous restructuringactivities, including facility closures and headcount reductions (see Note 18, “RestructuringLiability,” for further details).

·                      *Chromated copper arsenate (CCA) litigation defense costs:*   Costsof $0.8 million and $1.2 million were recorded in 2006 and 2005, respectively,primarily for attorney fees related to the Company’s Timber Treatment Chemicalsbusiness line of the Performance Additivessegment.

·                      *Systems/organization establishment expenses:*   For 2006,expenses of $10.7 million were recorded related to professional fees incurredregarding systems and internal control documentation in connection with theSarbanes-Oxley Act of 2002 and fees relating to the implementation of a newconsolidation software system. For 2005, expenses of $3.9 million were recordedrelated to the integration of the businesses acquired in the Dynamit NobelAcquisition, as well as professional fees incurred regarding systems andinternal control documentation in connection with the Sarbanes-Oxley Act of2002. For 2004, expenses of $4.8 million million were recorded related to theintegration of the businesses acquired in the Dynamit Nobel Acquisition,professional fees incurred regarding systems and internal control documentationin connection with the Sarbanes-Oxley Act of 2002 and costs that arose inconnection with the KKR Acquisition and the Company’s resulting organization asa stand-alone company and expenses relating to the amortization of sign-oncompensation arrangements for key executives.

·                      *Cancelled acquisition and disposal costs:*   Costs of$2.5 million, $1.2 million and $0.5 million were recorded in 2006, 2005 and2004, respectively, in connection with non-consummated acquisitions anddispositions.

·                      *Costs incurred related to debt modifications:  *InDecember 2005, the Company expensed $1.0 million related to the third amendmentof the senior secured credit agreement resulting in a 25 basis point interestrate reduction on each of our tranche E and tranche F term loans. In 2004, theCompany expensed $2.0 million related to debt refinancing.

·                      *Stamp duty tax:*   In June 2004, the Company paid a stampduty tax of $4.0 million on certain assets transferred to the United Kingdom inconnection with the KKR Acquisition.

·                      *Inventory write-up reversal:  *Under Statement ofFinancial Accounting Standard No. 141, Business Combinations, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withthe acquisition of the Süd-Chemie businesses in 2005 and acquisitions in theAdvanced Ceramics and Specialty Compounds segments in 2006, the Companyallocated a portion of the total purchase price to inventory to reflectmanufacturing profit in inventory at the date of the acquisition. This resultedin a consequential reduction in gross profit of $1.1 million as theinventory was sold in the normal course of business. In connection with theDynamit Nobel Acquisition in 2004, the Company allocated a portion of the totalpurchase price to inventory to reflect manufacturing profit in inventory at thedate of the acquisition. This resulted in a consequential reduction in grossprofit, including currency effects, of $52.8 million during 2004, as theinventory was sold in the normal course of business. In connection with the pigments and dispersions acquisition inthe Performance Additives segment, the Company also included the $1.0 millionimpact from the reversal of inventory step-ups in 2004.

·                      *Management services agreement termination fee:  *Inconnection with the IPO, the Company recorded an expense of $10.0million in thethird quarter of 2005 to terminate the management services agreement withaffiliates of KKR and DLJMB.

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·                      *Loss on early extinguishment of debt:  *In the thirdquarter of 2005, the Company paid a redemption premium of $13.2 million toredeem long-term debt and wrote off $13.4 million of deferred financing costsassociated with the debt repaid in connectionwith the IPO.

·                      *Deferred Debt Issuance Costs:  *In 2004, the Companywrote off $25.1 million of debt in connection with repayment and refinancingof indebtedness.

·                      *Losses (gains) related to asset sales:  *The Companyrecorded gains, net of $0.2 million and $4.4 million (including a gain of $1.7million related to the sale and leaseback of a facility in the SpecialtyChemicals segment) in 2006 and 2005, respectively,related to asset sales.

·                      *Foreign exchange (gain) loss:  *During the periodspresented, the Company recorded foreign exchange (gains) and losses related toour long-term debt. These amounts primarily reflect the non-cash translationimpact on the Company’s euro-denominated debt resulting from the strengtheningor weakening of the euro against the U.S. dollar and/or the British pound. For2006 and 2005, gains of $8.6 million and $114.5 million, respectively, wererecorded. In 2004, losses of $126.2 million were recorded. In addition, theforeign exchange loss in 2004 included a $10.9 million mark-to-market realizedloss on foreign currency derivative agreements that the Company entered into inconnection with the Dynamit Nobel Acquisition. The decrease in foreign exchangegains in 2006 from 2005 was primarily due to the designation of the majority ofthe Company’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.

·                      *Other:  *In 2006, the Company recorded $1.8 million ofincome primarily related to the correction of an immaterial error related to apreviously unrecorded asset in the Titanium Dioxide segment of $1.6 million. In2005, the Company recorded income of $2.6 million primarily related to thereversal of a bad debt reserve of $2.9 million related to a note receivable fromthe buyer in connection with the sale of a business by Dynamit Nobel prior tothe Dynamit Nobel Acquisition, which was collected from the buyer in 2005. Theloss in 2004 of $2.8 million primarily relates to a stamp duty tax paid oncertain assets transferred to the United Kingdom in connection with the KKRacquisition.

·                      *Discontinued operations:  *As noted above, the Companycompleted the sale of its Groupe Novasep subsidiary on January 9,  2007. As a result, the Company’s financialstatements have been reclassified to reflect the Groupe Novasep subsidiary as adiscontinued operation for all periods presented. The following represent someof the significant adjustments to Adjusted EBITDA for the former Groupe Novasepsegment:

·                      Inconnection with the sale of Rohner AG in March 2006, the Company recorded a pre-tax loss of $11.5 million in 2006.

·                      Inconjunction with the downsizing of the Company’s manufacturing operations atthe Rohner AG facility within the Groupe Novasep segment, the Company recordedimpairment charges of $44.7 million in 2005 primarily related to the write-down of property, plant and equipment.

·                      Inconnection with the Groupe Novasep combination, the Company allocated a portionof the total purchase price to inventory to reflect manufacturing profit ininventory at the date of the acquisition. This resulted in a consequentialreduction in gross profit of $3.1 million for 2005 as the inventory was sold inthe normal course of business. In connection with the Dynamit Nobel Acquisitionin 2004, the Company allocated a portion of the total purchase price toinventory to reflect manufacturing profit in inventory at the date of theacquisition. This resulted in a consequential reduction in gross profit,including currency effects, of $7.3 million during 2004, as the inventory wassold in the normal course of business.

**5. ACQUISITIONS:**

Since February 2002, pursuant to the Company’sbusiness strategy of achieving profitable growth through selectiveacquisitions, the Company has acquired several businesses at purchase pricesranging from approximately $3.0 million (a U.S. liquid pigments assetacquisition by our Performance Additives segment) to $2,290.3 million,including net debt assumed (the four businesses of Dynamit Nobel). Inaccordance with SFAS No. 142, *“Goodwill and OtherIntangible Assets,”* any goodwill resulting from acquisitions istested for impairment at least annually.

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**Dynamit Nobel**

On July 31, 2004, the Company consummated the DynamitNobel Acquisition. The Company paid approximately €1,635.0 million (or $1,968.5million) (excluding repayment of certain assumed debt) in cash to mgtechnologies ag, now known as GEA Group Aktiengesellschaft, for the businessesacquired. On July 6, 2005, the Company paid $16.1 million of additional cashpurchase price consideration (based on the July 6, 2005 exchange rate of €1.00= $1.1927) in post-closing adjustments. The four divisions of Dynamit Nobelacquired by Rockwood were (i) Chemetall, or Specialty Chemicals; (ii)Sachtleben Chemie, or Titanium Dioxide Pigments; (iii) CeramTec, or AdvancedCeramics and (iv) DNES Custom Synthesis (consisting of Dynamit Nobel SpecialChemistry, Finorga, S.A. and Rohner AG), which was an integral part of theGroupe Novasep segment prior to its sale in January 2007. The Company’sfinancial statements have been reclassified to reflect the Groupe Novasepsegment as a discontinued operation for all periods presented. See Note 2, “DiscontinuedOperations,” for further details. The allocation of the purchase price to theidentifiable assets acquired is complete.

The excess of the total purchase price over theestimated fair value of the net assets acquired at closing was allocated togoodwill. Goodwill arising from the transaction totaled $944.8 million atDecember 31, 2005. This represented a $32.3 million increase to goodwill from theinitial allocation of the purchase price contained in our September 30, 2004balance sheet and was primarily due to: a) refinement and reallocation ofidentifiable asset valuation estimates by the independent appraiser; b) therecognition of additional liabilities for which management was seekingadditional information and did not have sufficient information to record as ofSeptember 30, 2004; c) the additional cash purchase price consideration of€13.5 million that represented post-closing adjustments; and d) reversal ofdeferred tax valuation allowances.

**Johnson Matthey Pigments and Dispersions Business**

On September 2, 2004, the Company completed theacquisition of the Pigments and Dispersions business of Johnson Matthey Plc.for approximately $50.0 million (including fees and expenses). The Companyutilized the remaining undrawn funds from the term loan portion of its seniorcredit facilities to finance this transaction. See Note 10, “Long-Term Debt”.

This acquisition was accounted for using the purchasemethod of accounting and is incorporated into the Company’s PerformanceAdditives segment. The allocation of the purchase price to the identifiableassets acquired is complete. Goodwill of less than $1.0 million has beenrecorded. This acquisition was not significant on a pro forma basis andtherefore, pro forma information is not provided.

**Groupe Novasep Combination**

On December 31, 2004, in connection with thecombination of the three business lines of the Custom Synthesis segment withGroupe Novasep SAS, one of Rockwood’s subsidiaries acquired 69.4% of the stockof Groupe Novasep SAS for a total purchase price of approximately $139.7million, including assumed debt of $48.6 million, cash acquired of $14.6million and the exchange of the remaining 30.6% of the stock of Groupe NovasepSAS for stock in the acquiring subsidiary. As a result of this transaction, theCompany owned approximately 79% of the new Groupe Novasep (formerly known asthe Groupe Novasep segment) and management of Groupe Novasep owned theremaining 21%. The Company used cash on hand to finance this transaction.

This combination was accounted for using the purchasemethod of accounting and was incorporated into the Company’s Groupe Novasepsegment. The Company has finalized the estimated fair value of the assetsacquired and liabilities assumed. Goodwill of $28.6 million atDecember 31, 2006 is included in the accompanying balance sheet in assetsfrom discontinued operations. This acquisition was not significant on a proforma basis and therefore, pro forma information is not provided. As notedabove, the Company sold Groupe Novasep in January 2007.

**Süd-Chemie AG Rheological Additives and CarbonlessDevelopers’ Businesses**

On December 30, 2005, the Company completed theacquisition of the rheological additives and carbonless developers businessesof Süd-ChemieAG, Munich, Germany. This acquisition complements the Company’sexisting Clay-based Additives businesses and allows the Company to better servecustomers with a broader product line, enhanced technical resources andincreased production capability. This acquisition was accounted for using thepurchase method of accounting and is incorporated into the Company’sPerformance Additives segment. Goodwill in the transaction totaled $10.1million as of December 31, 2006. This acquisition was not significant on a proforma basis and therefore, pro forma information is not provided.

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**6. INVENTORIES:**

Inventories are comprised of the following:

 
| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| **($ in  millions)** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw materials                       |       | $                     | 160.1      |   | $ | 127.7 |   |
| Work-in-process                     |       | 53.3                  |       | 49.4 |   |
| Finished goods                      |       | 226.4                 |       | 198.1 |   |
| Packaging  materials                |       | 5.6                   |       | 5.3 |   |
|                                |       | $                     | 445.4      |   | $ | 380.5 |   |

 

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

Property, plant and equipment, net is comprised of thefollowing:
|                                                          | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| **($ in  millions)**                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land                                                     |       | $                     | 134.7      |   | $ | 123.3 |   |
| Buildings and  improvements, including land improvements |       | 419.7                 |       | 365.9 |   |
| Machinery and  equipment                                 |       | 1,010.9               |       | 815.4 |   |
| Furniture and  fixtures                                  |       | 100.1                 |       | 68.1 |   |
| Mining rights                                            |       | 86.3                  |       | 86.3 |   |
| Construction-in-progress                                 |       | 99.4                  |       | 82.4 |   |
| Property, plant  and equipment, at cost                  |       | 1,851.1               |       | 1,541.4 |   |
| Less accumulated  depreciation and amortization          |       | (476.2                | )          | (303.8 | ) |
| Property, plant and  equipment, net                      |       | $                     | 1,374.9    |   | $ | 1,237.6 |   |

 

Depreciation expense was $139.3 million, $127.8million and $81.5 million for the years ended December 31, 2006, 2005 and 2004,respectively.

The Company recorded an impairment charge of $7.0million in 2004 related to property, plant and equipment in its Electronicssegment. See Note 17, “Impairment Charges.”

In addition, property, plant and equipment at December31, 2006 and 2005 includes items recorded under capital leases as follows:
|                                                          | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| **($ in  millions)**                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Buildings and  improvements, including land improvements |       | $                     | 48.3       |   | $ | 43.2 |   |
| Machinery and  equipment                                 |       | 0.5                   |       | 4.9 |   |
| Furniture and  fixtures                                  |       | 6.7                   |       | 2.3 |   |
|                                                     |       | 55.5                  |       | 50.4 |   |
| Accumulated  depreciation                                |       | (8.0                  | )          | (5.4 | ) |
| Total                                                    |       | **$**                 | 47.5       |   | $ | 45.0 |   |

 

In the fourth quarter of 2006, the Company recorded anadjustment related to certain fixed assets originally recorded in connectionwith the Laporte acquisition subsequently determined to be not supported byinternal documentation. This adjustment to the Company’s purchase accountingresulted in an increase to goodwill of $1.4 million within the PerformanceAdditives segment with a corresponding decrease to property, plant andequipment, net of $1.4 million. The effects of this adjustment to the Company’sConsolidated Balance Sheet as of December 31, 2005 was not material. Inaddition, this adjustment had no impact on the Company’s ConsolidatedStatements of Operations or the Consolidated Statements of Cash Flows for theyear ended December 31, 2005.

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**8. GOODWILL:**

Below are goodwill balances and activity by segment:
| ** **                                                | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                                                | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** ** | ** ** |
| **($ in millions)**                             | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Total**  | ** ** |
| Balance, January  1, 2005                                 |       | **$**         | 665.5      |            | $          | 463.8        |       | $            | 172.4      |          | $          | 230.7           |       | $          | 115.5      |   | $ | 124.2 |   | $ | 1,772.1 |   |
| Acquisitions                                              |       | —        |       | 9.9             |       | —       |       | —       |       | —        |       | —          |       | 9.9        |       |
| Reversal of  deferred tax valuation allowances            |       | (12.5         | )          | —          |       | —       |       | (5.1         | )          | —        |       | —          |       | (17.6      | )          |
| Other tax  adjustments                                    |       | (17.3         | )          | 2.5             |       | 0.6          |       | (7.5         | )          | —        |       | —          |       | (21.7      | )          |
| Post-closing  consideration and other related adjustments |       | 3.5           |       | 3.5             |       | 1.7          |       | 1.9          |       | —        |       | —          |       | 10.6       |       |
| Restructuring  reserves                                   |       | (0.9          | )          | —          |       | (0.4         | )          | (1.6         | )          | —        |       | —          |       | (2.9       | )          |
| Foreign exchange  and other (a)                           |       | (99.5         | )          | (20.2           | )          | (22.6        | )          | (30.9        | )          | (6.3          | )          | (4.9            | )          | (184.4     | )          |
| Balance,  December 31, 2005                               |       | 538.8         |       | 459.5           |       | 151.7        |       | 187.5        |       | 109.2         |       | 119.3           |       | 1,566.0    |       |
| Acquisitions                                              |       | —        |       | —          |       | —       |       | 5.8          |       | 2.1           |       | —          |       | 7.9        |       |
| Other tax  adjustments                                    |       | (5.5          | )          | —          |       | 2.7          |       | 6.0          |       | —        |       | —          |       | 3.2        |       |
| Post-closing  consideration and other related adjustments |       | 0.6           |       | (1.1            | )          | 0.2          |       | 0.7          |       | —        |       | —          |       | 0.4        |       |
| Foreign exchange  and other (a)                           |       | 63.7          |       | 22.4            |       | 18.0         |       | 23.2         |       | 7.2           |       | 5.7             |       | 140.2      |       |
| Balance, December 31,  2006                               |       | $             | 597.6      |            | $          | 480.8        |       | $            | 172.6      |          | $          | 223.2           |       | $          | 118.5      |   | $ | 125.0 |   | $ | 1,717.7 |   |

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(a) Consists primarily of foreign currency changes.

In the fourth quarter of 2006, the Company recorded anadjustment related to a pension obligation which had not been recorded inconnection with the Dynamit Nobel Acquisition. This adjustment to the Company’spurchase accounting resulted in an increase to goodwill of approximately $0.9million and a corresponding increase to pension liabilities. The effects ofthis adjustment to the Company’s Consolidated Balance Sheet as of December 31,2005, and the Consolidated Statements of Operations and the ConsolidatedStatements of Cash Flows for the year ended December 31, 2005 were notmaterial.

Also in the fourth quarter of 2006, the Companyrecorded an adjustment related to a deferred tax asset which was recorded inconnection with the Dynamit Nobel Acquisition purchase accounting in 2005. Theadjustment resulted in a decrease to goodwill of approximately $4.6 million anda corresponding increase to non-current deferred tax liabilities. The effectsof this adjustment to the Company’s Consolidated Balance Sheet as of December31, 2005, and the Consolidated Statements of Operations and the ConsolidatedStatements of Cash Flows for the year ended December 31, 2005 were notmaterial.

**9. OTHER INTANGIBLE ASSETS:**

Other intangible assets, net consist of:
| ** **                               | ** ** | **As of December 31, 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 |       | $                                               | 311.1      |                                            | $          | (82.0 | ) | $ | 229.1 |   | $ | 283.9 |   | $ | (53.3 | ) | $ | 230.6 |   |
| Trade names and  trademarks              |       | 132.7                                           |       | (15.2                                           | )          | 117.5 |   | 111.8 |   | (7.2 | ) | 104.6 |   |
| Customer  relationships                  |       | 191.3                                           |       | (32.6                                           | )          | 158.7 |   | 161.0 |   | (17.9 | ) | 143.1 |   |
| Other                                    |       | 52.9                                            |       | (18.6                                           | )          | 34.3 |   | 40.3 |   | (12.3 | ) | 28.0 |   |
| Total                                    |       | **$**                                           | 688.0      |                                            | $          | (148.4 | ) | $ | 539.6 |   | $ | 597.0 |   | $ | (90.7 | ) | $ | 506.3 |   |

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(a) Increase from December 31, 2005 primarily due to currency effects.

Amortization of other intangible assets was $51.7million, $42.8 million and $25.1 million for the years ended December 31, 2006,2005 and 2004, respectively.

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Estimated amortization expense for each of the fivesucceeding fiscal years is as follows:
| **($ in millions)**         | ** ** | **Amortization** | ** ** |
|---------------------------------------|------------|------------------|------------|
| **Year  ended  ** | ** ** | **Expense**      | ** ** |
| 2007                                  |       | $                | 55.4       |   |
| 2008                                  |       | 53.9             |       |
| 2009                                  |       | 46.4             |       |
| 2010                                  |       | 44.9             |       |
| 2011                                  |       | 43.4             |       |
|                                       |            |                  |            |  |

 

**10. LONG-TERM DEBT:**

Long-term debt and loans payable are summarized asfollows:
| ** **                                                                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| **($, € and £ in millions)**              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Senior secured  credit facilities:                                           |       |                  |       |   |   |
| Tranche A-1 term loans (€35.2 and €39.1,  respectively)            |       | **$**                 | 46.5       |   | $ | 46.1 |   |
| Tranche A-2 term loans (€153.4 and €170.4,  respectively)          |       | 202.4                 |       | 201.0 |   |
| Tranche E term loans                                                         |       | 1,127.8               |       | 1,139.3 |   |
| Tranche F term loans (€270.7 and €273.4,  respectively)            |       | 357.3                 |       | 322.5 |   |
| Revolving short-term loans                                                   |       | 37.0                  |       | 30.0 |   |
| 2011 Notes                                                                   |       | 273.4                 |       | 273.4 |   |
| 2014 Notes  (€375.0 and $200.0 as of December 31, 2006 and 2005)        |       | 695.0                 |       | 642.4 |   |
| Other term loan  facilities                                                  |       | 12.9                  |       | 26.9 |   |
| Capitalized  lease obligations (€35.3 and €37.8, respectively)     |       | 46.6                  |       | 44.6 |   |
| Preferred stock  of subsidiary (£12.0 as of December 31, 2006 and 2005) |       | 23.5                  |       | 20.6 |   |
| Other (€12.4 and  €12.2, respectively)                             |       | 16.3                  |       | 14.4 |   |
|                                                                         |       | 2,838.7               |       | 2,761.2 |   |
| Less current  maturities                                                     |       | (117.8                | )          | (99.8 | ) |
|                                                                         |       | $                     | 2,720.9    |   | $ | 2,661.4 |   |

Maturities of long-term debt are as follows:
| **($ in millions)** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| 2007                          |       | $          | 117.8      |   |
| 2008                          |       | 89.8       |       |
| 2009                          |       | 64.2       |       |
| 2010                          |       | 68.6       |       |
| 2011                          |       | 355.4      |       |
| Thereafter                    |       | 2,142.9    |       |
|                          |       | $          | 2,838.7    |   |

Senior Secured Credit Facilities 

*a) Structure*

In connection with the Dynamit Nobel Acquisition, theCompany entered into a senior secured credit agreement on July 30, 2004. €39.1of the tranche A-1 term loans, €128.5 million of the tranche A-2 term loans,$985.0 million of the tranche B term loans and €222.1 million of the tranche Cterm loans were drawn in a single drawing on the closing of the Dynamit NobelAcquisition. The remaining €41.9 million of the tranche A-2 term loans weredrawn in a single drawing on September 30, 2004 in connection with theacquisition of the pigments and dispersions business of Johnson Matthey Plc.

On October 8, 2004, the Company amended its seniorsecured credit facilities to borrow an additional $160.0 million of tranche Bterm loans and €52.7 million (or $65.5 million) of tranche C term loans (or$225.5 million in the aggregate) and used the proceeds to repay a portion (€105.9million and $89.9 million or $221.4 million in the aggregate) of the higherinterest rate bearing borrowings under the senior subordinated loan facility(subsequently repaid in full through the issuance of the 2014 Notes describedherein) and to pay related fees of $2.3 million. The Company wrote off $6.1million of deferred financing costs in connection with the repayment under thisamendment. On December 10, 2004, the Company entered into the second amendmentto the senior secured credit

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agreement to borrow $1,145.0 million of tranche D termloans and used the proceeds to repay in full the tranche B term loans, reducingthe interest rate on this debt by 25 basis points as a result. Related fees of$1.0 million were expensed.

On December 13, 2005, the Company entered into thethird amendment to the senior secured credit agreement to borrow $1,139.3 millionof new tranche E term loans and €273.4 million of new tranche F term loans andused the proceeds to repay in full the tranche C and tranche D term loans,reducing the interest rates on this debt by 25 basis points each. Related feesof $1.0 million were expensed.

*b) Availability*

The senior secured credit facilities consist of theterm loan tranches listed above as well as a senior secured revolving creditfacility in an aggregate principal amount of $250.0 million made available inU.S. dollars, euros and/or pounds sterling. A portion of the revolving creditfacility is available in the form of letters of credit and swingline loans.Under the terms of the amendments, the Company may, under certain circumstancesand subject to receipt of additional commitments from existing lenders or othereligible institutions, request that the tranche E term loans and/or therevolving credit commitments be increased by an aggregate amount of up to$250.0 million. As of December 31, 2006 the Company had outstanding borrowingsof $37.0 million under the revolving credit facility, and $26.5 million ofletters of credit issued on its behalf.

Amounts borrowed under the term loan facilities, otherthan the revolving credit facility, that are repaid or prepaid may not be reborrowed.

*c) Interest and Fees*

The interest rates per year under the tranche A-1 andA-2 term loan facilities are Adjusted EURIBOR plus 2.25%. The interest rate peryear, at the Company’s option, under the tranche E term loan facility isAdjusted LIBOR plus 2.00% or ABR plus 0.75%. Adjusted LIBOR is the Londoninter-bank offered rate, adjusted for statutory reserves. The interest rate peryear under the tranche F term loan facility is Adjusted EURIBOR plus 2.75%. Theinterest rates under the revolving credit facility are, at the Company’soption, Adjusted LIBOR plus 2.25% or, ABR plus 1.00%. Adjusted EURIBOR is theeuro inter-bank offered rate, adjusted for statutory reserves. In each case,the interest rates per year are subject to step-downs determined by referenceto a performance test. ABR is the alternate base rate, which is the higher ofCredit Suisse’s prime rate and the federal funds effective rate plus 0.5%.

The Company may elect interest periods of one, two,three or six months (or in the case of revolving credit loans, nine or twelvemonths, to the extent available from all lenders under the revolving creditfacility) for Adjusted LIBOR borrowings. Interest is payable quarterly in thecase of ABR loans and at the end of each interest period and, in any event, atleast every three months, in the case of Adjusted LIBOR borrowings.

The senior secured credit facilities require paymentof customary commitment, letter of credit and other fees.

*d) Guarantees; Security*

Obligations under the senior secured credit facilitiesare guaranteed by Rockwood Specialties International, Inc. and each of RockwoodSpecialties Group Inc.’s existing and subsequently acquired or organized director indirect domestic subsidiaries, subject to certain exceptions, and aresecured by first-priority security interests in: substantially all the tangibleand intangible assets of the Company and its direct or indirect domesticsubsidiaries, subject to exceptions; all the capital stock of or other equityinterest in the Company and each of its direct or indirect domesticsubsidiaries; a maximum of 65% of the capital stock of or other equityinterests in each direct foreign subsidiary of either Group or of any domesticsubsidiary of the Company.

*e) Maturity, Amortization and Prepayments*

The tranche A-1 and A-2 term loans will mature on July30, 2011 and amortize at escalating percentages on a semi-annual basiscommencing on January 31, 2006. The tranche E term loans and tranche F termloans will mature on July 30, 2012 and amortize on a semi-annual basiscommencing on July 31, 2006, with each repayment amount prior to maturity to beequal to 0.5% of the principal amount of the former tranche C term loans andtranche D term loans, respectively. The revolving credit facility will matureon July 30, 2010. The tranche E and F term loans have a prepayment fee equal to1.0% of the aggregate principal amount of such prepayment for one year from thedate of issuance.

In addition, the Company is required to make thefollowing mandatory prepayments of the term loans under the senior securedcredit facilities, in each case subject to certain exceptions, with:

·                      100%of the net cash proceeds of all sales or other dispositions by the Company orany of its restricted subsidiaries under the senior secured credit facilitiesof assets other than net cash proceeds (a) from the sale or other dispositionof assets in the ordinary course of business, (b) of certain disposalspermitted under the senior secured credit agreement (including the proceeds ofsales or transfers of accounts receivable (including pursuant to asecuritization) in the amount of up to 

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$200.0 million at any time) or (c) that are reinvestedin the Company and its restricted subsidiaries within twelve months of the saleor other disposition (subject to extension in certain circumstances).

·                      100%of the net cash proceeds of issuances of certain debt obligations.

·                      50% ofexcess cash flows, as defined, in respect of any fiscal year at the end ofwhich the consolidated total debt to consolidated EBITDA ratio is equal to orgreater than 3.50 to 1.0, reduced by any amounts reinvested during the firstsix months of the year and voluntary prepayments.

*f) Financial Covenants*

The senior secured credit facilities contain thefollowing financial covenants:

·                      aconsolidated total net debt to consolidated Adjusted EBITDA test;

·                      aconsolidated Adjusted EBITDA to consolidated cash interest expense test; and

·                      limitationson capital expenditures.

For purposes of calculating compliance with thefinancial covenants as of any date, foreign currency denominated indebtednessis to be converted to U.S. dollars based on average exchange rates for thetwelve-month period ending on such date.

***2011 Notes***—Inconnection with the July 2003 refinancing, the Company issued $375.0 millionprincipal amount of senior subordinated notes due 2011 (“2011 Notes”). InAugust 2005, $101.6 million, or 27%, of the 2011 Notes were redeemed with the IPOproceeds. Interest on the 2011 Notes is payable semi-annually on May 15 andNovember 15 and accrues at the rate of 10.625% per year. Certain of ourdomestic subsidiaries guarantee the 2011 Notes on a senior subordinated basis.The Company may redeem the 2011 Notes in whole or in part, at a premium, whichdeclines annually through maturity. The 2011 Notes have covenants and otherterms and conditions that are comparable or generally less restrictive than thesenior secured credit facilities.

***2014 Notes***—OnNovember 10, 2004, the Company repaid the senior subordinated loan facility bycompleting the sale of €375.0 million aggregate principal amount of 7.625%senior subordinated notes and $200.0 million aggregate principal amount of 7.500%senior subordinated notes, both due in 2014 (“2014 Notes”). The 2014 Notes are *pari passu* to existing and future senior subordinatedindebtedness, including the 2011 Notes and junior to all of the Company’sexisting and future senior indebtedness. The 2014 Notes are guaranteed on asenior subordinated unsecured basis by certain of the Company’s domesticsubsidiaries.

***Other term loan facilities***—The Company has seven euro-denominated term loan facilities that provideaggregate outstanding borrowings of approximately €7.8 million ($10.3 million)as of December 31, 2006. These term loans mature between 2008 and 2010 and bearannual interest rates ranging between 1.50% and 4.25%. In addition, the Companyhas three term loan facilities denominated in other foreign currencies,including Taiwanese Dollars, Chinese Renminbi and Japanese Yen, providing forborrowings of an aggregate U.S. dollar equivalent amount of $2.5 million as ofDecember 31, 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.

***Preferred stock of subsidiary***—ChemetallPlc., a Rockwood subsidiary, had previously issued 12.0 million shares ofpreferred stock, which must be redeemed at their par value (£1) on July 3, 2008and may be called at an earlier date. The shares have a liquidation preferenceat their par value and pay an annual dividend of 9.0% payable on January 3 andJuly 3 of each year. If, in the opinion of management, the level of profitreported does not allow the payment of a dividend, the dividend arrearage mustbe paid in subsequent years. The preferred stock does not confer any votingrights unless the payment of the dividend or redemption price is more than sixmonths in arrears or a vote is being held on the company’s liquidation or acapital reduction. The Company is currently meeting its dividend obligations.The terms and conditions governing the issuance of the preferred stock containcovenants obliging the issuer to maintain a certain debt/equity ratio.

***Senior Discount Notes***—InAugust 2005, net proceeds of $89.2 million from the IPO were used to redeem theoutstanding principal amount of the 12% senior discount notes (includingaccreted and unpaid interest), which were held by an affiliate of KKR. The$70.0 million initial principal balance on the senior discount notes accretedsemiannually through August 22, 2005, the date the notes were repaid.

***Pay-in-kind Loans and Notes***—InAugust 2005, net proceeds of $61.1 million and €98.3 million ($120.2 million,based on the August 22, 2005 exchange rate of €1.00 = $1.2232) from the IPOwere used to redeem the outstanding principal amounts of the pay-

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in-kind loans and notes, and to pay accrued and unpaidinterest and a redemption premium.

Interest on the pay-in-kind loans and notes accrued atan annual rate of 15%, and to the extent not paid in cash, could be financed,at the option of the borrower, Rockwood Specialties Consolidated, Inc., throughincreasing the principal amount outstanding (or, in the case of the pay-in-kindnotes, at the holder’s option, through the issuance of additional pay-in-kindnotes) at the end of each six-month period.

In connection with the initial issuance of thepay-in-kind loans and notes, the Company issued a total of 1,036,114 of itscommon shares, with a fair value of $14.61 per share. This amount has beenrecorded as deferred debt issuance costs.

***Fair Value***—TheCompany estimates that its debt under the senior secured credit facilities,based on current interest rates and terms, approximates fair value. Based onquoted market values at December 31, 2006, the Company estimates the fair valueof its 2011 Notes and 2014 Notes approximated $291.1 million and $730.5 million,respectively.

***Derivative Contracts***—TheCompany has historically entered into interest rate swaps to manage itsexposure to changes in interest rates related to euro-denominated debt. As ofDecember 31, 2006, these contracts covered notional amounts of $736.3 million(at rates of 3.644% and 4.499%) and €472.7 million (at rates ranging from2.498% to 5.720%). As of December 31, 2005, these contracts covered notionalamounts of $749.0 million (at rates of 3.644% and 4.499%) and €478.4 million(at rates ranging from 2.498% to 4.529%). These contracts effectively convert86% of the Company’s floating rate debt instruments to fixed rate obligationsfor the contract periods. The swaps mature between July 2007 and August 2008.The Company elected not to apply hedge accounting for these interest rate swapsin the historical periods presented and recorded the mark-to-market of thesederivative transactions as a component of interest expense. These transactionsdecreased interest expense by $15.7 million and $9.1 million in 2006 and 2005,respectively, and increased interest expense by $4.4 million in the year endedDecember 31, 2004, of which gains of $9.4 million, $18.8 million and $5.2million in 2006, 2005 and 2004, respectively, represented mark-to-marketadjustments. The related asset and liability on the contracts’ marked-to-marketadjustments is reflected in “Other Assets” and “Other liabilities,” respectively,in the “Consolidated Balance Sheets.” The Company believes that thecounterparties to these agreements are financially sound institutions and thecredit risk for non-performance of these contracts is not significant.

During 2003 the Company entered into cross-currencyinterest rate swaps with notional amounts aggregating $78.2 million thateffectively converted $78.2 million U.S. dollar borrowings into euro basedobligations at an effective interest rate of EURIBOR plus 4%. In connection withthe July 2003 refinancing, the Company reduced the notional amounts of thiscross currency hedge to $20.1 million and €17.7 million. These contracts havefinal maturity dates of July 2010. These transactions increased interestexpense by $1.3 million and $0.1 million in 2006 and 2004, respectively, anddecreased interest expense by $4.4 million in 2005, of which (losses) gains of$(2.2) million, $3.6 million and $0.8 million in 2006, 2005 and 2004,respectively, represented mark-to-market adjustments.

In connection with the offering of the 2014 Notes, theCompany entered into cross currency interest rate swaps with a five year termand a notional amount of €155.6 million that effectively convert the U.S.dollar fixed rate debt in respect of the 2014 dollar-denominated notes soldinto euro fixed rate debt. The Company designated this contract as a hedge ofthe foreign currency exposure of its net investment in its euro-denominatedoperations. There was no ineffective portion of the net investment hedge as ofDecember 31, 2006. The Company does not expect any of the loss on the netinvestment hedge residing in other comprehensive income at December 31, 2006 tobe reclassified into earnings in 2007.

In addition, the Company designated the remainingportion of its euro-denominated debt that is recorded on its U.S. books as anet investment hedge of its euro-denominated investments as of October 1, 2005(euro debt of €680.9 million and $898.7 million based on the Friday, December29, 2006 exchange rate of €1.00=$1.3199). As a result, any foreign currencygains and losses resulting from the euro-denominated debt discussed above,effective October 1, 2005 is accounted for as a component of accumulated othercomprehensive income for as long as the hedge remains effective. There was noineffective portion of the net investment hedge as of December 31, 2006. TheCompany does not expect any of the loss on the net investment hedge residing inother comprehensive income at December 31, 2006 to be reclassified intoearnings in 2007.

During 2005, the Company designated as cash flowhedges certain foreign currency derivative contracts to hedge its exposure tothe foreign currency rate variability of the functional-currency equivalent ofthe foreign-currency denominated cash flows associated with forecasted sales orforecasted purchases. The ultimate maturities of the contracts are timed tocoincide with the expected occurrence of the underlying forecasted transaction.

For the year ended December 31, 2005, the Companyreported after-tax losses of $0.6 million in accumulated other comprehensiveincome (“AOCI”) relating to the change in the fair value of derivativesdesignated as foreign exchange cash flow hedges. This amount was reclassifiedinto earnings within the next twelve months. There was no gain or lossreclassified from AOCI into income as a result of the discontinuance of cashflow hedges due to the probability of the original forecasted transactions notoccurring. As of

 

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December 31, 2005, the maximum length of time overwhich the Company has hedged its exposure to movements in foreign exchangerates for forecasted transactions was six months. For the year ended December31, 2006, the Company did not enter into any derivatives designated as foreignexchange cash flow hedges.

As of December 31, 2006, $1,174.4 million of the debtoutstanding was denominated in euros.

In order to mitigate the effect of any exchange ratechanges which may have taken place prior to the closing of the Dynamit NobelAcquisition, the Company entered into call options, permitting it to purchaseup to €750.0 million at a price of $1.225 = €1.00. The options expiredunexercised and the Company recorded an aggregate loss of $11.0 million on thecall options in 2004. Rockwood also entered into a forward contract in July2004 to purchase €1,057.0 million of euros at a fixed U.S. dollar rate of$1.208 = €1.00 which was utilized to pay for a portion of the purchase price atthe closing of the Dynamit Nobel Acquisition. The Company recorded a relatedcharge of $4.2 million in 2004.

***Deferred Debt Issuance Costs***—Inconnection with the Dynamit Nobel Acquisition, the Company wrote-off $1.8million of deferred debt issuance costs during 2004. Also, the Company capitalizedfees of $69.7 million during the same period related to the financing of theDynamit Nobel Acquisition which are being amortized using the effectiveinterest rate method over the term of the debt outstanding. The Company wroteoff $6.1 million of deferred financing costs in connection with the October 8,2004 amendment of the secured credit facilities. Also, a write-off of $17.2million of deferred financing costs was incurred related to the bridge loanrepayments in connection with the issuance of the 2014 Notes.

***Loss on Early Extinguishment ofDebt***—In the third quarter of 2005, the Company paid aredemption premium of $13.2 million ($10.8 million on the 2011 Notes and $2.4million on the pay-in-kind loans and notes) and wrote-off $13.4 million ($10.9million on the pay-in-kind loans and notes and $2.5 million on the 2011 Notes)of deferred financing costs associated with the debt repaid in connection withthe IPO.

***Guarantees***—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 ofDecember 31, 2006, the Company had approximately $55.1 million of letters ofcredit and other bank guarantees, of which $0.8 million will expire in lessthan one year, $25.9 million will expire in 4-5 years and $28.4 million willexpire after five years. This amount includes outstanding letters of credit of$26.5 million that reduced our availability under the senior secured creditfacility. In the opinion of management, such obligations will not significantlyaffect the Company’s financial position, results of operations or cash flows asthe Company anticipates fulfilling its performance obligations.

**11. TAXES ON INCOME:**

Income (loss) before income taxes is as follows:

|                               | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)** | ** ** | ** **                                 | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States                 |       | $                                          | (11.7      | ) | $ | 76.0 |   | $ | (146.4 | ) |
| Foreign                       |       | 164.6                                      |       | 125.2 |   | (40.7 | ) |
|                          |       | $                                          | 152.9      |   | $ | 201.2 |   | $ | (187.1 | ) |
|                               |            |                                            |            |  |  |  |  |  |  |  |  |

 

The provision (benefit) for taxes on income consistedof the following:
| ** **                              | ** ** | **Year Ended December 31** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **($ in millions)**           | ** ** | ** **                                | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current income  tax expense:            |       |                                      |       |   |   |   |   |
| State                                   |       | $                                         | 4.4        |   | $ | 2.0 |   | $ | 5.3 |   |
| Foreign                                 |       | 28.0                                      |       | 29.5 |   | 14.9 |   |
|                                    |       | $                                         | 32.4       |   | $ | 31.5 |   | $ | 20.2 |   |
| Deferred income  tax expense (benefit): |       |                                      |       |   |   |   |   |
| Federal                                 |       | $                                         | 12.5       |   | $ | 9.1 |   | $ | 28.9 |   |
| State                                   |       | 1.0                                       |       | 7.3 |   | (3.8 | ) |
| Foreign                                 |       | 26.7                                      |       | 16.3 |   | (18.2 | ) |
|                                    |       | 40.2                                      |       | 32.7 |   | 6.9 |   |
| Total provision for  taxes              |       | $                                         | 72.6       |   | $ | 64.2 |   | $ | 27.1 |   |
|                                         |            |                                           |            |  |  |  |  |  |  |  |  |

 

Amounts are reflected in the preceding table based onthe location of the taxing authorities. Changes in enacted rates impact tax 

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provision in the year a rate change is enacted.

Deferred income taxes are provided for the effects oftemporary differences between the amounts of assets and liabilities recognizedfor financial reporting purposes and the amounts recognized for income taxpurposes. The deferred tax assets and liabilities are determined by applyingthe enacted tax rate in the year in which the temporary difference is expectedto reverse.

The tax effects of the major items recorded asdeferred tax assets and liabilities are as follows:
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **($ in millions)**                    | ** ** | ** **            | **2006**   | ** ** | **2005** | ** ** |
| Current deferred  income tax assets:             |       |                  |       |   |   |
| Allowance for doubtful accounts                  |       | **$**                 | 1.9        |   | $ | 4.2 |   |
| Restructuring                                    |       | 2.7                   |       | 2.2 |   |
| Other current reserves and accruals              |       | 19.3                  |       | 26.1 |   |
| Valuation allowance                              |       | (14.2                 | )          | (7.8 | ) |
| Total current deferred income tax assets         |       | 9.7                   |       | 24.7 |   |
| Noncurrent  deferred income tax assets:          |       |                  |       |   |   |
| Pension and postretirement benefits              |       | 55.9                  |       | 56.8 |   |
| Tax loss carryforwards and credits               |       | 165.1                 |       | 148.5 |   |
| Other non-current reserves and accruals          |       | 4.4                   |       | 14.9 |   |
| Foreign exchange on debt                         |       | 29.8                  |       | — |   |
| Valuation allowance                              |       | (85.9                 | )          | (43.1 | ) |
| Total noncurrent deferred income tax assets      |       | 169.3                 |       | 177.1 |   |
| Noncurrent  deferred income tax liabilities:     |       |                  |       |   |   |
| Derivative instruments                           |       | (24.6                 | )          | (23.9 | ) |
| Goodwill and other intangibles                   |       | (79.2                 | )          | (69.2 | ) |
| Property, plant and equipment                    |       | (102.9                | )          | (88.6 | ) |
| Other                                            |       | (5.7                  | )          | (5.3 | ) |
| Total noncurrent deferred income tax liabilities |       | (212.4                | )          | (187.0 | ) |
| Net deferred income tax  liability               |       | $                     | (33.4      | ) | $ | 14.8 |   |
|                                                  |            |                       |            |  |  |  |  |  |

 

Reconciliations of the U.S. statutory income tax rateto the effective tax rate are as follows:
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal  statutory rate                     |       | 35.0                                       | %          | 35.0 | % | (35.0 | )% |
| State taxes, net  of federal effect         |       | 2.3                                        |       | 3.1 |   | 0.5 |   |
| Foreign/U.S. tax  differential              |       | (3.3                                       | )          | 1.0 |   | 3.4 |   |
| Goodwill                                    |       | 1.0                                        |       | 0.1 |   | 0.7 |   |
| Increase  (decrease) in valuation allowance |       | 10.5                                       |       | (14.3 | ) | 39.3 |   |
| Debt instruments                            |       | 1.8                                        |       | 2.1 |   | 2.9 |   |
| Other                                       |       | 0.2                                        |       | 4.9 |   | 2.7 |   |
| Effective tax rate                          |       | 47.5                                       | %          | 31.9 | % | 14.5 | % |

 

The Company’s U.S. operations are included in aconsolidated federal income tax return. The amount of current and deferred taxexpense is computed on a separate entity basis for each member of the groupbased on applying the principles of SFAS 109.

As of December 31, 2006, the Company has U.S. federaland foreign Corporate tax loss carryforwards (excluding state and localamounts) of approximately $456.6 million, of which $285.4 millionexpire in years 2007 through 2026 and $171.2 million have no currentexpiration date. Included in the U.S. federal and foreign carryforwards areU.S. federal tax loss carryforwards of $281.0 million, of which $265.2million expire in 2020 and beyond. The Company also has state and local taxloss carryforwards of approximately $204.1 million expiring in years 2007through 2026.

The Company has increased its worldwide valuationallowance during 2006 by $49.2 million, from $50.9 million on a continuingoperations basis to $100.1 million primarily due to increases in the U.S.valuation allowance due to the increase in U.S. deferred tax assets. Theincrease consists of $1.5 million recorded to goodwill in connection with prioryear acquisitions, $31.0 million recorded to other comprehensive income and$16.1 recorded as an expense to continuing operations. The remainder relates toforeign currency fluctuations.

 

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The valuation allowance as of December 31, 2006 and 2005is attributable to deferred tax assets related to certain tax losscarryforwards in Germany, Italy and the United States, including certainstates, for which it is more likely than not that the related tax benefits willnot be realized. It is the Company’s policy that the valuation allowance isdecreased or increased in the year management determines that it is more likelythan not that the deferred tax assets will be realized or not.

A table reflecting the activity in the valuationallowance is as follows:
| ** **                            | ** ** | ** **          | ** **         | **Additions**       | ** **  | ** **    | ** **   | ** **    | ** ** | ** **          | ** **         |
|---------------------------------------|------------|---------------------|--------------------|---------------------|-------------|---------------|--------------|---------------|------------|---------------------|--------------------|
| ** **                            | ** ** | **Balance at** | ** **         | **(Deductions)**    | ** **  | ** **    | ** **   | ** **    | ** ** | **Balance at** | ** **         |
| ** **                            | ** ** | **Beginning**       | ** **         | **Charged to** | ** **  | **Additions** | ** **   | **Deletions** | ** ** | **End**             | ** **         |
| **($ in millions)**         | ** ** | ** **          | **of Period** | ** **          | **Expense** | ** **    | **Acquired** | ** **    | **Other**  | ** **          | **of Period** | ** ** |
| Valuation  Allowance                  |       |                |               |                |        |          |         |          |       |                |               |
| For the year  ended December 31, 2006 |       | $                   | 50.9               |                | $           | 16.1          |         | $             | —     |                | $                  | 33.1 |   | $ | 100.1 |   |
| For the year  ended December 31, 2005 |       | 113.4               |               | (27.6               | )           | —        |         | (34.9         | )          | 50.9                |               |
| For the year ended  December 31, 2004 |       | 16.4                |               | 78.9                |        | 18.1          |         | —        |       | 113.4               |               |
|                                       |            |                     |                    |                     |             |               |              |               |            |                     |                    |  |  |  |  |  |  |

 

At December 31, 2006 and 2005 the Company hadundistributed foreign earnings of $284.6 million and $158.7 million,respectively, which the Company intends to be permanently reinvested. TheCompany has determined that it is not practicable to compute a deferred taxliability for foreign withholding taxes or U.S. income taxes on these earnings.The foreign currency gains recorded in other comprehensive income related tointercompany debt and foreign currency translation have not been tax effectedin accordance with the indefinite reversal criteria.

The Company records liabilities for potentialassessments in various tax jurisdictions. The liabilities relate to tax returnpositions, although supportable by the Company that may be challenged by thetax authorities. The Company adjusts these liabilities as a result of changesin tax legislation, interpretations of laws by Courts, rulings by taxauthorities, changes in estimates and the closing of the statute oflimitations. The Company’s effective tax rate in any given year includes theimpact of any changes to these liabilities. Favorable resolution of an issuewould be recognized either as reduction to the Company’s annual tax rate or, inthe case of acquired liabilities, an adjustment to goodwill.

During the fourth quarter of 2006, the Companyrecorded adjustments primarily related to year-end 2005 tax computations. Thenet effect of these adjustments resulted in an increase to the income taxprovision of approximately $0.8 million, a decrease of $5.4 million to incometaxes payable and a net increase to deferred tax liabilities of $6.2 million.The effects of this adjustment to the Company’s Consolidated Balance Sheet asof December 31, 2005, and the Consolidated Statements of Operations and theConsolidated Statements of Cash Flows for the year ended December 31, 2005 wasnot material.

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**12. OPERATING LEASE OBLIGATIONS:**

The following is a schedule of minimum future rentalsunder the terms of noncancelable operating leases as of December 31, 2006:
| **($ in millions)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|
| Years ended  December 31:     |       |       |       |
| 2007                          |       | $          | 22.1       |       |
| 2008                          |       | 15.7       |       |
| 2009                          |       | 11.2       |       |
| 2010                          |       | 7.9        |       |
| 2011                          |       | 6.3        |       |
| Thereafter                    |       | 33.0       |       |
| Total                         |       | $          | 96.2       |       |

 

Rent expense under all operating leases was $29.6million, $27.2 million and $21.8 million for the years ended December 31, 2006,2005 and 2004, respectively. Rent escalations and other lease concessions arereflected on a straight-line basis over the minimum lease term. Minimum futurerentals include the effect of any index or rate that was applicable at leaseinception.

**13. EMPLOYEE BENEFIT PLANS:**

The Company maintains various defined benefit pensionplans, which cover certain employees in the U.S., U.K., Germany and othercountries. Two subsidiaries in the United States provide various retirees withpostretirement benefits, principally health care benefits. In addition, theCompany provides certain retired employees in Germany with postretirementbenefits for private health insurance premiums.

Funding requirements and investment policies for theCompany’s various defined benefit plans are governed by local statutes andfiduciary standards outlined below.

As discussed in Note 1, “Description of Business and Summaryof Significant Accounting Policies,” the Company adopted the recognitionprovisions of SFAS No. 158 as of December 31, 2006. SFAS No. 158 requires therecognition of the overfunded or underfunded status of a single-employerdefined benefit postretirement plan as an asset or liability in its statementof financial position and to recognize changes in that funded status incomprehensive income in the year in which the changes occur.

The following table presents the effect of applyingSFAS No. 158 on the individual line items in the Consolidated Balance Sheet asof December 31, 2006:
| ** **                              | ** ** | **Before**           | ** **        | ** **        | ** **      | **After**            | ** **        |
|-----------------------------------------|------------|----------------------|-------------------|-------------------|-----------------|----------------------|-------------------|
| ** **                              | ** ** | **adoption of** | ** **        | **SFAS 158** | ** **      | **adoption of** | ** **        |
| **($ in millions)**           | ** ** | ** **           | **SFAS 158** | ** **        | **adjustments** | ** **           | **SFAS 158** | ** ** |
| Pension and  related liabilities        |       | $                    | 340.1             |              | $               | 12.9                 |              | $ | 353.0 |   |
| Deferred income  taxes (non-current)    |       | 53.8                 |              | (1.9              | )               | 51.9                 |              |
| Accumulated other  comprehensive income |       | 245.3                |              | (11.3             | )               | 234.0                |              |
|                                         |            |                      |                   |                   |                 |                      |                   |  |  |  |  |

 

The following tables provide a reconciliation of thebenefit obligations, plan assets and the funded status of the plans, along withthe amounts recognized in the consolidated balance sheets and the weightedaverage assumptions used. The Company uses a December 31 measurement date formost of its plans.

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| ** **                                                                                        | ** ** | **Pension Benefits** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                        | ** ** | **U.S. Plans**       | ** ** | **Non-U.S. Plans** | ** ** |
| **($ in millions)**                                                                          | ** ** |                      | **2006**   | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** |   |
| *Change in benefit obligation:*                                                                   |       |                      |       |   |   |   |   |   |   |
| Benefit  obligation at beginning of year                                                          |       | $                         | 27.6       |   | $ | 25.5 |   | $ | 455.3 |   | $ | 443.0 |   |
| Service cost                                                                                      |       | 0.9                       |       | 1.0 |   | 7.8 |   | 6.2 |   |
| Interest cost                                                                                     |       | 1.6                       |       | 1.5 |   | 20.0 |   | 21.2 |   |
| Plan  participants’ contributions                                                            |       | —                    |       | — |   | 0.5 |   | 0.5 |   |
| Acquisitions                                                                                      |       | —                    |       | — |   | 3.3 |   | 1.1 |   |
| Actuarial loss  (gain)                                                                            |       | 0.2                       |       | 0.7 |   | (30.9 | ) | 45.9 |   |
| Foreign exchange  loss (gain)                                                                     |       | —                    |       | — |   | 54.7 |   | (60.0 | ) |
| Benefits paid                                                                                     |       | (1.2                      | )          | (1.1 | ) | (19.9 | ) | (21.3 | ) |
| Effect of  curtailment/settlement                                                                 |       | (0.9                      | )          | — |   | (2.8 | ) | 1.4 |   |
| Other                                                                                             |       | —                    |       | — |   | (2.9 | ) | 17.3 |   |
| Benefit  obligation at end of year                                                                |       | $                         | 28.2       |   | $ | 27.6 |   | $ | 485.1 |   | $ | 455.3 |   |
| *Change in fair value of plan  assets:*                                                           |       |                      |       |   |   |   |   |   |   |
| Fair value of  plan assets at beginning of year                                                   |       | $                         | 20.4       |   | $ | 19.1 |   | $ | 98.8 |   | $ | 100.8 |   |
| Actual return on  assets                                                                          |       | 2.5                       |       | 1.3 |   | 6.3 |   | 13.9 |   |
| Employer  contributions                                                                           |       | 1.7                       |       | 1.1 |   | 9.1 |   | 4.0 |   |
| Plan  participants’ contributions                                                            |       | —                    |       | — |   | 0.5 |   | 0.5 |   |
| Foreign exchange  loss (gain)                                                                     |       | —                    |       | — |   | 13.6 |   | (13.1 | ) |
| Benefits paid                                                                                     |       | (1.2                      | )          | (1.1 | ) | (4.2 | ) | (7.0 | ) |
| Effect of  curtailment/settlement                                                                 |       | —                    |       | — |   | (2.8 | ) | — |   |
| Other                                                                                             |       | —                    |       | — |   | (1.3 | ) | (0.3 | ) |
| Fair value of  plan assets at end of year                                                         |       | $                         | 23.4       |   | $ | 20.4 |   | $ | 120.0 |   | $ | 98.8 |   |
| *Reconciliation of funded status  at end of year:*                                                |       |                      |       |   |   |   |   |   |   |
| Funded status                                                                                     |       | $                         | (4.8       | ) | $ | (7.2 | ) | $ | (365.1 | ) | $ | (356.5 | ) |
| Unrecognized  prior service cost                                                                  |       |                      |       | 0.1 |   |   |   | — |   |
| Unrecognized net  loss                                                                            |       |                      |       | 3.0 |   |   |   | 60.8 |   |
| Accrued benefit  cost                                                                             |       |                      |       | $ | (4.1 | ) |   |   | $ | (295.7 | ) |
| *Amount recognized in the  consolidated balance sheets:*                                          |       |                      |       |   |   |   |   |   |   |
| Current  liabilities                                                                              |       | $                         | —     |   |   |   | $ | (11.3 | ) |   |   |
| Noncurrent  liabilities                                                                           |       | (4.8                      | )          |   |   | (353.8 | ) |   |   |
| Net amount  recognized                                                                            |       | $                         | (4.8       | ) |   |   | $ | (365.1 | ) |   |   |
| * *                                                                                          |       |                      |       |   |   |   |   |   |   |
| *The accumulated benefit  obligation at December 31 is as follows:*                               |       | $                         | 28.0       |   | $ | 26.5 |   | $ | 440.0 |   | $ | 427.5 |   |
| *Amount recognized in the  consolidated balance sheets:*                                          |       |                      |       |   |   |   |   |   |   |
| Accrued benefit  liability                                                                        |       |                      |       | $ | (6.4 | ) |   |   | $ | (336.1 | ) |
| Intangible asset                                                                                  |       |                      |       | 0.1 |   |   |   | — |   |
| Accumulated  other comprehensive income                                                           |       |                      |       | 2.3 |   |   |   | 40.4 |   |
| Net amount  recognized                                                                            |       |                      |       | $ | (4.0 | ) |   |   | $ | (295.7 | ) |
| *Amounts recognized in  accumulated other comprehensive income*                                   |       |                      |       |   |   |   |   |   |   |
| Net actuarial  losses                                                                             |       | $                         | 1.9        |   |   |   | $ | 32.9 |   |   |   |
| Prior service  cost                                                                               |       | 0.1                       |       |   |   | — |   |   |   |
| Accumulated  other comprehensive income                                                           |       | $                         | 2.0        |   |   |   | $ | 32.9 |   |   |   |
| *Information for pension plans  with an accumulated benefit obligation in excess of plan assets:* |       |                      |       |   |   |   |   |   |   |
| Projected  benefit obligation                                                                     |       | $                         | 28.2       |   |   |   | $ | 420.7 |   |   |   |
| Accumulated  benefit obligation                                                                   |       | 28.0                      |       |   |   | 410.3 |   |   |   |
| Fair value of  plan assets                                                                        |       | 23.4                      |       |   |   | 77.3 |   |   |   |
|                                                                                              |       |                      |       |   |   |   |   |   |   |
| *Weighted-average assumptions  used to determine benefit obligations at December 31*:             |       |                      |       |   |   |   |   |   |   |
| Discount rate                                                                                     |       | 5.76                      | %          | 5.69 | % | 4.64 | % | 4.20 | % |
| Rate of compensation  increase                                                                    |       | N/A                       |       | 4.50 | % | 3.26 | % | 2.88 | % |
|                                                                                                   |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

115

----

 
| ** **                                                | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| **($ in millions)**                             | ** ** | ** **          | **2006**   | ** **              | **2005**   | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ***Weighted-average  assumptions used to determine net*** | ** ** | ** **          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***periodic  benefit cost for years ended December 31:*** | ** ** | ** **          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                             |       | 5.69                | %          | 5.75                    | %          | 6.22 | % | 4.20 | % | 5.04 | % | 5.48 | % |
| Expected return on plan assets (a)                        |       | 8.29                | %          | 8.30                    | %          | 8.41 | % | 4.97 | % | 5.55 | % | 5.86 | % |
| Rate of compensation increase                             |       | 4.50                | %          | 4.50                    | %          | 4.50 | % | 2.88 | % | 3.23 | % | 3.19 | % |
| *Components  of net pension benefit costs:*               |       |                |       |                    |       |   |   |   |   |   |   |   |   |
| Service cost                                              |       | $                   | 0.9        |                    | $          | 1.0 |   | $ | 1.0 |   | $ | 7.8 |   | $ | 6.2 |   | $ | 3.2 |   |
| Interest cost                                             |       | 1.6                 |       | 1.5                     |       | 0.8 |   | 20.0 |   | 21.2 |   | 9.6 |   |
| Expected return on assets                                 |       | (1.7                | )          | (1.6                    | )          | (0.9 | ) | (6.4 | ) | (5.6 | ) | (3.3 | ) |
| Net amortization of actuarial losses (gains)              |       | 0.1                 |       | 0.1                     |       | — |   | 1.0 |   | (0.3 | ) | — |   |
| Net amortization of prior experience losses               |       | —              |       | —                  |       | — |   | — |   | — |   | 0.5 |   |
| Net periodic pension cost                                 |       | 0.9                 |       | 1.0                     |       | 0.9 |   | 22.4 |   | 21.5 |   | 10.0 |   |
| SFAS 88 settlement/curtailment                            |       | (0.4                | )          | —                  |       | (3.3 | ) | 1.1 |   | 1.4 |   | — |   |
| Total pension  cost                                       |       | $                   | 0.5        |                    | $          | 1.0 |   | $ | (2.4 | ) | $ | 23.5 |   | $ | 22.9 |   | $ | 10.0 |   |
|                                                           |            |                     |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)             Theexpected return on plan assets reflects the asset mix of the underlying planassets along with the expected returns within each asset category, based on thelocal market. See “*Investment policies andstrategies”*below*.*

Pension plans have thefollowing weighted-average asset allocations at December 31, 2006 and 2005:
| ** **         | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** | ** ** |
|--------------------|------------|---------------------|------------|-------------------------|------------|
| ** **         | ** ** | **2006**            | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity  securities |       | 58                  | %          | 57                      | %          | 46 | % | 50 | % |
| Debt securities    |       | 34                  | %          | 41                      | %          | 42 | % | 43 | % |
| Real estate        |       | —              | %          | —                  | %          | 7 | % | — | % |
| Other              |       | 8                   | %          | 2                       | %          | 5 | % | 7 | % |

The following benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid:
| **($ in millions)**       | ** ** | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** | ** ** |
|-------------------------------------|------------|------------|---------------------|------------|-------------------------|------------|
| 2007                                |       | $          | 0.9                 |       | $                       | 20.1       |   |
| 2008                                |       | 1.1        |                | 20.5       |                    |
| 2009                                |       | 1.1        |                | 21.2       |                    |
| 2010                                |       | 1.3        |                | 21.8       |                    |
| 2011                                |       | 1.4        |                | 22.4       |                    |
| Years 2012 -  2016                  |       | 9.1        |                | 120.0      |                    |
| *Expected  employer contributions*: |       |       |                |       |                    |
| 2007                                |       | $          | 1.6                 |       | $                       | 4.6        |   |

 

In 2007, the Company expects to recognize $0.7 millionof previously unrecognized actuarial losses.

116

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** **
| ** **                                                                            | ** ** | **Other PostretirementBenefits** | ** **                                                                                                                       |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
| **($ in millions)**                                                         | ** ** | ** **                            | **          2006          ** | ** ** | **          2005          ** | ** ** |
| *Change  in benefit obligation:*                                                      |       |                                  |                                                                                                                             |   |   |
| Benefit obligation at beginning of year                                               |       | $                                     | 5.6                                                                                                                              |   | $ | 5.2 |   |
| Service cost                                                                          |       | 0.2                                   |                                                                                                                             | 0.2 |   |
| Interest cost                                                                         |       | 0.3                                   |                                                                                                                             | 0.3 |   |
| Actuarial (gain) loss                                                                 |       | (1.0                                  | )                                                                                                                                | 0.1 |   |
| Benefits paid                                                                         |       | (0.2                                  | )                                                                                                                                | (0.2 | ) |
| Benefit obligation at end of year                                                     |       | $                                     | 4.9                                                                                                                              |   | $ | 5.6 |   |
| *Reconciliation  of funded status at end of year:*                                    |       |                                  |                                                                                                                             |   |   |
| Funded status                                                                         |       | $                                     | (4.9                                                                                                                             | ) | $ | (5.6 | ) |
| Unrecognized prior service cost                                                       |       |                                  |                                                                                                                             | (0.2 | ) |
| Unrecognized net loss                                                                 |       |                                  |                                                                                                                             | 1.0 |   |
| Accrued benefit cost                                                                  |       |                                  |                                                                                                                             | $ | (4.8 | ) |
| *Amount  recognized in the consolidated balance sheets:*                              |       |                                  |                                                                                                                             |   |   |
| Current liabilities                                                                   |       | $                                     | (0.2                                                                                                                             | ) |   |   |
| Noncurrent liabilities                                                                |       | (4.7                                  | )                                                                                                                                |   |   |
| Net amount recognized                                                                 |       | $                                     | (4.9                                                                                                                             | ) |   |   |
| *Amount  recognized in the consolidated balance sheets:*                              |       |                                  |                                                                                                                             |   |   |
| Accrued benefit liability                                                             |       |                                  |                                                                                                                             | $ | (4.8 | ) |
| Accumulated other comprehensive income                                                |       |                                  |                                                                                                                             | — |   |
| Net amount recognized                                                                 |       |                                  |                                                                                                                             | $ | (4.8 | ) |
| *Amounts  recognized in accumulated other comprehensive income*                       |       |                                  |                                                                                                                             |   |   |
| Prior service cost                                                                    |       | $                                     | (0.2                                                                                                                             | ) |   |   |
| Accumulated other comprehensive income                                                |       | $                                     | (0.2                                                                                                                             | ) |   |   |
|                                                                                  |       |                                  |                                                                                                                             |   |   |
| *Weighted-average  assumptions used to determine benefit obligations at December 31:* |       |                                  |                                                                                                                             |   |   |
| Discount rate                                                                         |       | 5.75                                  | %                                                                                                                                | 5.52 | % |
| Rate of compensation  increase                                                        |       | N/A                                   |                                                                                                                             | N/A |   |
|                                                                                       |            |                                       |                                                                                                                                  |  |  |  |  |  |

 
| **($ in millions)**                                                                             | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|----------|------------|----------|------------|
| *Weighted-average  assumptions used to determine net periodic benefit cost for years ended  December 31:* |       |       |     |       |     |       |     |
| Discount rate                                                                                             |       | 5.52       | %        | 5.40       | %        | 5.84       | %        |
| Expected return on plan assets                                                                            |       | N/A        |     | N/A        |     | N/A        |     |
| Rate of compensation increase                                                                             |       | N/A        |     | N/A        |     | 4.50       | %        |
| *Components  of other postretirement benefit costs:*                                                      |       |       |     |       |     |       |     |
| Service cost                                                                                              |       | $          | 0.2      |       | $        | 0.2        |     | $          | 0.1 |   |
| Interest cost                                                                                             |       | 0.3        |     | 0.3        |     | 0.2        |     |
| Net amortization of prior experience losses                                                               |       | (0.1       | )        | —     |     | 0.1        |     |
| Total pension cost                                                                                        |       | $          | 0.4      |       | $        | 0.5        |     | $          | 0.4 |   |

 
|                                                                              |   | **2006**       |   | **2005** |   |
|-----------------------------------------------------------------------------------|--------|----------------|--------|----------|--------|
| ***Other  Postretirement Benefit Plans***                                         |   |           |   |     |   |
| Assumed health  care cost trend rates at December 31 (hourly plan/salaried plan): |   |           |   |     |   |
| Health care cost trend rate assumed for the  following year                       |   | 10.00% - 11.00 | %      | 11.00    | %      |
| Ultimate trend rate (rate to which the cost trend  rate is   assumed to decline)  |   | 4.75% - 5.00   | %      | 5.00     | %      |
| Year that the  rate reaches the ultimate trend rate                               |   | 2013           |   | 2012     |   |

 
| **($ in millions)**                             | ** ** | ** ** | **1% Decrease** | ** ** | **1% Increase** | ** ** |
|-----------------------------------------------------------|------------|------------|----------------------|------------|----------------------|------------|
| *2006  Healthcare cost trend rate sensitivity analysis:*  | * *   | * *   | * *             | * *   | * *             |
| Effect on annual total of service cost and interest  cost |       | $          | (0.1                 | )          | $                    | 0.1        |   |
| Effect on  postretirement benefit obligation              |       | (0.4       | )                    | 0.4        |                 |
|                                                           |            |            |                      |            |                      |            |  |  |

 

117

----

 

The following benefit payments, which reflect expectedfuture service, as appropriate, are expected to be paid:
| ** **                          | ** ** | **Other Post-** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| **($ in millions)**       | ** ** | ** **           | ** ** | **retirement** | ** ** |
| 2007                                |       | $                    | 0.2        |   |
| 2008                                |       | 0.2                  |       |
| 2009                                |       | 0.2                  |       |
| 2010                                |       | 0.3                  |       |
| 2011                                |       | 0.3                  |       |
| Years 2012 - 2016                   |       | 2.2                  |       |
| *Expected employer  contributions:* |       |                 |       |
| 2007                                |       | $                    | 0.2        |   |
|                                     |            |                      |            |  |  |  |

 

***Planswith projected benefit obligations in excess of plan assets***—TheCompany’s defined benefit plans all had projected benefit obligations in excessof plan assets.

***Contributions***—Duringthe year ended December 31, 2006, the Company made contributions ofapproximately $10.8 million to its defined benefit pension trusts and anadditional $15.7 million in benefit payments directly to plan participants. For2007, the Company expects to make payments of approximately $6.2 million ascontributions to pension trusts plus benefit payments directly to planparticipants of approximately $16.5 million.

***Investment policies and strategies***—TheCompany’s plans have varying statutory and plan governance requirements.Although the Company has representatives of local management involved in thegovernance of all plans, some plans or statutes also have representation byworkers, employee unions, and/or corporate-level executives. Plans in the U.K.and the U.S. represent over 80% of total plan assets. In these countries, thegeneral investment objectives are to maximize the expected return on the plans’assets without unduly prejudicing the security of the members’ accrued benefitsand with sufficient liquidity to meet current plan cash flow requirements. Aseach plan is locally governed, asset allocations may vary. In 2006, the planswere targeted to investment allocations within certain ranges that approximatethe following:
| ** **        | ** ** | **U.S.** | ** ** | **U.K.** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Equity securities |       | 58       | %          | 54       | %          |
| Debt securities   |       | 34       | %          | 37       | %          |
| Real Estate       |       | —   | %          | 8        | %          |
| Other             |       | 8        | %          | 1        | %          |

 

Plan trustees regularlyconsult with professional investment advisors as to whether these allocationsremain appropriate in light of relative investment performance and risk and/oractuarial changes related to plan participants. U.K. plan investments arelimited to listed securities not affiliated with the Company or the investmentadviser and equities are divided between domestic and foreign equity. U.S. planinvestments are generally limited to mutual funds.

***Expectedlong-term rate of return on assets***—The long-term rate ofreturn on assets listed above is the average of expected returns developed foreach plan weighted by each plan’s assets, as of January 1 of the year measured.Rates of return have been estimated based on various asset-appropriate priceand yield indices, adjusted for projected inflation and long-term dividendgrowth.

**Other Retirement Benefit Plans**

***Savings Plans***—TheCompany sponsors various defined contribution plans for certain employees.Contributions under the plans are based on specified percentages of employeecompensation. In aggregate, the Company’s contributions to these plans were $10.2million, $9.7 million, $7.7 million in 2006, 2005 and 2004, respectively.

***MultiemployerPlans***—The Company participates in two multiemployerplans. Contributions under the plans are based on specified percentages ofassociate contributions. The Company’s contributions to the plans were $4.2million, $3.7 million and $1.2 million in 2006, 2005 and 2004, respectively.

118

----

 

**14. EARNINGS PER SHARE:**

Basic and dilutedearnings per common share (“EPS”) were computed using the following share data:
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |       |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|
| **($ in  millions, except per share amounts; shares in thousands)**           | ** ** | ** **                                 | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **EPS  Numerator — Basic:**                                                   |       |                                       |       |       |   |   |   |   |
| Net income (loss) from continuing operations                                       |       | $                                          | 80.3       |       | $ | 137.0 |   | $ | (214.2 | ) |   |
| Redeemable convertible preferred stock dividends                                   |       | —                                     |       | (4.3       | ) | (4.2 | ) |   |
| Net income (loss) from continuing operations  applicable to common shareholders    |       | 80.3                                       |       | 132.7      |   | (218.4 | ) |   |
| Income (loss) from discontinued operations, net of  tax                            |       | 27.9                                       |       | (44.2      | ) | (1.9 | ) |   |
| Minority interest in discontinued operations, net of  tax                          |       | (5.2                                       | )          | 3.0        |   | — |   |   |
| Net income (loss) applicable to common shareholders                                |       | $                                          | 103.0      |       | $ | 91.5 |   | $ | (220.3 | ) |   |
|                                                                               |       |                                       |       |       |   |   |   |   |
| **EPS  Denominator - Basic:**                                                      |       |                                       |       |       |   |   |   |   |
| Weighted average number of common shares outstanding                               |       | 73,782                                     |       | 59,133     |   | 33,054 |   |   |
|                                                                               |       |                                       |       |       |   |   |   |   |
| **Basic  earnings (loss) per common share:**                                       |       |                                       |       |       |   |   |   |   |
| Earnings (loss) from continuing operations                                         |       | $                                          | 1.09       |       | $ | 2.24 |   | $ | (6.61 | ) |   |
| Earnings (loss) from discontinued operations, net of  tax                          |       | 0.31                                       |       | (0.69      | ) | (0.05 | ) |   |
| Basic earnings (loss) per common share                                             |       | $                                          | 1.40       |       | $ | 1.55 |   | $ | (6.66 | ) |   |
|                                                                               |       |                                       |       |       |   |   |   |   |
| **EPS  Numerator - Diluted:**                                                      |       |                                       |       |       |   |   |   |   |
| Net income (loss) from continuing operations                                       |       | $                                          | 80.3       |       | $ | 137.0 |   | $ | (214.2 | ) |   |
| Redeemable convertible preferred stock dividends                                   |       | —                                     |       | (4.3       | ) | (4.2 | ) |   |
| Net income (loss) from continuing operations  applicable to common shareholders    |       | 80.3                                       |       | 132.7      |   | (218.4 | ) |   |
| Income (loss) from discontinued operations, net of  tax                            |       | 27.9                                       |       | (44.2      | ) | (1.9 | ) |   |
| Minority interest in discontinued operations, net of  tax                          |       | (5.2                                       | )          | 3.0        |   |   |   |   |
| Net income (loss) applicable to common shareholders                                |       | $                                          | 103.0      |       | $ | 91.5 |   | $ | (220.3 | ) |   |
|                                                                               |       |                                       |       |       |   |   |   |   |
| **EPS  Denominator - Diluted:**                                                    |       |                                       |       |       |   |   |   |   |
| Weighted average number of common shares outstanding                               |       | 73,782                                     |       | 59,133     |   | 33,054 |   |   |
| Effect of dilutive stock options and other  incentives                             |       | 1,262                                      |       | 869        |   | — |   |   |
| Weighted average number of common shares outstanding  and common stock equivalents |       | 75,044                                     |       | 60,002     |   | 33,054 |   |   |
|                                                                               |       |                                       |       |       |   |   |   |   |
| **Diluted  earnings (loss) per common share:**                                     |       |                                       |       |       |   |   |   |   |
| Earnings (loss) from continuing operations                                         |       | $                                          | 1.07       |       | $ | 2.21 |   | $ | (6.61 | ) |   |
| Earnings (loss) from discontinued operations, net of  tax                          |       | 0.30                                       |       | (0.69      | ) | (0.05 | ) |   |
| Diluted earnings  (loss) per common share                                          |       | $                                          | 1.37       |       | $ | 1.52 |   | $ | (6.66 | ) |   |
|                                                                                    |            |                                            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the year ended December 31, 2004, the effect of commonstock issuable under the assumed exercise of stock options and warrants,computed on the treasury stock method, and the assumed conversion of theCompany’s issued and outstanding redeemable convertible preferred stock havebeen excluded from the diluted earnings per share calculation for all periodspresented since the effect of such securities is anti-dilutive.

**15. REDEEMABLE CONVERTIBLE PREFERRED STOCK:**

In connection with the July 2003 refinancing, theCompany issued $25.0 million of its redeemable convertible preferred stock toan affiliate of KKR. The redeemable convertible preferred stock accrueddividends at 15% per year; the dividends accumulated and compoundedsemi-annually whether or not the Company had earnings or profits, whether ornot there were funds legally available for payment of such dividends andwhether or not dividends were declared. The redeemable convertible preferredstock was redeemable by the Company at its option at any time. The redeemableconvertible preferred stock was also convertible into common stock of theCompany, at the option of the holder, on or after an initial public offering ofcommon stock of the Company at a conversion price equal to the then currentmarket price, subject to adjustment. On August 22, 2005, the Company completedan initial public offering of its common stock and redeemed all outstandingshares of the redeemable convertible preferred stock (including a redemptionpremium and accumulated and unpaid dividends) with $38.5 million of theproceeds.

**16.****WARRANTS:**

In connection with theissuance of the redeemable convertible preferred stock as discussed in Note 15,“Redeemable Convertible

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Preferred Stock,” theCompany issued warrants to an affiliate of KKR, exercisable at any time at a$14.61 per share exercise price, to purchase 958,315 additional shares ofcommon stock of the Company. The warrants expire July 23, 2013. The Company hasattributed a portion of the proceeds from issuance of the redeemableconvertible preferred stock to the fair value of the warrants. The warrantswere valued at $6.1 million and were recorded as a component of stockholders’equity.

**17. IMPAIRMENT CHARGES:**

During the fourth quarterof 2006, management performed an impairment review of a business within theFine Chemicals division of the Specialty Chemicals segment due to poorprofitability. Based on this review, an impairment charge of $2.2 million wasrecorded to write-down the full value of machinery and equipment. In 2005, theCompany recorded an impairment charge of $0.4 million to property, plant andequipment in the Color Pigments and Services business within the PerformanceAdditives segment.

The Company recorded a goodwill impairment charge of$4.0 million in 2004 within the Electronics segment. This charge was recognizedbased on Rockwood’s annual impairment testing. In computing this impairment,fair value was determined by multiplying the adjusted EBITDA of the reportingunit projected for the following year by a discount factor based primarily onthe ratio of enterprise value (generally market capitalization plus long-term debt lesscash) to EBITDA of publicly-held companies in similar businesses, bothhistorical and projected, as reported in published industry analysis. Thisimpairment resulted from a significant decline, in earnings and operating cashflows, both historical and prospective, based on global economic conditionscommon to significant competitors, including overcapacity, as well as theerosion of the reporting units’ relative competitive position due to continuedindustry concentration and resulting pricing pressure.

Based on the circumstances described above, theCompany also performed impairment evaluations of the property, plant andequipment belonging to the respective reporting unit and recorded an impairmentcharge of $7.0 million in 2004. Based on the availability of additionalrelevant data, this impairment was computed by a discounted cash flow analysisof expected future cash flows of the reporting unit (as measured by AdjustedEBITDA).

**18. RESTRUCTURING LIABILITY:**

The Company recorded $5.2 million, $15.4 million and$1.1 million of restructuring charges in 2006, 2005 and 2004, respectively. In addition,inventory writedowns of $0.4 million were recorded in cost of products sold in2006 related to the restructuring of a business in the Fine Chemicals divisionof the Specialty Chemicals segment and inventory writedowns of $0.5 millionwere recorded in cost of products sold in 2005 related to the restructuring ofthe Wafer Reclaim business in the Electronics segment. The Company records restructuringliabilities from time to time that represent charges incurred in connectionwith consolidations and cessations of certain of its operations, includingoperations from acquisitions, as well as headcount reduction programs. Thesecharges consist primarily of write-offs of surplus assets and severance costs.Severance charges are based on various factors including the employee’s lengthof service, contract provisions, salary levels and local governmental legislation.At the time a related charge is recorded, the Company calculates its bestestimate based upon detailed analysis. Although significant changes are notexpected, actual costs may differ from these estimates.

**2006 Restructuring Actions**

During the year endedDecember 31, 2006, the Company expensed $5.2 million of restructuring charges.In the Specialty Chemicals segment, $1.6 million was recorded for miscellaneousheadcount reductions and the closure of an administrative office in Spain. Inthe Electronics segment, $1.1 million was recorded related to the restructuringof the Wafer Reclaim business. This included severance and related costs foremployees in connection with the closure of two Wafer Reclaim facilities. TheCompany closed a Wafer Reclaim facility in the U.K. in January 2006 and one ofthe facilities in the U.S. in March 2006. In addition, $1.2 million wasrecorded in the Performance Additives segment, $1.1 million was recorded in theAdvanced Ceramics segment and $0.2 million was recorded in the Corporatesegment primarily for miscellaneous headcount reductions.

**2005 Restructuring Actions**

During the year ended December 31, 2005, the Companyexpensed $15.4 million of restructuring charges for miscellaneous restructuringactions, including $4.1 million for the announced closure of the Baulking,United Kingdom facility in the Clay-based Additives business and $2.3 millionfor the announced restructuring of the Wafer Reclaim business. The Companyrecorded severance and related costs for employees in connection with theclosure of the Wafer Reclaim facilities (one each in the U.K. and U.S.). Inaddition, $4.2 million was recorded in the Specialty Chemicals segment, $2.2million was recorded in the Performance Additives segment and $1.2 million wasrecorded in the Advanced Ceramics segment for miscellaneous headcountreductions. In addition, $1.4 million was recorded in the Advanced Ceramicssegment related to the closure of a facility in Italy.

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**2004 Restructuring Actions**

**Dynamit Nobel Restructuring and Johnson MattheyPigments and Dispersions Restructuring**

During the year ended December 31, 2004, the Companyexpensed $1.1 million of restructuring charges. The Company began to assess andformulate specific plans to involuntarily terminate or relocate certainemployees and/or exit certain activities of the Dynamit Nobel businesses as ofthe Dynamit Nobel Acquisition date. As a result, the Company closed the formercorporate office of Dynamit Nobel located in Troisdorf, Germany in the fourthquarter of 2004. The Company recorded restructuring charges related to thisclosure including severance costs for 44 general and administrative personnel ofthe former Dynamit Nobel company, the closure costs on this building and therelocation costs for the remaining 27 employees who were relocated to theCompany’s new Frankfurt, Germany location. Also in 2004, as part of theacquisition of the Pigments and Dispersions business of Johnson Matthey, the Companyenacted a restructuring program and 40 positions were eliminated. All of theseemployees were selling, general and administrative personnel.

Selected information for the 2006 restructuringactions follows:
| ** **                            | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | ** **    | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Costs**  | ** ** | **Total** | ** ** |
| **2006**                              |       |          |       |         |       |           |       |       |       |
| Liability  balance, December 31, 2005 |       | $             | —     |         | $          | —         |       | $          | —     |   | $ | — |   |
| Purchase  accounting (a)              |       | 3.5           |       | 0.7          |       | 0.7            |       | 4.9        |       |
| Restructuring  charge in 2006         |       | 2.9           |       | 1.2          |       | —         |       | 4.1        |       |
| Utilized in 2006                      |       | (1.2          | )          | (1.2         | )          | —         |       | (2.4       | )          |
| Foreign exchange  and other           |       | (0.8          | )          | —       |       | —         |       | (0.8       | )          |
| Liability balance,  December 31, 2006 |       | $             | 4.4        |         | $          | 0.7            |       | $          | 0.7        |   | $ | 5.8 |   |
|                                       |            |               |            |              |            |                |            |            |            |  |  |  |  |  |  |

----

(a)             Consistsof severance costs related to the consolidation in 2007 of several U.K.facilities resulting from an acquisition by our Specialty Compounds segment.

Selected information for the 2005 restructuringactions follows:
| ** **                            | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Write-** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | ** **    | ** ** | **Costs**    | ** ** | **Costs**  | ** ** | **downs**  | ** ** | **Total** | ** ** |
| **2005**                              |       |          |       |         |       |       |       |       |       |
| Liability  balance, January 1, 2005   |       | $             | —     |         | $          | —     |       | $          | —     |   | $ | — |   |
| Restructuring  charge in 2005         |       | 11.2          |       | 1.0          |       | 0.6        |       | 12.8       |       |
| Utilized in 2005                      |       | (9.5          | )          | (1.0         | )          | (0.6       | )          | (11.1      | )          |
| Foreign exchange  and other           |       | (0.2          | )          | —       |       | —     |       | (0.2       | )          |
| Liability  balance, December 31, 2005 |       | 1.5           |       | —       |       | —     |       | 1.5        |       |
| Restructuring  charge in 2006         |       | —        |       | 0.9          |       | —     |       | 0.9        |       |
| Utilized in 2006                      |       | (0.9          | )          | (1.3         | )          | —     |       | (2.2       | )          |
| Foreign exchange  and other           |       | (0.4          | )          | 0.9          |       | —     |       | 0.5        |       |
| Liability balance,  December 31, 2006 |       | $             | 0.2        |         | $          | 0.5        |       | $          | —     |   | $ | 0.7 |   |
|                                       |            |               |            |              |            |            |            |            |            |  |  |  |  |  |  |

 

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Selected information for the 2004 restructuringactions follows:
| ** **                                    | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                    | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | ** **    | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Costs**  | ** ** | **Total** | ** ** |
| **2004**                                      | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, January 1, 2004           |       | $             | —     |         | $          | —         |       | $          | —     |   | $ | — |   |
| Purchase  accounting                          |       | 21.3          |       | 4.7          |       | 2.7            |       | 28.7       |       |
| Restructuring  charge in 2004                 |       | 1.1           |       | —       |       | —         |       | 1.1        |       |
| Utilized in 2004                              |       | (4.7          | )          | (0.4         | )          | (0.4           | )          | (5.5       | )          |
| Historic Dynamit  Nobel restructuring program |       | —        |       | 3.6          |       | —         |       | 3.6        |       |
| Foreign exchange  and other                   |       | 2.5           |       | 1.3          |       | 0.3            |       | 4.1        |       |
| Liability  balance, December 31, 2004         |       | 20.2          |       | 9.2          |       | 2.6            |       | 32.0       |       |
| Purchase  accounting                          |       | 0.9           |       | (1.9         | )          | (1.3           | )          | (2.3       | )          |
| Restructuring  charge in 2005                 |       | 1.0           |       | 1.3          |       | —         |       | 2.3        |       |
| Utilized in 2005                              |       | (11.0         | )          | (5.4         | )          | (1.8           | )          | (18.2      | )          |
| Foreign exchange  and other                   |       | (0.5          | )          | (2.3         | )          | 0.9            |       | (1.9       | )          |
| Liability  balance, December 31, 2005         |       | 10.6          |       | 0.9          |       | 0.4            |       | 11.9       |       |
| Restructuring  charge in 2006                 |       | —        |       | 0.2          |       | —         |       | 0.2        |       |
| Utilized in 2006                              |       | (4.8          | )          | (1.0         | )          | (0.1           | )          | (5.9       | )          |
| Foreign exchange  and other                   |       | (4.2          | )          | —       |       | —         |       | (4.2       | )          |
| Liability balance,  December 31, 2006         |       | $             | 1.6        |         | $          | 0.1            |       | $          | 0.3        |   | $ | 2.0 |   |
|                                               |            |               |            |              |            |                |            |            |            |  |  |  |  |  |  |

 

Concurrent with the KKRAcquisition, the Company began a restructuring plan involving the closure andrationalization of certain facilities acquired. Selected information for theKKR Acquisition related restructuring program is as follows:
| ** **                            | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------|------------|------------|------------|
| ** **                            | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | ** **   | ** ** | **Costs**  | ** ** | **Total** | ** ** |
| Liability  balance, January 1, 2004   |       | $            | 1.2        |       | $          | 1.2 |   |
| Utilized in 2004                      |       | (0.8         | )          | (0.8       | )          |
| Liability  balance, December 31, 2004 |       | 0.4          |       | 0.4        |       |
| Restructuring  charge in 2005         |       | 0.3          |       | 0.3        |       |
| Utilized in 2005                      |       | (0.7         | )          | (0.7       | )          |
| Liability balance,  December 31, 2005 |       | $            | —     |       | $          | — |   |
|                                       |            |              |            |            |            |  |  |  |  |

 

Restructuring reserves by segment are as follows:
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Specialty  Chemicals          |       | $                     | 1.9        |   | $ | 4.9 |   |
| Performance  Additives        |       | 0.6                   |       | 1.1 |   |
| Titanium Dioxide  Pigments    |       | —                |       | 0.3 |   |
| Advanced  Ceramics            |       | 0.7                   |       | 0.5 |   |
| Specialty  Compounds          |       | 4.9                   |       | — |   |
| Electronics                   |       | 0.1                   |       | 0.7 |   |
| Corporate                     |       | 0.3                   |       | 5.9 |   |
|                          |       | $                     | 8.5        |   | $ | 13.4 |   |
|                               |            |                       |            |  |  |  |  |  |  |

 

**19. SALE AND LEASEBACK:**

In November 2005, asubsidiary included in the Company’s Specialty Chemicals segment entered into asale and leaseback transaction involving real estate with a non-affiliatedthird party. The Company realized net proceeds of approximately $6.1 millionfrom the sale. The resulting gain of approximately $1.7 million was recognizedin full in the fourth quarter of 2005. The lease had an initial term of ninemonths with six 1-month renewal options. The leaseback portion, classified asan operating lease, had an initial minimum annual base rent of $0.3 million.

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In June 2002, a subsidiary included in the Company’sPerformance Additives segment entered into a sale and leaseback transactioninvolving real estate with a non-affiliated third party. The Company realizednet proceeds of approximately $12.1 million from the sale. The resulting gainof approximately $4.1 million was deferred and is being amortized on astraight-line basis over the initial lease term of 15 years. The deferred gainis included in other liabilities in the accompanying consolidated balance sheet.The leaseback portion, classified as an operating lease, had an initial minimumannual base rent of $1.3 million, with adjustments based on a standard economicindex. The Company has two 10-year renewal options beyond the initial leaseterm.

**20. ACCUMULATED OTHER COMPREHENSIVE INCOME**

Changes in accumulated other comprehensive income(loss) are as follows:
| ** **                               | ** ** | ** **                  | ** **               | ** **   | ** **      | ** **                | ** **       | ** **                 | ** **               | ** **         | ** **               | **Total**                    | ** **             |
|------------------------------------------|------------|-----------------------------|--------------------------|--------------|-----------------|---------------------------|------------------|----------------------------|--------------------------|--------------------|--------------------------|------------------------------|------------------------|
| ** **                               | ** ** | **Minimum**                 | ** **               | **Foreign**  | ** **      | **Intercompany**          | ** **       | **Net**                    | ** **               | **Cash flow** | ** **               | **accumulated**              | ** **             |
| ** **                               | ** ** | **pension liability,** | ** **               | **currency** | ** **      | **foreign currency** | ** **       | **investment hedge,** | ** **               | **hedges,**        | ** **               | **other comprehensive** | ** **             |
| **($ in millions)**            | ** ** | ** **                  | **net of tax** | ** **   | **translation** | ** **                | **transactions** | ** **                 | **net of tax** | ** **         | **net of tax** | ** **                   | **income (loss)** | ** ** |
| Balance at January 1,  2004         |       | $                           | (3.2                     | )            | $               | 66.8                      |             | $                          | 20.8                     |               | $                        | —                       |                   | $ | — |   | $ | 84.4 |   |
| Period change                            |       | (14.3                       | )                        | 150.0        |            | 163.4                     |             | (13.1                      | )                        | —             |                     | 286.0                        |                   |
| Balance at December 31,  2004       |       | (17.5                       | )                        | 216.8        |            | 184.2                     |             | (13.1                      | )                        | —             |                     | 370.4                        |                   |
| Period change                            |       | (16.1                       | )                        | (163.4       | )               | (183.7                    | )                | 45.4                       |                     | (0.6               | )                        | (318.4                       | )                      |
| Balance at December 31,  2005       |       | (33.6                       | )                        | 53.4         |            | 0.5                       |             | 32.3                       |                     | (0.6               | )                        | 52.0                         |                   |
| Period change                            |       | 20.7                        |                     | 147.4        |            | 131.7                     |             | (107.1                     | )                        | 0.6                |                     | 193.3                        |                   |
| Effect of adoption of  SFAS No. 158 |       | (11.3                       | )                        | —       |            | —                    |             | —                     |                     | —             |                     | (11.3                        | )                      |
| Balance at December 31, 2006        |       | $                           | (24.2                    | )            | $               | 200.8                     |             | $                          | 132.2                    |               | $                        | (74.8                        | )                      | $ | — |   | $ | 234.0 |   |
|                                          |            |                             |                          |              |                 |                           |                  |                            |                          |                    |                          |                              |                        |  |  |  |  |  |  |  |

 

Gains and losses on intercompany foreign currency transactionsthat are of a long-term investment nature for which settlement is not plannedor anticipated in the foreseeable future are reported as a component ofaccumulated other comprehensive income.

On October 1, 2005, the Company designated the remainingportion of its euro-denominated debt that is recorded on its U.S. books as anet investment hedge of its euro-denominated investments. As a result, anyforeign currency gains and losses resulting from this debt, effective October1, 2005, is accounted for as a component of accumulated other comprehensiveincome for as long as the hedge remains effective.

**21. COMMITMENTS AND CONTINGENCIES:**

***Legal Proceedings***—TheCompany is involved in various legal proceedings, including commercial,intellectual property, product liability and environmental matters of a natureconsidered normal to its business. It is the Company’s policy to accrue foramounts related to these matters in accordance with SFAS 5, *Accounting for Contingencies*, if it 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 $500,000 and in theaggregate $3.5 million. The Company’s reserve estimates are based on availablefacts, including damage claims and input from its internal and external legalcounsel, past experience, and, in some instances where defense costs are beingpaid by its insurer’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***—Underthe terms of the Business and Share Sale and Purchase Agreement, the Deed ofTax Covenant and the Environmental Deed entered into in connection with the KKRAcquisition, Degussa U.K. Holdings Ltd., as successor to Laporte Plc, isobligated to indemnify the Company for certain legal, tax and environmentalliabilities and obligations that relate to the period prior to the closing ofthe KKR Acquisition. Under the terms of the Sale and Purchase Agreement with mgtechnologies ag (now known as GEA Group Aktiengesellschaft (“GEA Group”)) andits subsidiary MG North America Holdings, Inc. (now known as GEA North AmericaInc. (“GEA North America”)), GEA Group is obligated to indemnify the Companyfor certain legal, tax and environmental liabilities and obligations thatrelate to the period prior to the closing, subject to certain limits andexclusions. Pursuant to these agreements, the Company has various claims forindemnification with Degussa and GEA Group. In addition, the Company may besubject to indemnity claims relating to properties or businesses it divested.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***

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*** ***

The Company is subject to extensive environmental,health and safety laws in the United States, the European Union (“EU”) andelsewhere at the international, national, state, and local levels. Many ofthese laws impose requirements relating to clean-up of contamination, andimpose liability in the event of damage to human beings, natural resources orproperty, and provide for substantial fines, injunctions and potential criminalsanctions for violations. The products, including the raw materials handled,are also subject to rigorous industrial hygiene regulations and investigation.The nature of the Company’s operations exposes it to risks of liability forbreaches of these laws and regulations as a result of the production, storage,transportation and sale of materials that can cause contamination or personalinjury when released into the environment. Environmental laws are subject tochange and have tended to become stricter over time. Such changes inenvironmental laws, or the enactment of new environmental laws, could result inmaterially increased capital, operating and compliance costs.

***Safety, Health and EnvironmentalSystems***

The Company is committed to achieving and maintainingcompliance with all applicable safety, health and environmental (“SHE”) legalrequirements, and the Company’s subsidiaries have developed policies andmanagement systems that are intended to identify the SHE legal requirementsapplicable to their operations, enhance compliance with such requirements,ensure the safety of the Company’s employees, contractors, community neighborsand customers and minimize the production and emission of wastes and otherpollutants. Although SHE legal requirements are constantly changing, these SHEmanagement systems are designed to assist the Company in meeting its compliancegoals and minimizing overall risk.

***SHE Capital Expenditures***

The Company may incur future costs for capitalimprovements and general compliance under SHE laws. For the year ended December 31, 2006, the capital expenditures for SHE matters totaledapproximately $35.3 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2007, the Company estimates capital expenditures forcompliance with SHE laws to be at similar levels; however, because capitalexpenditures for these matters are subject to changes in existing and new SHElaws, the Company cannot provide assurance that its recent expenditures will beindicative of future amounts required to comply with these laws.

***Regulatory Developments***

In December 2006, the European Parliament and Counselof the EU adopted legislation for a new EU framework for chemicals known as theRegistration, Evaluation and Authorization of Chemicals, or REACH which willsignificantly expand the EU’s regulation of chemicals. REACH includesrequirements that certain manufacturers and importers of chemicals registerthose chemicals, perform health and environmental risk analyses of thosechemicals, and in certain instances, obtain authorizations for the use of thechemicals. Substances that are not registered within the prescribed deadlineswill not be permitted to be manufactured or marketed within the EU. As aspecialty chemicals company, it is possible that the Company is the onlymanufacturer of one or more substances to be regulated under REACH and thuscould potentially bear the full cost of compliance with REACH for some or allof the Company’s products. The Company estimates it has approximately 350products that might be subject to REACH, compliance with which is requiredstarting in June 2007. The Company is taking steps to comply with REACH and isevaluating the potential costs of compliance.

Under the European Union Integrated PollutionPrevention and Control Directive (“IPPC”), EU member governments are to adoptrules and implement a cross-media (air, water and waste) environmentalpermitting program for individual facilities. IPPC requires a consistentapplication of Best Available Techniques throughout the EU. While the EUcountries are at varying stages in their respective implementation of the IPPCpermit program, the Company has submitted all necessary IPPC permitapplications required to date, and in some cases received completed permitsfrom the applicable government agency. The Company expects to submit all otherIPPC applications and related documents on a timely basis as the variouscountries implement the IPPC permit program. Although it is not known with certaintywhat each IPPC permit will require, the Company believes, based upon itsexperience with the permits received to date, that the costs of compliance withthe IPPC permit program will not be material to its results of operations,financial position or liquidity.

The Kyoto Protocol is an amendment to an internationaltreaty on global warming. The Protocol establishes significant emissionreduction targets for six gases considered to have global warming potential,referred to as greenhouse gases. The Protocol was adopted in 1997 and becameeffective in February 2005 in over 140 countries that have ratified it. The EU,including Germany and other countries where the Company has interests, ratifiedthe Kyoto Protocol in 2002 and, in doing so, have enacted regulations thatreduce the emission of greenhouse gases and have established a trading systemcovering carbon dioxide emissions. Such a trading system became effective atthe start of 2005. The new regulation directly affects the Company’s powerplants at the Duisburg and Langelsheim sites in Germany, as well as the powerplant being operated by a third party on one of the Company’s sites. Rockwoodand such third party will be required to purchase carbon dioxide credits, whichcould result in increased operating costs, and may be required to developadditional cost-effective methods to reduce carbon dioxide emissions, whichcould result in increased capital expenditures. The new regulation indirectlyaffects the Company’s other operations in the EU, which may experience higherenergy

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costs from third party providers. The Companycontinues to evaluate options in order to comply with the Protocol. However,the Company does not expect this to have a material impact on its cash flow orresults of operations.

***Remediation Liabilities***

Environmental laws have a significant effect on thenature and scope of any clean-up of contamination at current and formeroperating facilities, the costs of transportation and storage of chemicals andfinished products and the costs of the storage and disposal of wastes. Inaddition, “Superfund” statutes in the United States as well as statutes inother jurisdictions impose strict, joint and several liability for clean-upcosts on the entities that generated waste and/or arranged for its disposal atcontaminated third party sites, as well as the past and present owners andoperators of contaminated sites. All responsible parties may be required tobear some or all clean-up costs regardless of fault, legality of the originaldisposal or ownership of the disposal site.

Environmental contamination is known to exist atcertain of the Company’s present and former facilities, including itsfacilities located in Turin, Italy; St. Fromond, St. Cheron and Sens, France;Hainhausen, Troisdorf, Stadeln, Duisburg, Plochingen, Marktredwitz,Ronnenberg-Empelde and Langelsheim, Germany; Oss, The Netherlands; Kidsgrove,Sudbury and Barrow, U.K.; Boksburg East, South Africa and in the United States,in Valdosta, Georgia, Beltsville, Maryland, Louisville, Kentucky, NewJohnsonville, Tennessee, Harrisburg, North Carolina, Laurens, South Carolina,Silver Peak, Nevada and La Mirada, California. Soil contamination is also knownto exist at the Company’s facilities at Freeport, Texas, 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 Hainhausen, Stadeln, Valdosta,and Silver Peak facilities. The Company also operates groundwater remediationand/or monitoring systems at its Plochingen, Marktredwitz, Stadeln, Troisdorf,New Johnsonville and Laurens facilities, for which prior owners or insurershave assumed responsibility. The Company also continues to monitor groundwaterat the Beltsville and St. Cheron facilities, which were previously the subjectof a soil removal action. Groundwater is also monitored at the St. Fromond andBarrow facilities due to prior spills and at the Harrisburg facility due to alandfill closure. The Company believes that additional environmental studies,and possibly environmental remediations, will be required at the Harrisburg andLouisville facilities. 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 offsite disposal activities,the Company is responsible for the following other matters: contaminationbeneath divested portions of the manufacturing facility in Troisdorf; a formerdisposal site in Laurel, Maryland; contamination at a closed SpecialtyChemicals facility in Houston, Texas; contamination at a former SpecialtyChemicals facility in Sunbright, Virginia; groundwater remediation at Stadeln;and former sites operated by Dynamit Nobel’s previously divested explosivesbusiness. The Company is also a *de minimis*participant in several Superfund matters.

Although the Company cannot provide assurances in thisregard, the Company does not believe that these issues will have a materialadverse effect on its business or financial condition, but may have a materialadverse effect on the results of operations or cash flows in any givenquarterly or annual reporting period. Nonetheless, the discovery ofcontamination arising from present or historical industrial operations at someof the Company’s and the Company’s predecessor’s former and present propertiesand/or at sites the Company and its predecessor disposed wastes could exposethe Company to cleanup obligations and other damages in the future.

***Government EnforcementProceedings and Civil Litigation***

During the course of the Company’s business, theCompany may receive notices of violation, enforcement and other complaints fromregulatory agencies alleging non-compliance with applicable SHE laws.Currently, the Company is a party to a consent order with the MetropolitanSewer District (“MSD”) in Saint Louis, Missouri to reduce ammoniaconcentrations in wastewater discharge to a city treatment plant. MSD’s newNational Pollution Discharge Elimination System (“NPDES”) permit requires theCompany to reduce the facility’s ammonia discharge by an average of 50% byDecember 31, 2008. The Company is evaluating various options to reduce theamount of ammonia discharge. Although the Company will be required to makecapital expenditures in connection with this matter, it does not believe thatthis issue will have a material adverse effect on its business or financialcondition.

***Environmental IndemnityObligations***

Pursuant to the share purchase agreement entered intoin connection with the sale of the Groupe Novasep subsidiary, the Companyagreed to indemnify the buyers for certain known and unknown environmentalactions which may arise in the future related to periods prior to closing. Theseobligations expire three years after the closing; however, the Company’sliability for such obligations is reduced from 90 percent of any qualifyingenvironmental liability claim to 70 percent of such claims 15 months after theclosing. In addition, the Company is required to indemnify the purchaser of theCompany’s U.S. wafer reclaim business for six years for any unknownenvironmental actions attributable to the conduct of such business prior to theclosing of the disposition. The business purchase agreement provides that theCompany must indemnify the buyer for 100% of claims related to contamination ofthe business’ site or the migration of any hazardous substances from such siteif notice of any such claim is given within four years of the closing of thedisposition, and 50% of such claims if notice is given after the fourth butbefore the sixth anniversary of the closing.

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***Environmental Indemnities***

Pursuant to the environmental deed entered into inconnection with the KKR Acquisition, Degussa, as successor to Laporte, isrequired to indemnify us and our subsidiaries for certain environmental mattersthat relate to the business as conducted prior to the closing of the KKRAcquisition. The environmental deed provides that Degussa will indemnify the Companyand its subsidiaries for claims for which notice is given within a period oftwo years for breaches of representations and warranties, which expired in2002, and five years, which expired in September 2005, for claims related tothe contamination of the Company’s properties or the Company’s subsidiaries’properties (inclusive of contamination which leaks or escapes from the Company’sproperties or the Company’s subsidiaries’ properties). These indemnityobligations are subject to a minimum per matter loss of $0.2 million and arefurther subject to a $5.0 million deductible for the indemnity to be available.In addition, the environmental deed provides that Degussa will indemnify theCompany and its subsidiaries for claims relating to properties that wereformerly owned, occupied or used as of November 20, 2000, as well as propertiesowned by third parties (inclusive of disposal of waste and certain otheridentified issues prior to November 20, 2000). The environmental deed providesthat in this instance, Degussa will be responsible for reasonable costs andexpenses incurred.

In addition, pursuant to the sale and purchaseagreement entered into in connection with the Dynamit Nobel Acquisition inApril 2004, GEA Group and its subsidiary, GEA North America, are required toindemnify the Company and its subsidiaries for 50% of the excess amount oflosses over the amount of the related reserves (in the case of known claims)and 50% of claims (in the case of unknown claims) related to the contaminationof the Company or its subsidiaries’ properties, if notified within ten years.If GEA Group’s and GEA North America’s responsibility for contamination matterscannot be proven, a sliding scale reduces the percentage further for each yearduring the five-year period from year six to ten. GEA Group and GEA NorthAmerica are also obligated to indemnify us for 85% of claims related to legacysite matters, such as environmental matters relating to properties orbusinesses owned or operated by Dynamit Nobel prior to, but not on, the closingof Dynamit Nobel Acquisition, if notified within ten years from closing (whichoccurred on July 31, 2004). In addition, GEA Group and GEA North America areobligated to indemnify the Company for 50% of the excess amount of losses overthe amount of the related reserves for operational compliance matters, ifnotified by December 31, 2006, and 50% of the excess amount of losses over theamount of the related reserves (in the case of known claims) and 50% of claims(in the case of unknown claims) related to certain environmental damage claimsunknown at the time of the closing of the Dynamit Nobel Acquisition, ifnotified within ten years. All of these indemnity obligations are subject todifferent minimum perclaim thresholds depending on whether the matter wasdisclosed or not, and on the subject matter, ranging between €100,000 and€750,000 ($131,990 and $989,925 using the December 31, 2006 exchange rate of€1.00=$1.3199) depending on the type of claim. The indemnity obligations arefurther subject to certain deductibles, exclusions and limitations.Furthermore, GEA Group and GEA North America are obligated to indemnify theCompany for certain environmental risks arising from certain “shared site”structures for a duration of ten years from closing. This indemnity obligationis not subject 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 Company seeks indemnity under any ofthese agreements or through other means, there can be no assurance that GEAGroup, GEA North America, Degussa or any other party who may have obligationsto indemnify the Company will adhere to their obligations and the Company mayhave to resort to legal action to enforce its rights under the indemnities. Inaddition, the Company may be required to make indemnity payments in connectionwith certain environmental matters. However, the Company does not believe thatresolution of the known environmental matters subject to indemnificationobligations owed to the Company will have a material adverse effect on itsbusiness or financial condition, but may have a material adverse effect on theCompany’s results of operations or cash flow in any quarterly or annualreporting period.

***Environmental Reserves***

The Company has established financial reservesrelating to anticipated environmental cleanup obligations, site reclamation andremediation and closure costs. Liabilities are recorded when potentialliabilities are either known or believed to be probable and can be reasonablyestimated. The Company’s liability estimates are based upon available facts,existing technology, past experience and, in some instances, insurancerecoveries where the remediation costs are being paid directly by it’s insurersand are generated by several means, including State-mandated schedules,environmental consultants and internal experts, depending on the circumstances.On a consolidated basis, the Company has accrued approximately $37.0 millionand $34.3 million for known environmental liabilities as of December 31, 2006and 2005, respectively, all of which are classified as other non-currentliabilities on our consolidated balance sheets for such periods. Included inthe $37.0 million as of December 31, 2006 is €6.7 million ($8.8 million usingthe December 31, 2006 exchange rate of €1.00=$1.3199) that is discounted usinga 5.0% discount rate (undiscounted amount equals $13.2 million), and €1.9million ($2.5 million) that is discounted using a 5.5% discount rate(undiscounted amount equals $3.2 million). Included in the $34.3 million as ofDecember 31, 2005 is €6.5 million ($7.6 million using the December 31, 2005exchange rate of €1.00=$1.1796) that is discounted using a 5.0% discount rate(undiscounted amount equals $11.7 million), and €1.9 million ($2.2 million)that is discounted using a 5.5% discount rate (undiscounted amount equals $2.9million). In certain cases, the Company’s remediation liabilities are payableover periods of up to 30 years.

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The Company is obligated to undertake soil remediationat two facilities in Europe in the event manufacturing operations arediscontinued there at some future date. In addition, in the event thatmanufacturing operations are discontinued at any of the Company’s otherfacilities with known contamination, regulatory authorities may impose morestringent requirements on the Company including soil remediation. The Companydoes not contemplate any such action occurring in the foreseeable future, asthese facilities’ remaining lives are indefinite. Given the indeterminateuseful life of these facilities and the corresponding indeterminate settlementdate of any soil remediation obligations, the Company does not have sufficientinformation to estimate a range of potential settlement dates for it’sobligations. Consequently, the Company cannot employ a present value techniqueto estimate fair value and, accordingly, has not accrued for any environmentalrelated costs to remediate soil at these facilities.

The Company believes these accruals are adequate basedon currently available information. The Company may incur losses in excess ofthe amounts accrued, however, based on currently available information it doesnot believe the additional amount of potential losses would have a materialeffect on it’s results of operations or financial condition, but may have amaterial effect on the results of operations or cash flow in any givenquarterly or annual reporting period. The Company is unable to estimate theamount or range of any potential incremental charges should facts andcircumstances change and may in the future revise its estimates based on newinformation becoming available.

***Commitments***

As of December 31, 2006, the Company has unconditionalpurchase obligations of $252.6 million primarily consisting of take-or-paycontracts to purchase goods that are enforceable and legally binding and thatspecify all significant terms, including: fixed or minimum quantities to bepurchased; fixed, minimum or variable price provisions; and the approximatetiming of the transaction. Amounts due within one year are estimated to be$139.8 million and the majority of the remainder is due during 2008 and 2009.The Company has disclosed its contractual obligations as of December 31, 2006in Item 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources,” section.

**22. SUBSEQUENT EVENTS:**

On January 2, 2007, Chemical Specialties, Inc. (“CSI”),a wholly-owned subsidiary of the Company, and Rohm and Haas Company completedthe formation of Viance, LLC, a joint venture company that provides anextensive range of advanced wood treatment technologies and services to theglobal wood treatment industry. Viance is jointly-owned by CSI and Rohm andHaas and was formed through the contribution by CSI and its relatedsubsidiaries of their wood protection chemicals business and cash of $7.4million and the contribution by Rohm and Haas of its wood biocides business andcash of $76.6 million. Of the $76.6 million from Rohm and Haas, CSI receivedcash proceeds of $67.6 million. In accordance with the consolidation principlesof FIN 46 (R), *Consolidation of Variable Interest Entities—AnInterpretation of ARB No. 51,* the Company has concluded thatRockwood is the primary beneficiary of the joint venture and as such will berequired to consolidate the joint venture.

On January 9, 2007, the Company completed the sale ofits Groupe Novasep subsidiary. As a result, the Company has accounted for theresults of the former Groupe Novasep reportable segment as a discontinuedoperation in the accompanying consolidated financial statements. See Note 2, “DiscontinuedOperations,” for further details.

On February 12, 2007, the Company completed the sale ofits United States Wafer Reclaim business for approximately $11.0 million.

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** **

**Item 9. Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

None.

**Item 9A. Controls and Procedures**

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as ofDecember 31, 2006 and concluded that our disclosure controls and procedures areeffective. In connection with this evaluation, our management did not identifyany change in our internal control over financial reporting that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting during our fourth quarter of 2006.

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVERFINANCIAL REPORTING**

The management of Rockwood Holdings, Inc. andsubsidiaries (the “Company”) is responsible for establishing and maintainingadequate internal control over financial reporting. The Company’s internalcontrol system was designed to provide reasonable assurance to the Company’smanagement and board of directors regarding the preparation and fairpresentation of published financial statements. 

Our disclosure controls and procedures are designed toensure that (a) information required to be disclosed in our reports under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and (b) suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosures. All internal control systems, no matter howwell designed, have inherent limitations. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance with respectto financial statement preparation and presentation.

Management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2006. In makingthis assessment, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*. Based on thisassessment, management believes that, as of December 31, 2006, the Company’sinternal control over financial reporting is effective based on those criteria.

Management’s assessment of the effectiveness ofinternal control over financial reporting as of December 31, 2006 has beenaudited by Deloitte & Touche LLP, an independent registered publicaccounting firm, who expressed an unqualified opinion as stated in their reportincluded herein.
| /s/ SEIFI GHASEMI                                  |   |
|----------------------------------------------------|--------|
| Seifi Ghasemi                                      |
| Chairman and  Chief Executive Officer              |
| March 16, 2007                                     |
|                                               |
| /s/ ROBERT J.  ZATTA                               |   |
| Robert J. Zatta                                    |
| Senior Vice  President and Chief Financial Officer |
| March 16, 2007                                     |
|                                                    |        |  |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Shareholders and Board of Directors of

Rockwood Holdings, Inc.

Princeton, New Jersey

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Rockwood Holdings, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December31, 2006, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizationsof management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company’s assets that could have a material effecton the financial statements. Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2006, is fairly stated, in all material respects, based on thecriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of December 31, 2006, based on the criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements and financial statement schedule as of andfor the year ended December 31, 2006 of the Company and our report, dated March16, 2007, expressed an unqualified opinion on those financial statements andfinancial statement schedule and included an explanatory paragraph relating tothe Company’s adoption of Statement of Financial Accounting Standard No. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans*.
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
| Parsippany, New  Jersey       |
| March 16, 2007                |

 

129

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**Item 9B. Other Information**

None.

**PART III**

**Item 10. Directors, Executive Officers andCorporate Governance.**

Information concerning directors, executive officersof the Company and corporate governance is included under the caption “Proposal One—Electionof Directors,” “Corporate Governance and Related Matters,” “ExecutiveOfficers,” “Stock Ownership—Section 16(a) Beneficial Ownership ReportingCompliance,” in the Proxy Statement for the 2007 Annual Meeting of Stockholdersand is incorporated herein by reference.

**Item 11. Executive Compensation.**

Information concerning executive compensation isincluded under the captions “Executive Compensation and Related Information,”“Corporate Governance and Related Matters—Compensation Committee Interlocks andInsider Participation” and “Corporate Governance and RelatedMatters—Compensation Committee Report” in the Proxy Statement for the 2007Annual Meeting of Stockholders and is incorporated herein by reference.

**Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

Information concerning security ownership of certainbeneficial owners and management is included under the caption “Stock Ownership—SecurityOwnership of Certain Beneficial Owners and Management” and “ExecutiveCompensation and Related Information—Equity Compensation Plan Information” inthe Proxy Statement for the 2007 Annual Meeting of Stockholders and isincorporated herein by reference.

**Item 13. Certain Relationships and RelatedTransactions, and Director Independence.**

Information concerning certain transactions isincluded under the caption “Certain Relationships and Related PartyTransactions,” “Corporate Governance and Related Matters—Director Independence”in the Proxy Statement for the 2007 Annual Meeting of Stockholders and isincorporated herein by reference.

**Item 14. Principal Accounting Fees and Services.**

Information concerning certain transactions isincluded under the caption “Audit and Related Fees” in the Proxy Statement forthe 2007 Annual Meeting of Stockholders and is incorporated herein byreference.

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**PART IV**

** **

**Item 15. Exhibits and Financial StatementSchedules.**

 

List of documents filed as part of this report:

 
| 1.     | Financial Statements:                                                                                                  |   |
|--------|------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                   |   |
|   | Consolidated  Statements of Operations for the years ended December 31, 2006, 2005 and 2004                            |   |   | 84 |
|   |                                                                                                                   |   |   |   |
|   | Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                          |   |   | 85 |
|   |                                                                                                                   |   |   |   |
|   | Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                            |   |   | 86 |
|   |                                                                                                                   |   |   |   |
|   | Consolidated  Statements of Changes in Stockholder’s Equity for the years ended December  31, 2006, 2005 and 2004 |   | 87 |
|   |                                                                                                                   |   |   |
|   | Notes to  Consolidated Financial Statements                                                                            |   |   | 88 |
|        |                                                                                                                        |        |  |  |  |  |  |  |  |  |  |

 

131

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2.      FinancialStatement Schedules:

 

**ROCKWOOD HOLDINGS, INC. (PARENTCOMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED STATEMENTS OF OPERATIONS**

**(Dollars in millions)**

** **
|                                                            | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Equity in undistributed  earnings (losses) of subsidiaries |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) |
|                                                       |       |                                       |       |   |   |   |   |
| Net income (loss)                                          |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) |

 

These condensed financial statements should be read inconjunction with the accompanying consolidated financial statements and notesthereto of Rockwood Holdings, Inc. and Subsidiaries.

 

See accompanying notes tocondensed financial statements.

 

132

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**ROCKWOOD HOLDINGS, INC. (PARENTCOMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED BALANCE SHEETS**

**(Dollars in millions, except pershare amounts; shares in thousands)**

 
|                                                                                                                                                                                           | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                |       |                  |       |   |   |
| Current assets:                                                                                                                                                                           |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                |       | $                     | 1.8        |   | $ | 4.1 |   |
| Total current  assets                                                                                                                                                                     |       | 1.8                   |       | 4.1 |   |
| Investment in  subsidiaries                                                                                                                                                               |       | 1,116.6               |       | 830.7 |   |
| Due from affiliates                                                                                                                                                                       |       | 2.3                   |       | 0.2 |   |
| Total assets                                                                                                                                                                              |       | $                     | 1,120.7    |   | $ | 835.0 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                            |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                      |       |                  |       |   |   |
| Income taxes payable                                                                                                                                                                      |       | $                     | 0.2        |   | $ | — |   |
| Accrued expenses and  other current liabilities                                                                                                                                           |       | 0.2                   |       | 0.3 |   |
| Total current  liabilities                                                                                                                                                                |       | 0.4                   |       | 0.3 |   |
| Deferred income taxes                                                                                                                                                                     |       | (0.2                  | )          | — |   |
| Total  liabilities                                                                                                                                                                        |       | 0.2                   |       | 0.3 |   |
|                                                                                                                                                                                      |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                |       |                  |       |   |   |
| Common stock ($0.01 par  value, 400,000 shares authorized, 73,879 shares issued and 73,785 shares  outstanding at December 31, 2006; 400,000 shares authorized, 73,873 shares  issued and |       |                  |       |   |   |
| 73,779 shares  outstanding at December 31, 2005)                                                                                                                                          |       | 0.7                   |       | 0.7 |   |
| Paid-in capital                                                                                                                                                                           |       | 1,151.8               |       | 1,151.7 |   |
| Accumulated other  comprehensive income                                                                                                                                                   |       | 234.0                 |       | 52.0 |   |
| Accumulated deficit                                                                                                                                                                       |       | (264.6                | )          | (367.6 | ) |
| Treasury stock, at cost                                                                                                                                                                   |       | (1.4                  | )          | (1.4 | ) |
| Other                                                                                                                                                                                     |       | —                |       | (0.7 | ) |
| Total  stockholders’ equity                                                                                                                                                          |       | 1,120.5               |       | 834.7 |   |
| Total liabilities and  stockholders’ equity                                                                                                                                          |       | $                     | 1,120.7    |   | $ | 835.0 |   |

 

These condensed financial statements should be read inconjunction with the accompanying consolidated financial statements and notesthereto of Rockwood Holdings, Inc. and Subsidiaries.

 

See accompanying notes tocondensed financial statements.

 

133

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**ROCKWOOD HOLDINGS, INC. (PARENTCOMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Dollars in millions)**

 
|                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                    |       |                                       |       |   |   |   |   |
| Net income  (loss)                                                            |       | $                                          | 103.0      |   | $ | 95.8 |   | $ | (216.1 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating |       |                                       |       |   |   |   |   |
| activities:                                                                   |       |                                       |       |   |   |   |   |
| Equity in  undistributed (income) losses of subsidiaries                      |       | (103.0                                     | )          | (95.8 | ) | 216.1 |   |
| Deferred income  taxes                                                        |       | (0.2                                       | )          | — |   | — |   |
| Changes in assets and  liabilities, net of the effect of foreign currency     |       |                                       |       |   |   |   |   |
| translation and  acquisitions:                                                |       |                                       |       |   |   |   |   |
| Due from  affiliates                                                          |       | (2.3                                       | )          | — |   | — |   |
| Income taxes  payable                                                         |       | 0.2                                        |       | — |   | — |   |
| Accrued expenses  and other liabilities                                       |       | (0.1                                       | )          | 1.0 |   | 0.7 |   |
| **Net  cash provided by operating activities**                                |       | (2.4                                       | )          | 1.0 |   | 0.7 |   |
| ** **                                                                    |       |                                       |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                    |       |                                       |       |   |   |   |   |
| Investment in  subsidiaries                                                   |       | —                                     |       | (395.9 | ) | (431.6 | ) |
| **Net  cash used in investing activities**                                    |       | —                                     |       | (395.9 | ) | (431.6 | ) |
| ** **                                                                    |       |                                       |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance of common  stock, net of fees                                        |       | 0.1                                        |       | 471.4 |   | 432.0 |   |
| Stock issuance costs                                                          |       | —                                     |       | (33.8 | ) | (0.1 | ) |
| Redemption of  redeemable convertible preferred stock from IPO proceeds       |       | —                                     |       | (38.5 | ) | — |   |
| Other changes to  stockholders’ equity                                   |       | —                                     |       | — |   | (0.3 | ) |
| **Net  cash provided by financing activities**                                |       | 0.1                                        |       | 399.1 |   | 431.6 |   |
| ** **                                                                    |       |                                       |       |   |   |   |   |
| Net (decrease) increase  in cash and cash equivalents                         |       | (2.3                                       | )          | 4.2 |   | 0.7 |   |
| Cash and cash  equivalents, beginning of year                                 |       | 4.1                                        |       | (0.1 | ) | (0.8 | ) |
| Cash and cash  equivalents, end of year                                       |       | $                                          | 1.8        |   | $ | 4.1 |   | $ | (0.1 | ) |

 

 

These condensed financial statements should be read inconjunction with the accompanying consolidated financial statements and notesthereto of Rockwood Holdings, Inc. and Subsidiaries.

 

See accompanying notes tocondensed financial statements.

 

134

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**Notes toCondensed Financial Statements**

The accompanyingcondensed financial statements of Rockwood Holdings, Inc. (the “Registrant”)should be read in conjunction with the consolidated financial statements andnotes thereto of Rockwood Holdings, Inc. and Subsidiaries included elsewhere inthis filing.

**1.   BASIS OF PRESENTATION**

Pursuant to rules and regulations of the Securitiesand Exchange Commission, the unconsolidated condensed financial statements ofRockwood Holdings, Inc. (“the Company”) do not reflect all of the informationand notes normally included with financial statements prepared in accordancewith generally accepted accounting principles. Therefore, these financialstatements should be read in conjunction with the consolidated financial statementsand related notes thereto included in this filing.

* *

*Accounting for subsidiaries*—TheCompany has accounted for the losses of its subsidiaries under the equity methodin the unconsolidated condensed financial statements.

**2.****   REDEEMABLE CONVERTIBLE PREFERRED STOCK**

The Company issued $25.0million of its redeemable convertible preferred stock to an affiliate of KKR inJuly 2003. See Note 15, “Redeemable Convertible Preferred Stock” to theconsolidated financial statements.

**3.****   STOCK-BASED COMPENSATION**

 

The Company has in place the 2005 Amended and RestatedStock Purchase and Option Plan. See Note 3, “Stock-Based Compensation” to theconsolidated financial statements.

**4.****   DIVIDEND RESTRICTIONS**

Under the terms of the senior secured creditfacilities of Rockwood Holdings, Inc. and subsidiaries, certain subsidiariesmay not, subject to certain exceptions, (i) declare or pay any dividends, otherthan dividends payable solely in its equity interests; (ii) redeem or otherwiseacquire or retire for value any of its or its parent companies’ equityinterests; (iii) make any principal payment on or otherwise acquire or retirefor value any subordinated indebtedness; or (iv) make any loan or capitalcontribution to, or purchase any securities or assets of, any person. So longas no default exists, the Company’s subsidiaries may make certain otherwiserestricted payments, such as (i) redeeming capital stock with the proceeds fromconcurrent equity contributions; (ii) repurchasing shares of their capitalstock pursuant to employee stock plans or shareholder agreements; (iii) payingdividends to any parent company; (iv) paying taxes; (v) making certainpermitted investments; or (vi) redeeming or refinancing certain other debtobligations; however, some of these permitted payments are subject to certainlimitations and others may only be made subject to compliance with certainfinancial covenants, such as Debt to EBITDA ratio (as defined).

Generally, under the terms of the 2011 Notes and the2014 Notes, the Company’s subsidiaries may not (i) declare or pay any dividendon their equity interests other than dividends payable solely in equityinterests or in options, warrants, or other rights to purchase such equityinterests; (ii) redeem or otherwise acquire or retire for value any of theCompany’s subsidiaries or the Company’s equity interests; (iii) make anyprincipal payment on or otherwise acquire or retire for value any subordinatedindebtedness; or (iv) make any loan or capital contribution to, or purchase anysecurities or assets of, any person. These restrictions do not apply if, at thetime of taking any of these actions, (a) no Default or Event of Default existsunder the Company’s debt obligations, (b) immediately after taking such action,the Company could incur additional indebtedness without violating the Company’sdebt covenants, and (c) the total amount of payments made pursuant to the aboveactions does not exceed the sum of (1) 50% of net income, (2) the proceeds ofany capital contributions or equity offerings, and (3) the fair market value ofany unrestricted subsidiary redesignated as a restricted subsidiary. Numerousexceptions to these general prohibitions exist that permit the Company’ssubsidiaries to make certain restricted payments without compliance with (a),(b) and (c).

**5.   STOCK SPLIT**

On July 18, 2005, in connection with a plannedoffering of its common stock, the Company’s board of directors authorized a

34.22553019-for-one stock split of its common stock.

 

135

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3.   Exhibits:

 
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** ** | ** ** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| 2.1(A)      |       | Business and  Share Sale and Purchase Agreement, dated September 25, 2000 between Rockwood  Holdings, Inc. and Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                |       |       |
| 2.2(B)      |       | Sale and  Purchase Agreement, dated April 19, 2004 among mg technologies ag and MG  North America Holdings Inc., as Sellers and other parties named as purchasers  therein                                                                                                                                                                                                                                                                                                                                                |       |       |
| 3.1(I)      |       | Form of Amended  and Restated Certificate of Incorporation of Rockwood Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |       |
| 3.2(I)      |       | Form of Amended  and Restated By-Laws of Rockwood Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |       |
| 4.1(I)      |       | Form of  Certificate of Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |       |
| 4.2(I)      |       | Warrant  Agreement, dated as of July 23, 2003, between Rockwood Holdings, Inc. and KKR  Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                                                                                              |       |       |
| 4.3(I)      |       | Registration  Rights Agreement, dated as of November 20, 2000, among Rockwood Holdings,  Inc., KKR 1996 Fund L.P. and KKR Partners II, L.P.                                                                                                                                                                                                                                                                                                                                                                               |       |       |
| 4.4(I)      |       | First Amendment,  dated as of July 23, 2003, to the Registration Rights Agreement, among  Rockwood Holdings, Inc., KKR 1996 Fund L.P., KKR Partners II, L.P. and KKR  Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                |       |       |
| 4.5(A)      |       | Indenture, dated  as of July 23, 2003, among Rockwood Specialties Group, Inc., the Guarantors  named therein and The Bank of New York, as Trustee                                                                                                                                                                                                                                                                                                                                                                         |       |       |
| 4.6(I)      |       | Supplemental  Indenture, dated as of July 31, 2004, among Rockwood Specialties Group, Inc.,  the Guarantors named therein and The Bank of New York, as Trustee                                                                                                                                                                                                                                                                                                                                                            |       |       |
| 4.7(A)      |       | Registration  Rights Agreement, dated as of July 23, 2003, among Rockwood Specialties  Group, Inc., the Guarantors named therein and Merrill Lynch & Co.,  Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan  Securities Inc. and Goldman, Sachs & Co., as Initial Purchasers                                                                                                                                                                                                                   |       |       |
| 4.8 (I)     |       | Stockholders  Agreement, dated as of July 29, 2004, among Rockwood Holdings, Inc., KKR 1996  Fund,                                                                                                                                                                                                                                                                                                                                                                                                                        |       |       |
|        |       | L.P., KKR Partners  II, L.P., KKR Millennium Fund, L.P., KKR Partners III, L.P., KKR European  Fund, Limited Partnership and DLJ Merchant Banking Partners III, L.P., DLJ  Offshore Partners III-1, C.V., DLJ Offshore Partners III-2, C.V., DLJ  Offshore Partners III, C.V., DLJ MB Partners III GmbH & Co. KG,  Millennium Partners II, L.P. and MBP III Plan Investors, L.P.                                                                                                                                      |       |       |
| 4.9(C)      |       | Indenture, dated  as of November 10, 2004, among Rockwood Specialties Group, Inc., the  Guarantors named therein and The Bank of New York, as Trustee                                                                                                                                                                                                                                                                                                                                                                     |       |       |
| 4.10 (C)    |       | Registration  Rights Agreement, dated as of November 10, 2004, among Rockwood Specialties  Group, Inc., the                                                                                                                                                                                                                                                                                                                                                                                                               |       |       |
|        |       | Guarantors named  therein and Credit Suisse First Boston (Europe) Limited, Goldman, Sachs &  Co., UBS Limited,                                                                                                                                                                                                                                                                                                                                                                                                        |       |       |
|        |       | Credit Suisse  First Boston LLC, UBS Securities LLC, BNP Paribas Securities Corp., ING  Financial Markets LLC,                                                                                                                                                                                                                                                                                                                                                                                                            |       |       |
|        |       | NatCity  Investments, Inc., Rabo Securities USA, Inc. and WestLB AG, London Branch, as  the Initial Purchasers                                                                                                                                                                                                                                                                                                                                                                                                            |       |       |
| 4.11 (I)    |       | Investors’  Rights Agreement, dated as of November 20, 2000, among K-L Holdings, Inc.,  KKR 1996 Fund L.P., KKR Partners II L.P. and Merrill Lynch Capital  Corporation                                                                                                                                                                                                                                                                                                                                              |       |       |
| 4.12(I)     |       | Amendment and  Supplement No. 1 dated as of February 7, 2001 to the Investors’ Rights  Agreement, dated as of November 20, 2000,among Rockwood Holdings, Inc., KKR  1996 Fund L.P., KKR Partners II, L.P., Merrill Lynch Capital Corporation and  Allianz Lebensversicherungs—AG, Stuttgart                                                                                                                                                                                                                     |       |       |
| 4.13(I)     |       | Supplement No. 2  dated as of January 14, 2005 to the Investors’ Rights Agreement, dated as of  November 20, 2000, among Rockwood Holdings, Inc., Merrill Lynch Capital  Corporation and SPCP Group, L.L.C.                                                                                                                                                                                                                                                                                                          |       |       |
| 4.14(I)     |       | PIK Bridge Loan  Agreement, dated as of November 20, 2000, among Rockwood Specialties  Consolidated, Inc., the lenders named therein, Merrill Lynch Capital  Corporation and Merrill Lynch International                                                                                                                                                                                                                                                                                                                  |       |       |
| 4.15(I)     |       | Amendment dated  as of June 20, 2005 to the PIK Bridge Loan Agreement dated as of November 20,  2000 among Rockwood Specialties Consolidated, Inc. as borrower, SPCP Group,  L.L.C., as Lender, and Allianz Lebensversicherungs—AG, Stuttgart, as  Noteholder                                                                                                                                                                                                                                                        |       |       |
| 4.16 (L)    |       | Amendment to  Stockholders Agreement and Waiver, dated as of January 27, 2006, by and among  Rockwood Holdings, Inc., KKR 1996 Fund, L.P., KKR Partners II, L.P., KKR  Millennium Fund, L.P., KKR Partners III, L.P., KKR European Fund, Limited  Partnership and DLJ Merchant Banking Partners III, L.P., DLJ Offshore  Partners III-1, C.V., DLJ Offshore Partners III-2, C.C., DLJ Offshore  Partners III, C.V., DLJ MB Partners III GmbH & Co. KG, Millennium  Partners II, L.P. and MBP III Plan Investors, L.P. |       |       |
| 10.1 (D)    |       | Credit  Agreement, dated as of July 30, 2004, among Rockwood Specialties Group, Inc.,  Rockwood Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse First Boston, acting through its Cayman  Islands Branch, as Administrative agent and Collateral agent, and UBS  Securities LLC and Goldman Sachs Credit Partners L.P., as Co-Syndication  Agents                                                                                                                 |       |       |
| 10.2 (E)    |       | First Amendment,  dated as of October 8, 2004, to the Credit Agreement, dated as of July 30,  2004, among Rockwood Specialties Group, Inc., Rockwood Specialties Limited,  Rockwood Specialties International, Inc., the lenders party thereto, Credit  Suisse First Boston, acting through its Cayman Islands Branch, as  Administrative agent and Collateral agent, and UBS Securities LLC and Goldman  Sachs Credit Partners L.P., as Co-Syndication Agents                                                            |       |       |

136

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| 10.3 (F) |   | Second Amendment,  dated as of December 10, 2004, to the Credit Agreement, dated as of July 30,  2004, among Rockwood Specialties Group, Inc., Rockwood Specialties Limited,  Rockwood Specialties International, Inc., the lenders party thereto, Credit  Suisse First Boston, acting through its Cayman Islands Branch, as  Administrative agent and Collateral agent, and UBS Securities LLC and Goldman  Sachs Credit Partners L.P., as Co-Syndication Agents                                                                                                                                                               |   |   |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.4 (K) |   | Third Amendment,  dated as of December 13, 2005, to the Credit Agreement dated as of July 30,  2004 and as amended by the First Amendment dated as of October 8, 2004 and by  the Second Amendment dated as of December 10, 2004, among Rockwood  Specialties Group, Inc., Rockwood Specialties Limited, Rockwood Specialties  International, Inc., the lenders party thereto, Credit Suisse (formerly known  as Credit Suisse First Boston), acting through its Cayman Islands Branch, as  Administrative Agent and Collateral Agent, and UBS Securities LLC and Goldman  Sachs Credit Partners L.P., as Co-Syndication Agents |   |   |
| 10.5(D)  |   | Security  Agreement, dated as of July 30, 2004, among Rockwood Specialties  International, Inc., Rockwood Specialties Group, Inc., as US Borrower, the  Subsidiaries of the U.S. Borrower named therein and Credit Suisse First  Boston, acting through its Cayman Islands Branch, as Administrative Agent                                                                                                                                                                                                                                                                                                                      |   |   |
| 10.6(D)  |   | Pledge  Agreement, dated as of July 30, 2004, among Rockwood Specialties Group, Inc.,  as U.S. Borrower, the Subsidiaries of the U.S. Borrower named therein and  Credit Suisse First Boston, acting through its Cayman Islands Branch, as  Administrative Agent                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 10.7(D)  |   | Guarantee, dated  as of July 30, 2004, among Rockwood Specialties International, Inc., Rockwood  Specialties Group, Inc., as U.S. Borrower, the Subsidiaries of the U.S.  Borrower named therein and Credit Suisse First Boston, acting through its  Cayman Islands Branch, as Administrative Agent                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.8(D)  |   | Guarantee, dated  as of July 30, 2004, among Rockwood Specialties Group, Inc., the Subsidiaries  of Rockwood Specialties Limited named therein and Credit Suisse First Boston,  acting through its Cayman Islands Branch, as Administrative Agent                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.9 (D) |   | Senior  Subordinated Loan Agreement, dated as of July 30, 2004, among Rockwood  Specialties Group, Inc., the lenders party thereto, Credit Suisse First  Boston, acting through its Cayman Islands Branch, UBS Securities LLC and  Goldman Sachs Credit Partners L.P., as Lead Arrangers, Credit Suisse First  Boston, acting through its Cayman Islands Branch, as Administrative Agent,  Goldman Sachs Credit Partners L.P., as Syndication Agent, and UBS AG,  Stamford Branch, as Documentation Agent                                                                                                                       |   |   |
| 10.10(D) |   | Guarantee, dated  as of July 30, 2004, among the Subsidiaries of Rockwood Specialties Group,  Inc. named therein and Credit Suisse First Boston, acting through its Cayman  Islands Branch, UBS Securities LLC and Goldman Sachs Credit Partners L.P. and  UBS AG, Stamford Branch, as Agents                                                                                                                                                                                                                                                                                                                                   |   |   |
| 10.11(A) |   | Deed of Tax  Covenant dated September 25, 2000 between Rockwood Holdings, Inc. and Laporte  plc                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.12(A) |   | Environmental  Deed dated September 25, 2000 between Rockwood Holdings, Inc. and Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.13(A) |   | Form of  Management Stockholder’s Agreement, dated as of February 2, 2001, between  Rockwood Holdings, Inc. and each Management Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.14(I) |   | Form of  Management Stockholder’s Agreement, dated as of November 30, 2004 between  Rockwood Holdings, Inc. and each Management Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| 10.15(I) |   | Form of Amended and Restated Management Stockholder’s Agreement, dated  as of October, 2004, between Rockwood Holdings, Inc. and each  Management Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 10.16(A) |   | Form of Sale  Participation Agreement, dated as of January 30, 2001, among Rockwood  Holdings, Inc., each Management Stockholder party to the Management  Stockholders’ Agreement, dated as of January 30, 2001, KKR Partners II L.P.  and KKR 1996 Fund L.P.                                                                                                                                                                                                                                                                                                                                                              |   |   |
| 10.17(I) |   | Form of Sale  Participation Agreement, dated as of November 30, 2004, among KKR 1996 Fund  L.P., KKR Partners II L.P., KKR Millennium Fund, L.P., KKR Partners III, L.P.  and KKR European Fund, Limited Partnership and each Management Stockholder  (as defined therein)                                                                                                                                                                                                                                                                                                                                                      |   |   |
| 10.18(I) |   | Form of Amended and Restated Sale Participation Agreement, dated as of  October, 2004, between Rockwood Holdings, Inc. and each Management  Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.19(A) |   | Form of Pledge  Agreement in favor of Rockwood Specialties, Inc. made by an executive officer  in connection with 2001 management equity program                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 10.20(A) |   | Form of  Promissory Note made by an executive officer in connection with 2001  management equity program                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |
| 10.21(G) |   | Amended and  Restated Management Stockholder’s Agreement, dated as of September 24, 2004,  between Rockwood Holdings, Inc. and Seifi Ghasemi                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.22(G) |   | Amended and  Restated Sale Participation Agreement, dated as of September 24, 2004, among  Seifi Ghasemi, KKR 1996 Fund L.P., KKR Partners II, L.P., KKR Millennium  Fund, L.P., KKR Partners III, L.P. and KKR European Fund, Limited Partnership                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| 10.23(G) |   | Time Stock  Option Agreement, dated as of September 24, 2004, between Rockwood Holdings,  Inc. and Seifi Ghasemi (included as Exhibit A to the Second Amendment to the  Employment Agreement listed as Exhibit 10.37 herewith)                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |
| 10.24(J) |   | Time/Performance  Stock Option Agreement, dated as of September 24, 2004, between Rockwood  Holdings, Inc. and Seifi Ghasemi                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| 10.25(H) |   | Amended and  Restated Management Stockholder’s Agreement, dated as of October 15, 2004,  between Rockwood Holdings, Inc. and Robert J. Zatta                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |

137

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| 10.26(H) |   | Time/Performance  Stock Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                                                                       |   |   |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.27(H) |   | Performance  Stock Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                                                                            |   |   |
| 10.28(H) |   | Amended and  Restated Sale Participation Agreement, dated as of October 15, 2004, between  Rockwood Holdings, Inc. and Robert J. Zatta                                                                                                                                                                             |   |   |
| 10.29(I) |   | Amendment to  Stock Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                                                                           |   |   |
| 10.30(H) |   | Amended and  Restated Management Stockholder’s Agreement, dated as of October 15, 2004,  between Rockwood Holdings, Inc. and Thomas J. Riordan                                                                                                                                                                |   |   |
| 10.31(H) |   | Time/Performance  Stock Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                                                     |   |   |
| 10.32(H) |   | Performance  Stock Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                                                          |   |   |
| 10.33(H) |   | Amended and  Restated Sale Participation Agreement, dated as of October 15, 2004, between  Rockwood Holdings, Inc. and Thomas J. Riordan                                                                                                                                                                           |   |   |
| 10.34(I) |   | Amendment to  Stock Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                                                         |   |   |
| 10.35(A) |   | Employment  Agreement dated as of September 28, 2001 between Rockwood Holdings, Inc. and  Seifi Ghasemi                                                                                                                                                                                                            |   |   |
| 10.36(G) |   | First Amendment,  dated as of August 9, 2004, to the Employment Agreement dated as of September  28, 2001 between Rockwood Holdings, Inc. and Seifi Ghasemi                                                                                                                                                        |   |   |
| 10.37(G) |   | Second  Amendment, dated as of September 24, 2004, to the Employment Agreement dated  as of September 28, 2001 between Rockwood Holdings, Inc. and Seifi Ghasemi                                                                                                                                                   |   |   |
| 10.38(A) |   | Employment  Agreement dated as of March 21, 2001 between Rockwood Specialties, Inc. and  Robert J. Zatta                                                                                                                                                                                                           |   |   |
| 10.39(H) |   | Amendment, dated  as of October 15, 2004, to the Employment Agreement, dated as of March 21,  2001 between Rockwood Specialties, Inc. and Robert J. Zatta                                                                                                                                                          |   |   |
| 10.40(A) |   | Employment  Agreement dated as of October 14, 1994 and amended as of August 26, 1999  between Laporte Inc. and Thomas J. Riordan                                                                                                                                                                                   |   |   |
| 10.41(A) |   | Profit-Sharing/401(K)  Plan for Employees of Rockwood Specialties, Inc.                                                                                                                                                                                                                                            |   |   |
| 10.42(A) |   | The Rockwood  Specialties, Inc. Money Purchase Pension Plan                                                                                                                                                                                                                                                        |   |   |
| 10.43(A) |   | Supplementary  Savings Plan of Laporte Inc.                                                                                                                                                                                                                                                                        |   |   |
| 10.44(A) |   | Rockwood  Specialties, Inc. Deferred Compensation Plan                                                                                                                                                                                                                                                             |   |   |
| 10.45(I) |   | Management  Services Agreement dated as of July 29, 2004 between Kohlberg Kravis Roberts  & Co. L.P., DLJ Merchant Banking Partners III, L.P. and Rockwood  Holdings, Inc.                                                                                                                                     |   |   |
| 10.46(I) |   | Termination  Agreement dated as of May 13, 2005 between Kohlberg Kravis Roberts & Co.  L.P., DLJ Merchant Banking Partners III, L.P. and Rockwood Holdings, Inc.                                                                                                                                               |   |   |
| 10.47(I) |   | Restricted Stock  Unit Award Agreement effective as of November 1, 2001 between Rockwood  Holdings, Inc. and Seifi Ghasemi                                                                                                                                                                                         |   |   |
| 10.48(I) |   | Form of 2001  Stock Option Agreement, dated as of February 2, 2001, between K-L Holdings,  Inc. and an employee of the Company or a Subsidiary or Affiliate of the  Company.                                                                                                                                       |   |   |
| 10.49(I) |   | Form of 2004  Stock Option Agreement between Rockwood Holdings, Inc. and an employee of the  Company or a Subsidiary or Affiliate of the Company.                                                                                                                                                                  |   |   |
| 10.50(I) |   | 2005 Amended and  Restated Stock Purchase and Option Plan for Rockwood Holdings, Inc. and  Subsidiaries                                                                                                                                                                                                            |   |   |
| 10.51(I) |   | Short-Term  Incentive Plan for Rockwood Holdings, Inc. and Subsidiaries                                                                                                                                                                                                                                            |   |   |
| 10.52(I) |   | Form of  Non-Employee Director Stock Option Agreement                                                                                                                                                                                                                                                              |   |   |
| 10.53(M) |   | Share Purchase  Agreement dated November 29, 2006 by and among Rockwood Specialties Group  GmbH and Gilde Buyout Partners BV, Banexi Capital and Groupe Novasep  management.                                                                                                                                       |   |   |
| 21.1*    |   | List of  Subsidiaries                                                                                                                                                                                                                                                                                              |   |   |
| 23.1*    |   | Consent of  Deloitte & Touche LLP                                                                                                                                                                                                                                                                              |   |   |
| 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. |   |   |

----

*             Filedherewith.

 

138

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| (A)    |   | Incorporated by  reference to Rockwood Specialties Group, Inc.’s Registration Statement on  form S-4 (File No. 333-109686). |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                             |   |
| (B)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties Group,  Inc filed on May 4, 2004.           |   |
|   |   |                                                                                                                             |   |
| (C)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties Group,  Inc filed on November 12, 2004.     |   |
|   |   |                                                                                                                             |   |
| (D)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties Group,  Inc filed on August 4, 2004.        |   |
|   |   |                                                                                                                             |   |
| (E)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties Group,  Inc filed on October 12, 2004.      |   |
|   |   |                                                                                                                             |   |
| (F)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties Group,  Inc filed on December 14, 2004.     |   |
|   |   |                                                                                                                             |   |
| (G)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties Group,  Inc filed on September 30, 2004.    |   |
|   |   |                                                                                                                             |   |
| (H)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties Group,  Inc filed on October 19, 2004.      |   |
|   |   |                                                                                                                             |   |
| (I)    |   | Incorporated by  reference to the Company’s Registration Statement on Form S-1 (File No.  333-122764).                      |   |
|   |   |                                                                                                                             |   |
| (J)    |   | Incorporated by  reference to the Annual Report on Form 10-K of the Rockwood Specialties  Group, Inc. filed on April 29, 2005.   |   |
|   |   |                                                                                                                             |   |
| (K)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on December 15,  2005.                         |   |
|   |   |                                                                                                                             |   |
| (L)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on February 2,  2006.                          |   |
|   |   |                                                                                                                             |   |
| (M)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on January 16,  2007.                          |   |

 

 

139

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**SIGNATURES**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this Annual Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|        | ROCKWOOD HOLDINGS, INC. |
|--------|-------------------------|
|   |                    |   |
|   |                    |   |
|   | By:                     | /s/ Seifi Ghasemi |   |   |
|   |                    | Seifi Ghasemi |
|   |                    | Chairman of the Board and Chief Executive Officer  Date: March 16, 2007 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Annual Report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated

 
| Name                                         | ** ** | **Title**                                                     | ** ** | **Date**                   |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------|
| ** **                                   | ** ** | ** **                                                    | ** ** | ** **                 |
|  /s/  SEIFI GHASEMI           |       | Chairman  and Chief Executive Officer and Director (Principal |       | Date:  March 16, 2007 |
| By: Seifi Ghasemi                            |       | Executive  Officer)                                           |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  ROBERT J. ZATTA         |       | Senior  Vice President and Chief Financial Officer (Principal |       | Date:  March 16, 2007 |
| By: Robert J. Zatta                          |       | Financial  Officer)                                           |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  JAMES T. SULLIVAN  |       | Corporate  Controller (Principal Accounting Officer)          |       | Date:  March 16, 2007 |
| By: James T. Sullivan                        |       |                                                          |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  BRIAN F. CARROLL   |       | Director                                                      |       | Date:  March 16, 2007 |
| By: Brian F. Carroll                         |       |                                                          |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  SHELDON R. ERIKSON      |       | Director                                                      |       | Date:  March 16, 2007 |
| By: Sheldon R. Erikson                       |       |                                                          |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  TODD A. FISHER          |       | Director                                                      |       | Date:  March 16, 2007 |
| By: Todd A. Fisher                           |       |                                                          |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  PERRY GOLKIN            |       | Director                                                      |       | Date:  March 16, 2007 |
| By: Perry Golkin                             |       |                                                          |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  DOUGLAS L. MAINE        |       | Director                                                      |       | Date:  March 16, 2007 |
| By: Douglas L. Maine                         |       |                                                          |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  CYNTHIA A. NIEKAMP      |       | Director                                                      |       | Date:  March 16, 2007 |
| By: Cynthia A. Niekamp                       |       |                                                          |       |                       |
|                                         |       |                                                          |       |                       |
|  /s/  SUSAN SCHNABEL          |       | Director                                                      |       | Date:  March 16, 2007 |
| By: Susan Schnabel                           |       |                                                          |       |                       |

 

 

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