**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended June 30, 2008**

 

**Or**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**Commissionfile number   333-109686**

 

**RockwoodSpecialties Group, Inc.**

(Exact name ofRegistrant as specified in its charter)

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

 

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

(Address ofprincipal executive offices) (Zip Code)

 

**(609)514-0300**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. xYes oNo

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
| Non-accelerated filer x                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes  xNo

 

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

 

The Registrant’s commonstock, par value $0.01 per share, is not publicly traded. As of August 7,2008, there were outstanding 382,000 shares of common stock of the Registrant,all of which is held by our parent company Rockwood Specialties International, Inc.

 

 

 

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**TABLE OF CONTENTS**

 

**FORM 10-Q**

 
|    |   | PART I- FINANCIAL INFORMATION                                                                               |   |
|---------|--------|------------------------------------------------------------------------------------------------------------------|--------|
| Item 1  |   | Financial Statements  (Unaudited)                                                                                |   |
|    |   | Condensed Consolidated  Statements of Operations for the three and six months ended June 30,  2008 and 2007 |   |
|    |   | Condensed Consolidated  Balance Sheets as of June 30, 2008 and December 31, 2007                       |   |
|    |   | Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2008 and 2007            |   |
|    |   | Notes to Condensed  Consolidated Financial Statements                                                            |   |
| Item 2  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |   |
| Item 3  |   | Quantitative  and Qualitative Disclosures about Market Risk                                                      |   |
| Item 4  |   | Controls and  Procedures                                                                                         |   |
|    |   |                                                                                                             |   |
|    |   | PART II- OTHER  INFORMATION                                                                                 |   |
| Item 1  |   | Legal Proceedings                                                                                                |   |
| Item 1A |   | Risk Factors                                                                                                     |   |
| Item 2  |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     |   |
| Item 3  |   | Defaults  Upon Senior Securities                                                                                 |   |
| Item 4  |   | Submission  of Matters to a Vote of Security Holders                                                             |   |
| Item 5  |   | Other Information                                                                                                |   |
| Item 6  |   | Exhibits                                                                                                         |   |
|    |   |                                                                                                             |   |
|    |   | Signatures                                                                                                       |   |

 

2

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**PART I — FINANCIAL INFORMATION**

 

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

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                                             |       | $                                               | 945.5      |                                          | $          | 802.7 |   | $ | 1,799.5 |   | $ | 1,550.4 |   |
| Cost of products  sold                                                |       | 656.0                                           |       | 542.1                                         |       | 1,235.1 |   | 1,045.7 |   |
| Gross profit                                                          |       | 289.5                                           |       | 260.6                                         |       | 564.4 |   | 504.7 |   |
| Selling, general  and administrative expenses                         |       | 179.1                                           |       | 152.6                                         |       | 349.2 |   | 299.8 |   |
| Restructuring  charges, net                                           |       | 1.5                                             |       | 2.0                                           |       | 2.3 |   | 6.0 |   |
| Loss (gain) on  sale of assets and other                              |       | 0.8                                             |       | (0.4                                          | )          | 0.9 |   | (5.2 | ) |
| Operating income                                                      |       | 108.1                                           |       | 106.4                                         |       | 212.0 |   | 204.1 |   |
| Other income  (expenses):                                             |       |                                            |       |                                          |       |   |   |   |   |
| Interest expense  (a)                                                 |       | (9.7                                            | )          | (47.0                                         | )          | (83.4 | ) | (101.7 | ) |
| Interest income                                                       |       | 1.4                                             |       | 3.6                                           |       | 3.6 |   | 8.4 |   |
| Loss on early  extinguishment of debt                                 |       | —                                          |       | (19.1                                         | )          | — |   | (19.1 | ) |
| Refinancing  expenses                                                 |       | —                                          |       | —                                        |       | — |   | (0.9 | ) |
| Foreign exchange  (loss) gain, net                                    |       | (0.8                                            | )          | 3.4                                           |       | 14.3 |   | 3.5 |   |
| Other, net                                                            |       | 0.1                                             |       | 0.1                                           |       | 0.5 |   | — |   |
| Other income  (expenses), net                                         |       | (9.0                                            | )          | (59.0                                         | )          | (65.0 | ) | (109.8 | ) |
| Income from  continuing operations before taxes and minority interest |       | 99.1                                            |       | 47.4                                          |       | 147.0 |   | 94.3 |   |
| Income tax  provision                                                 |       | 21.1                                            |       | 20.9                                          |       | 40.7 |   | 41.7 |   |
| Income from  continuing operations before minority interest           |       | 78.0                                            |       | 26.5                                          |       | 106.3 |   | 52.6 |   |
| Minority  interest in continuing operations, net of tax               |       | —                                          |       | (2.3                                          | )          | (0.6 | ) | (3.4 | ) |
| Net income from  continuing operations                                |       | 78.0                                            |       | 24.2                                          |       | 105.7 |   | 49.2 |   |
| Income from  discontinued operations, net of tax                      |       | —                                          |       | 3.8                                           |       | — |   | 8.5 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                                          |       | —                                        |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax             |       | —                                          |       | —                                        |       | — |   | (0.1 | ) |
| Net income                                                            |       | $                                               | 78.0       |                                          | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| (a) Interest  expense includes:                                  |       |                                            |       |                                          |       |   |   |   |   |
| Interest expense  on debt                                             |       | $                                               | (41.3      | )                                             | $          | (45.5 | ) | $ | (81.9 | ) | $ | (95.0 | ) |
| Mark-to-market  gains (losses) on interest rate swaps                 |       | 34.0                                            |       | 0.8                                           |       | 3.2 |   | (2.0 | ) |
| Deferred  financing costs                                             |       | (2.4                                            | )          | (2.3                                          | )          | (4.7 | ) | (4.7 | ) |
| Total                                                                 |       | $                                               | (9.7       | )                                             | $          | (47.0 | ) | $ | (83.4 | ) | $ | (101.7 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                           |       |                    |       |                        |       |
| Current assets:                                                                                      |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                           |       | $                       | 337.1      |                        | $          | 346.9 |   |
| Accounts  receivable, net                                                                            |       | 594.9                   |       | 483.7                       |       |
| Inventories                                                                                          |       | 578.3                   |       | 535.4                       |       |
| Deferred income  taxes                                                                               |       | 19.4                    |       | 22.7                        |       |
| Prepaid expenses  and other current assets                                                           |       | 58.7                    |       | 70.7                        |       |
| Total current  assets                                                                                |       | 1,588.4                 |       | 1,459.4                     |       |
| Property, plant  and equipment, net                                                                  |       | 1,594.6                 |       | 1,512.8                     |       |
| Goodwill                                                                                             |       | 1,826.6                 |       | 1,767.0                     |       |
| Other intangible  assets, net                                                                        |       | 693.2                   |       | 676.8                       |       |
| Deferred debt  issuance costs, net of accumulated amortization of $38.1 and $31.2,  respectively     |       | 42.1                    |       | 41.1                        |       |
| Deferred income  taxes                                                                               |       | 15.9                    |       | 15.5                        |       |
| Other assets                                                                                         |       | 56.4                    |       | 39.2                        |       |
| Total assets                                                                                         |       | $                       | 5,817.2    |                        | $          | 5,511.8 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                                       |       |                    |       |                        |       |
| Current  liabilities:                                                                                |       |                    |       |                        |       |
| Accounts payable                                                                                     |       | $                       | 277.4      |                        | $          | 293.2 |   |
| Income taxes  payable                                                                                |       | 13.0                    |       | 12.7                        |       |
| Accrued  compensation                                                                                |       | 76.7                    |       | 83.1                        |       |
| Restructuring  liability                                                                             |       | 9.7                     |       | 14.0                        |       |
| Accrued expenses  and other current liabilities                                                      |       | 191.2                   |       | 172.8                       |       |
| Deferred income  taxes                                                                               |       | 8.6                     |       | 7.2                         |       |
| Long-term debt,  current portion                                                                     |       | 105.5                   |       | 107.4                       |       |
| Total current  liabilities                                                                           |       | 682.1                   |       | 690.4                       |       |
| Long-term debt                                                                                       |       | 2,533.9                 |       | 2,474.0                     |       |
| Pension and  related liabilities                                                                     |       | 353.6                   |       | 327.5                       |       |
| Deferred income  taxes                                                                               |       | 126.1                   |       | 112.6                       |       |
| Other  liabilities                                                                                   |       | 189.7                   |       | 166.7                       |       |
| Total  liabilities                                                                                   |       | 3,885.4                 |       | 3,771.2                     |       |
| Minority  interest                                                                                   |       | 173.0                   |       | 175.3                       |       |
|                                                                                                 |       |                    |       |                        |       |
| Stockholder’s  equity:                                                                          |       |                    |       |                        |       |
| Common stock  ($0.01 par value, 1,000,000 shares authorized, 382,000 shares issued and  outstanding) |       | —                  |       | —                      |       |
| Paid-in capital                                                                                      |       | 1,035.4                 |       | 1,035.2                     |       |
| Accumulated  other comprehensive income                                                              |       | 461.3                   |       | 373.7                       |       |
| Retained  earnings                                                                                   |       | 262.1                   |       | 156.4                       |       |
| Total  stockholder’s equity                                                                     |       | 1,758.8                 |       | 1,565.3                     |       |
| Total  liabilities and stockholder’s equity                                                     |       | $                       | 5,817.2    |                        | $          | 5,511.8 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                   | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                                                   | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                                   |       |                                          |       |   |   |
| Net income                                                                                                                                                                                                                   |       | $                                             | 105.7      |   | $ | 173.3 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                                                                                                                           |       |                                          |       |   |   |
| Income from  discontinued operations, net of tax                                                                                                                                                                             |       | —                                        |       | (8.5 | ) |
| Gain on sale of  discontinued operations, net of tax                                                                                                                                                                         |       | —                                        |       | (115.7 | ) |
| Minority  interest in discontinued operations                                                                                                                                                                                |       | —                                        |       | 0.1 |   |
| Depreciation and  amortization                                                                                                                                                                                               |       | 125.6                                         |       | 100.5 |   |
| Deferred  financing costs amortization                                                                                                                                                                                       |       | 4.7                                           |       | 4.7 |   |
| Loss on early  extinguishment of debt (including $4.6 of non-cash write-offs on deferred  financing costs)                                                                                                                   |       | —                                        |       | 19.1 |   |
| Foreign exchange  gain                                                                                                                                                                                                       |       | (14.3                                         | )          | (3.5 | ) |
| Fair value  adjustment of derivatives                                                                                                                                                                                        |       | (3.2                                          | )          | 2.0 |   |
| Bad debt  provision                                                                                                                                                                                                          |       | 1.0                                           |       | 0.9 |   |
| Stock-based  compensation                                                                                                                                                                                                    |       | 4.1                                           |       | 0.7 |   |
| Deferred income  taxes                                                                                                                                                                                                       |       | 16.7                                          |       | 20.0 |   |
| Loss (gain) on  sale of assets and other                                                                                                                                                                                     |       | 0.4                                           |       | (5.2 | ) |
| Minority  interest in continuing operations                                                                                                                                                                                  |       | 0.6                                           |       | 3.4 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                                                                                     |       |                                          |       |   |   |
| Accounts  receivable                                                                                                                                                                                                         |       | (87.4                                         | )          | (58.1 | ) |
| Inventories, including  inventory write-up reversal                                                                                                                                                                          |       | (17.2                                         | )          | 7.3 |   |
| Prepaid expenses  and other assets                                                                                                                                                                                           |       | 7.9                                           |       | (6.8 | ) |
| Accounts payable                                                                                                                                                                                                             |       | (11.7                                         | )          | (13.1 | ) |
| Income taxes  payable                                                                                                                                                                                                        |       | 0.2                                           |       | 0.6 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                      |       | (9.4                                          | )          | 14.6 |   |
| Net cash  provided by operating activities of continuing operations                                                                                                                                                          |       | 123.7                                         |       | 136.3 |   |
| Net cash  provided by operating activities of discontinued operations                                                                                                                                                        |       | —                                        |       | 12.0 |   |
| **Net  cash provided by operating activities**                                                                                                                                                                               |       | 123.7                                         |       | 148.3 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                                   |       |                                          |       |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                                                                                                                         |       | (11.4                                         | )          | (33.4 | ) |
| Post closing  purchase price consideration                                                                                                                                                                                   |       | 29.1                                          |       | — |   |
| Capital  expenditures, excluding capital leases                                                                                                                                                                              |       | (104.8                                        | )          | (90.7 | ) |
| Proceeds from  formation of Viance joint venture, net                                                                                                                                                                        |       | —                                        |       | 76.6 |   |
| Proceeds on sale  of assets                                                                                                                                                                                                  |       | 2.9                                           |       | 10.0 |   |
| Net cash used in  investing activities of continuing operations                                                                                                                                                              |       | (84.2                                         | )          | (37.5 | ) |
| Net cash (used  in) provided by investing activities of discontinued operations, including  sale proceeds of $421.4 for the six months ended June 30, 2007                                                              |       | (4.3                                          | )          | 418.3 |   |
| **Net  cash (used in) provided by investing activities**                                                                                                                                                                     |       | (88.5                                         | )          | 380.8 |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                                   |       |                                          |       |   |   |
| Repayment of  2011 Notes                                                                                                                                                                                                     |       | —                                        |       | (273.4 | ) |
| Repayment of  senior secured credit facilities                                                                                                                                                                               |       | (33.5                                         | )          | (27.9 | ) |
| Repayment of  senior secured credit facilities revolver                                                                                                                                                                      |       | —                                        |       | (37.0 | ) |
| Payments on  other long-term debt                                                                                                                                                                                            |       | (5.6                                          | )          | (4.1 | ) |
| Equity  contribution                                                                                                                                                                                                         |       | 0.2                                           |       | — |   |
| Financing costs                                                                                                                                                                                                              |       | (3.0                                          | )          | — |   |
| Payments related  to early extinquishment of debt                                                                                                                                                                            |       | —                                        |       | (14.5 | ) |
| Distribution to  minority shareholder                                                                                                                                                                                        |       | (2.9                                          | )          | — |   |
| Net cash used in  financing activities of continuing operations                                                                                                                                                              |       | (44.8                                         | )          | (356.9 | ) |
| Net cash used in  financing activities of discontinued operations                                                                                                                                                            |       | —                                        |       | — |   |
| **Net  cash used in financing activities**                                                                                                                                                                                   |       | (44.8                                         | )          | (356.9 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                                                                                                                                                                |       | (0.2                                          | )          | (5.0 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                                                                                                                                        |       | (9.8                                          | )          | 167.2 |   |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                                                                                                                                            |       | —                                        |       | (1.6 | ) |
| (Decrease) increase  in cash and cash equivalents from continuing operations                                                                                                                                                 |       | (9.8                                          | )          | 165.6 |   |
| Cash and cash  equivalents of continuing operations, beginning of period                                                                                                                                                     |       | 346.9                                         |       | 25.9 |   |
| Cash and cash  equivalents of continuing operations, end of period                                                                                                                                                           |       | $                                             | 337.1      |   | $ | 191.5 |   |
| (a) -  Excludes $4.3 of sale-related cash outflows, net for the six months ended  June 30, 2008. Excludes sale proceeds of $421.4 and intercompany  transfers of $7.3 for the six months ended June 30, 2007. |       |                                          |       |   |   |
| Supplemental  disclosures of cash flow information:                                                                                                                                                                          |       |                                          |       |   |   |
| Interest paid                                                                                                                                                                                                                |       | $                                             | 82.8       |   | $ | 98.4 |   |
| Income taxes  paid, net of refunds                                                                                                                                                                                           |       | $                                             | 23.7       |   | $ | 20.3 |   |
| Non-cash  investing activities:                                                                                                                                                                                              |       |                                          |       |   |   |
| Acquisition of  capital equipment                                                                                                                                                                                            |       | $                                             | 8.4        |   | $ | 9.1 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**Notes To Condensed ConsolidatedFinancial Statements (Unaudited)**

 

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

 

***Business Description, Background***—Rockwood Specialties Group, Inc. and Subsidiaries is a global developer,manufacturer and marketer of high value-added specialty chemicals and advancedmaterials used for industrial and commercial purposes. Unless otherwise indicated,any references to “we,” “our,” “us,” the “Company” or “Rockwood” refer toRockwood Specialties Group, Inc. and its consolidated subsidiaries.

 

Rockwood was formed inconnection with an acquisition of certain assets, stock and businesses fromLaporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) byaffiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). Thebusinesses acquired focused on specialty compounds, iron-oxide pigments,timber-treatment chemicals, clay-based additives and pool and spa chemicals.The Company is an indirect wholly-owned subsidiary of Rockwood Holdings, Inc.(“Holdings”).

 

On July 31, 2004,the Company completed the acquisition of certain businesses of Dynamit Nobelfrom mg technologies ag, now known as GEA Group Aktiengesellschaft (“GEA Group”).The businesses acquired are focused on highly specialized markets and consistof surface treatment and lithium chemicals; advanced ceramics and titaniumdioxide pigments.

 

On January 9, 2007,the Company completed the sale of its Groupe Novasep segment and on December 31,2007, the Company completed the sale of its Electronics business, excluding itsEuropean wafer reclaim business.

 

On May 21, 2008, theCompany entered into a definitive agreement with Kemira Oyj (“Kemira”) to forma joint venture that will focus on specialty titanium dioxide pigments. Thejoint venture will combine the Company’s titanium dioxide pigments andfunctional additives businesses, which are part of the Titanium DioxidePigments segment, including its production facility in Duisburg, Germany, andKemira’s titanium dioxide business, including Kemira’s titanium dioxide plantin Pori, Finland. The Company will retain ownership of its water treatmentbusiness which represents the remaining portion of the Titanium DioxidePigments segment. The Company expects to own approximately 61% of the jointventure with Kemira owning the remaining portion. It is expected that the jointventure will acquire the shares of the Rockwood and Kemira entities in part withborrowings under a term loan of up to €300 million. In addition, the jointventure expects to enter into a €30 million revolving credit facility tofinance its operations.  The contributednet assets of Kemira include notes payable of approximately €25.0 million. TheCompany expects to receive a cash payment funded from the term loan borrowingsbased on its ownership percentage. Prior to the closing of this transaction,the Company and Kemira may develop an alternative capital structure, contributecash to the joint venture, reduce the amount of indebtedness incurred by thejoint venture and/or revise the ownership structure of the joint venture. Inaddition, the Company expects, based on information currently available, thatit will consolidate the joint venture and report Kemira’s interest as minorityinterest in the consolidated financial statements. The closing of thistransaction is expected to occur in the third quarter of 2008, subject toregulatory approval.

 

On June 17, 2008,funds affiliated with KKR, DLJ Merchant Banking Partners III, L.P. (“DLJMB”)and certain management stockholders sold an aggregate of 10 million shares of RockwoodHoldings, Inc. (“Holdings”) common stock.

 

***Basis of Presentation***—The accompanyingcondensed financial statements of Rockwood are presented on a consolidatedbasis. All significant intercompany accounts and transactions have beeneliminated in consolidation. Certain prior period amounts related to reportingthe sale of the Groupe Novasep segment and the Electronics business, excludingthe wafer reclaim business, as discontinued operations, have been reclassifiedto conform to current-year classification. The Groupe Novasep segment and theElectronics business, including the wafer reclaim business, represented two ofour reportable segments.

 

The interim financialstatements included herein are unaudited. The results of operations for theinterim periods are not necessarily indicative of the results of operations forthe full year. The condensed consolidated financial statements arepresented based upon accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”), except that certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith U.S. GAAP, have been condensed or omitted. The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto contained in theCompany’s 2007 Form 10-K. In the opinion of management, thisinformation contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

 

The Company’s minorityinterest in continuing operations represents the total of the minority party’sinterest in certain investments (principally Viance, LLC) that are consolidatedbut less than 100% owned. On January 2, 2007, Chemicals Specialties, Inc.(“CSI”), a wholly-owned subsidiary of the Company within the Timber TreatmentChemicals business of the Performance Additives segment, and Rohm and HaasCompany completed the formation of Viance, LLC, a joint venture company thatprovides an extensive range of advanced wood treatment technologies and servicesto the global wood treatment industry. In accordance with theconsolidation principles of FIN 46 (R),*Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51*,the Company has concluded that Rockwood is the primary beneficiary of the jointventure and as such has consolidated the joint venture.

 

Unless otherwise noted,all amounts which are denominated in currencies other than the U.S. dollar areconverted at the June 30,2008  exchange rate of €1.00 = $1.5755.

 

6

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***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-addedspecialty chemicals and advanced materials. The Company currently operates invarious business lines within its five reportable segments consisting of: (1) SpecialtyChemicals, which includes lithium compounds and chemicals, metal surfacetreatment chemicals, and synthetic metal sulfides, (2) PerformanceAdditives, which includes color pigments and services, timber treatmentchemicals, clay-based additives, and water treatment chemicals, (3) TitaniumDioxide Pigments, which consists of titanium dioxide pigments, and zinc- andbarium-based compounds, (4) Advanced Ceramics, which includesceramic-on-ceramic ball head and liner components used in hip-joint prosthesessystems, ceramic cutting tools and a range of other ceramic components and (5) SpecialtyCompounds, which consists of plastic compounds. As discussed above, theCompany sold its Electronics business, excluding its European wafer reclaimbusiness, in December 2007. As a result, the European wafer reclaimbusiness is included within “Corporate and other” for all periods presented(See Note 3, “Segment Information,” for further details).

 

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

 

***Use of Estimates***—The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities,the disclosure of contingent assets and liabilities at the date of thefinancial statements, and revenue and expenses during the periods reported.These estimates include, among other things, assessing the collectibility ofaccounts receivable, the use and recoverability of inventory, the valuation ofdeferred tax assets, the measurement of the accrual for uncertain tax benefits,impairment of goodwill as well as property, plant and equipment and otherintangible assets, the accrual of environmental and legal reserves and theuseful lives of tangible and intangible assets, among others. Actual resultscould differ from those estimates. Such estimates also include the fairvalue of assets acquired and liabilities assumed allocated to the purchaseprice of business combinations consummated.

 

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

 

***Related Party Transactions***—Rockwoodhas engaged in transactions with certain related parties including KKR andDLJMB and affiliates of each. Information concerning certain transactionsis included in the Company’s 2007 Form 10-K. Credit Suisse Securities(USA) LLC, an affiliate of DLJMB, served as an underwriter in the secondaryoffering of the Holdings’ stock by certain stockholders in June 2008.  The Company did not receive any proceeds inthat offering or pay any commissions. Except for the aforementioned secondaryoffering, there have not been additional related party transactions for theperiod ended June 30, 2008.

 

As of June 30, 2008,the Company had $11.0 million of payables due to its parent company, primarilyrelated to stock-based compensation costs.

 

***Revenue Recognition***—The Companyrecognizes revenue when the earnings process is complete. Product sales arerecognized when products are shipped to the customer in accordance with theterms of the contract of sale, title and risk of loss have been transferred,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 net sales in 2007, is realized when the service is performed.Liabilities for product warranties are less than 1% of consolidated net salesas of June 30, 2008 and December 31, 2007.

 

***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), includingintercompany financing arrangements for which settlement is planned oranticipated, are included in determining net income for the period in whichexchange rates change. Gains or losses on certain intercompany loans that areof a long-term investment nature for which settlement is not planned oranticipated in the foreseeable future and gains or losses on euro-denominateddebt that is designated as a net investment hedge of the Company’seuro-denominated investments are reported and accumulated in the same manner astranslation adjustments. These loans are all related to intercompany debtarrangements. As of June 30, 2008, intercompany debt arrangements deemedto be of a long-term investment nature for which settlement is not planned oranticipated in the foreseeable future is predominantly related to €519.4million (or $818.3 million at June 30, 2008) of intercompany loans.

 

***Derivatives***—The Company accounts forderivatives based on Statement of Financial Accounting Standards (“SFAS”) 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended and interpreted. SFAS 133 requires that allderivatives be 

 

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recognized as eitherassets or liabilities at fair value. Changes in the fair value of derivativesnot designated as hedging instruments are recognized currently in earningswhile changes in the fair value of derivatives that are designated as hedginginstruments are recognized as a component of comprehensive income. The Companyuses derivative instruments to manage its exposure to market risks associatedwith fluctuations in interest rates and foreign currency exchange rates. See “ComprehensiveIncome” section of Note 1 for the impact of the Company’s net investmenthedges. The Company does not enter into derivative contracts for tradingpurposes nor does it use leveraged or complex instruments.

 

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87,*Employers’ Accounting for Pensions* andSFAS 158,*Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132 (R)*. Other postretirement benefit costsand liabilities have been determined in accordance with SFAS 106,*Employers’ Accounting for Postretirement BenefitsOther Than Pensions* and SFAS 158. Postemployment benefit costs andliabilities have been determined in accordance with SFAS 112,*Employers’ Accounting for Postemployment Benefits.*

* *

***Income Taxes***—Income taxes aredetermined in accordance with SFAS 109,*Accounting for Income Taxes* and Financial Accounting Standards Board(“FASB”) Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109*. The Company’s U.S. operations areincluded in a consolidated federal income tax return. The amount of current anddeferred tax expense is computed on a separate entity basis for each member ofthe group based on applying the principles of SFAS 109. Deferred taxassets and liabilities are recognized for future tax consequences attributableto differences between the financial statement carrying amounts and thecorresponding tax carrying amounts of assets and liabilities. Deferred taxassets are also recognized for tax loss and tax credit carryforwards. Avaluation allowance is recorded to reduce deferred tax assets when it is morelikely than not that a tax benefit will not be realized based on availableevidence weighted toward evidence that is objectively verifiable. Deferredtaxes are not provided on the undistributed earnings of subsidiaries as suchamounts are considered to be permanently invested or could be distributed tothe parent company in a tax free manner.

 

FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with FASB Statement No. 109,*Accounting for Income Taxes* andprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that is more-likely-than-notto not be sustained upon audit by the relevant authority. An uncertain incometax position will not be recognized if it has less than a 50% likelihood ofbeing sustained. Additionally, FIN 48 provides guidance on derecognizing,classification, interest and penalties, accounting in interim periods,disclosure and transition.

 

***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,pension-related adjustments that are recorded directly into a separate sectionof stockholder’s equity in the balance sheets and net investment hedges. Foreigncurrency translation amounts are not adjusted for income taxes since theyrelate to indefinite length investments in non-U.S. subsidiaries and certainintercompany debt.

 

Comprehensive income issummarized as follows:

 
| ** **                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in millions)**            | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                               |       | $                                               | 78.0       |                                          | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
| Pension related  adjustments, net of tax |       | (0.1                                            | )          | (0.4                                          | )          | 0.4 |   | 0.1 |   |
| Foreign currency  translation            |       | 2.7                                             |       | 24.6                                          |       | 119.5 |   | 61.4 |   |
| Intercompany  foreign currency loans     |       | (1.3                                            | )          | 9.5                                           |       | 61.5 |   | 11.6 |   |
| Net investment  hedge, net of tax        |       | 3.0                                             |       | (14.0                                         | )          | (93.8 | ) | (24.4 | ) |
| Total  comprehensive income              |       | $                                               | 82.3       |                                          | $          | 47.7 |   | $ | 193.3 |   | $ | 222.0 |   |

 

In November 2004,the Company completed the sale of €375.0 million aggregate principalamount of 7.625% senior subordinated notes and $200.0 million aggregateprincipal amount of 7.500% senior subordinated notes, both due in 2014 (“2014Notes”). In connection with the 2014 Notes, the Company entered into across-currency swap with a five-year term and a notional amount of€155.6 million that effectively converted the U.S. dollar fixed-rate debtin respect of the dollar notes sold into euro fixed-rate debt. The Company hasdesignated this contract as a hedge of the foreign currency exposure of its netinvestment in its euro-denominated operations. There was no ineffective portionof the net investment hedge as of June 30, 2008. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at June 30, 2008 to be reclassified into earnings during thesubsequent twelve months.

 

In addition, the Companydesignated the remaining portion of the euro-denominated debt that is recordedon the U.S. books as a net investment hedge of our euro-denominated investmentsas of October 1, 2005 (euro-denominated debt of €667.7 million or $1,052.0million at June 30, 2008). As a result, effective October 1,2005, any foreign currency gains and losses resulting from the 

 

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euro-denominated debtdiscussed above are accounted for as a component of accumulated othercomprehensive income. There was no ineffective portion of the net investmenthedge as of June 30, 2008. The Company does not expect any of the loss onthe net investment hedge residing in comprehensive income at June 30, 2008to be reclassified into earnings during the subsequent twelve months.

 

***Accounting for Environmental Liabilities***—Inthe ordinary course of business, Rockwood is subject to extensive and changingfederal, state, local and foreign environmental laws and regulations, and hasmade provisions for the estimated financial impact of environmental cleanuprelated costs. Rockwood’s policy has been to accrue costs of a non-capitalnature related to environmental clean-up when those costs are believed to beprobable and can be reasonably estimated. If the aggregate amount of theobligation and the amount and timing of the cash payments for a site are fixedor reliably determinable, the liability is discounted. Expenditures that extendthe life of the related property or mitigate or prevent future environmentalcontamination are capitalized and expenditures related to existing conditionsresulting from past or present operations and from which no current or futurebenefit is discernible are immediately expensed. The quantification ofenvironmental exposures requires an assessment of many factors, includingchanging laws and regulations, advancements in environmental technologies, thequality of information available related to specific sites, the assessmentstage of each site investigation and the length of time involved in remediationor settlement. In some matters, Rockwood may share costs with other parties.Rockwood does not include anticipated recoveries from insurance carriers orother third parties in its accruals for environmental liabilities.

 

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

 

***Stock-Based Compensation***—Holdings hasin place the 2005 Amended and Restated Stock Purchase and Option Plan ofRockwood Holdings, Inc. and Subsidiaries (the “Plan”). Under the Plan,Holdings may grant stock options, restricted stock and other stock-based awardsto its employees and directors and allow employees and directors to purchaseshares of its common stock. There are 10,000,000 authorized shares availablefor grant under the Plan. Effective January 1, 2006, the Company adoptedSFAS No. 123R,*Share-Based Payment*,and related interpretations and began expensing the grant-date fair value ofstock options.

 

The compensation cost forstock options, restricted stock units and Holdings’ Board of Director stockgrants recorded under the Plan resulted in a decrease to income from continuingoperations before taxes and minority interest of $2.2 million and $0.7 millionfor the three months ended June 30, 2008 and 2007, respectively, and $4.1million and $0.8 million for the six months ended June 30, 2008 and 2007,respectively. See Note 10, “Stock-Based Compensation,” for furtherdetails.

 

Holdings grantedadditional stock options and performance restricted stock units in 2007 tocertain employees of Rockwood Corporate Headquarters and its business units.The performance restricted stock units contain a provision in which the unitsshall immediately vest and become converted into the right to receive a cashpayment upon a change in control as defined in the equity agreement. Asthe provisions for redemption are outside the control of the Company, the fairvalue of these units as of June 30, 2008 have been recorded as mezzanineequity (outside of permanent equity) in the Condensed Consolidated BalanceSheets of Holdings.

 

***Recent Accounting Pronouncements***—Thefollowing represents the impact of recently issued accounting pronouncements:

 

In September 2006,SFAS No. 157,*Fair Value Measurements*,was issued. This statement defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles (“GAAP”), andexpands disclosures about fair value measurements. This statement does notrequire any new fair value measurements. Certain disclosure provisions of thisstandard were effective for the Company as of January 1, 2008 and aredisclosed in Note 13, “Fair Value Measurements.” The adoption of SFAS No. 157did not have a material impact on the Company’s financial statements.

 

In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position(FSP) Financial Accounting Standard (FAS) 157-1,*Application of FASB Statement No. 157 to FASB Statement No. 13and Its Related Interpretive Accounting Pronouncements That Address LeasingTransactions,* and FSP FAS 157-2,*Effective Date of FASB Statement No. 157*. FSP FAS 157-1 removes leasing from the scope of SFAS No. 157. FSPFAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 forall nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). The Company will apply the provisionsof FSP 157-2 on January 1, 2009 and does not expect this FSP to have amaterial impact on its financial statements.

 

In February 2007,SFAS No. 159,*The Fair Value Option forFinancial Assets and Financial Liabilities*—*Including an Amendment of FASB Statement No. 115,*was issued. This statement permits an entity to choose to measure manyfinancial instruments and certain other items at fair value and permits allentities to choose to measure eligible items at fair value at specifiedelection dates. This statement is effective for the Company as of January 1,2008. The Company adopted this standard on January 1, 2008. However,the Company has elected not to measure any instruments at fair value under SFASNo. 159.

 

In December 2007,SFAS No. 141 (revised 2007),*BusinessCombinations* (“FAS 141R”) was issued, which replaces FASB Statement No. 141,*Business Combinations.* FAS 141Restablishes principles and requirements for how the acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and the 

 

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goodwill acquired. Thisstatement also establishes disclosure requirements to enable users of financialstatements to evaluate the nature and financial effects of the businesscombination. This statement is effective for the Company as of January 1,2009.

 

In December 2007,SFAS No. 160,*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51,*was issued. Per this statement, the accounting and reporting for minorityinterests will be recharacterized as noncontrolling interests and classified asa component of equity (but separate from parent’s equity). This statement alsoestablishes reporting requirements that provide sufficient disclosures thatclearly identify and distinguish between the interests of the parent and theinterests of the noncontrolling owners. This statement also applies to entitiesthat prepare consolidated financial statements, except not-for-profit organizations,but will affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. Thisstatement is effective for the Company as of January 1, 2009. The Companyis currently evaluating the impact this statement will have on its financialstatements primarily relating to its Viance, LLC joint venture and its titaniumdioxide pigments joint venture, as discussed above, which is expected to closein the third quarter of 2008.

 

In December 2007,the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, which providedinterpretive guidance regarding the use of a “simplified” method, as discussedin SAB No. 107, in developing an estimate of expected term of “plainvanilla” share options in accordance with SFAS No. 123R,*Share-Based Payment.* SAB 110 is effectivefor share options granted as of January 1, 2008. SAB 110 extended the useof the simplified method beyond December 31, 2007, under certaincircumstances, which included not having sufficient historical exercise data toprovide a reasonable basis upon which to estimate expected term due to thelimited period of time a company’s equity shares have been publicly traded. AsRockwood became a public company in August 2005, there is not sufficienthistorical exercise data available to estimate expected term. As a result, theCompany will continue to use the “simplified” method to estimate expected termfor share option grants until more relevant detailed information becomes widelyavailable.

 

In September 2006,SFAS No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R),* was issued. The Companyadopted the recognition provisions of SFAS No. 158 and initially appliedthem to the funded status of its defined benefit postretirement plans as of December 31,2006. This statement also requires an employer to measure the funded status ofa plan as of the date of its year-end statement of financial position, withlimited exceptions. The requirement to measure plan assets and benefitobligations as of the date of the employer’s fiscal year-end statement offinancial position is effective for the Company for the 2008 fiscal year end.The Company currently measures its funded status as of the date of the Company’sfiscal year-end consolidated balance sheet for most of its plans. The Companydoes not expect a material impact on its financial statements as a result ofthis change in 2008.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133* was issued. This statement changes thedisclosure requirements for derivative instruments and hedging activities,including enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133,*Accounting for Derivative Instruments and Hedging Activities*and its related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS No. 161 is effective for theCompany as of January 1, 2009. The Company does not expect this statementto have a material impact on its financial statements.

 

In April 2008, theFASB issued FSP No. 142-3, *Determination of theUseful Life of Intangible Assets*. This FSP amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB StatementNo. 142, *Goodwill and Other Intangible Assets*.The intent of this FSP is to improve the consistency between the useful life ofa recognized intangible asset under Statement 142 and the period of expectedcash flows used to measure the fair value of the asset under FASB Statement No. 141(revised 2007), *Business Combinations*, and otherU.S. GAAP. This FSP is effective for the Company as of January 1, 2009.The Company is currently evaluating the impact this FSP will have on itsfinancial statements.

 

In May 2008, SFAS No. 162,*The Hierarchy of Generally Accepted AccountingPrinciples,* was issued.This statement identifies the sources of accounting principles and theframework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles (GAAP) in the United States (the GAAPhierarchy). This Statement shall be effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board amendments to AU Section 411,*The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*. The Company does notexpect this statement to have a material impact on its financial statements.

 

**2.             DISCONTINUED OPERATIONS:**

** **

On January 9, 2007,the Company completed the sale of its Groupe Novasep segment. The transactionwas valued at approximately €425.0 million, which included the repayment ofthird party and intercompany indebtedness. In connection with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*,the Company’s financial statements have been reclassified to reflect the GroupeNovasep segment as a discontinued operation for all periods presented.

 

On December 31,2007, the Company completed the sale of its Electronics business, excluding itsEuropean wafer reclaim business, for $315.6 million. In connection with SFAS No. 144,the Company’s financial statements have been reclassified to reflect the 

 

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Electronics business soldas a discontinued operation for all periods presented.

 

Operating results of thediscontinued operations of the Electronics business sold for the three monthsended June 30, 2007 were as follows:

 
| **($ in millions)**                 | ** ** | **Electronics  Business** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|
| Net sales                                     |       | $                         | 48.0       |   |
| Cost of products  sold                        |       | 35.9                      |       |
| Gross profit                                  |       | 12.1                      |       |
| Selling, general  and administrative expenses |       | 7.6                       |       |
| Restructuring  charges                        |       | (0.5                      | )          |
| Operating income                              |       | 5.0                       |       |
| Other income  (expenses):                     |       |                      |       |
| Interest income                               |       | 0.4                       |       |
| Loss on early  extinguishment of debt         |       | (0.3                      | )          |
| Foreign exchange  loss, net                   |       | (0.1                      | )          |
| Other, net                                    |       | (0.1                      | )          |
| Other income  (expenses), net                 |       | (0.1                      | )          |
| Income before  taxes                          |       | 4.9                       |       |
| Income tax provision                          |       | 1.1                       |       |
| Net income                                    |       | $                         | 3.8        |   |

 

Operating results of thediscontinued operations of Groupe Novasep and the Electronics business sold forthe six months ended June 30, 2007 were as follows:

 
| ** **                                    | ** ** | **Groupe**  | ** ** | **Electronics** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------|------------|-----------------|------------|------------|------------|
| **($ in millions)**                 | ** ** | **Novasep** | ** ** | **Business**    | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $           | 8.9        |            | $          | 96.4       |       | $ | 105.3 |   |
| Cost of products  sold                        |       | 7.0         |       | 71.4            |       | 78.4       |       |
| Gross profit                                  |       | 1.9         |       | 25.0            |       | 26.9       |       |
| Selling, general  and administrative expenses |       | 1.0         |       | 15.2            |       | 16.2       |       |
| Restructuring  charges                        |       | —      |       | —          |       | —     |       |
| Gain on sale of  business/assets              |       | (117.7      | )          | —          |       | (117.7     | )          |
| Operating income                              |       | 118.6       |       | 9.8             |       | 128.4      |       |
| Other income  (expenses):                     |       |        |       |            |       |       |       |
| Interest expense                              |       | (0.3        | )          | —          |       | (0.3       | )          |
| Interest income                               |       | —      |       | 0.7             |       | 0.7        |       |
| Loss on early  extinguishment of debt         |       | —      |       | (0.3            | )          | (0.3       | )          |
| Foreign exchange  gain, net                   |       | —      |       | 0.2             |       | 0.2        |       |
| Other, net                                    |       | —      |       | (0.1            | )          | (0.1       | )          |
| Other income  (expenses), net                 |       | (0.3        | )          | 0.5             |       | 0.2        |       |
| Income before  taxes and minority interest    |       | 118.3       |       | 10.3            |       | 128.6      |       |
| Income tax  provision                         |       | 2.1         |       | 2.3             |       | 4.4        |       |
| Net income  before minority interest          |       | 116.2       |       | 8.0             |       | 124.2      |       |
| Minority  interest, net of tax                |       | (0.1        | )          | —          |       | (0.1       | )          |
| Net income                                    |       | $           | 116.1      |            | $          | 8.0        |       | $ | 124.1 |   |

 

As of June 30, 2007,the Company had received net cash proceeds of $421.4 million from the sale ofGroupe Novasep. These proceeds were reported as net cash provided by investingactivities of discontinued operations for the six months ended June 30,2007 in the Company’s Condensed Consolidated Statements of Cash Flows. Net cashproceeds for the year ended December 31, 2007 from the sale of Groupe Novasepwere $420.7 million. The net gain on the Groupe Novasep sale recorded inthe first quarter of 2007 was $115.7 million (net of $2.0 million ofGerman taxes).

 

**3.             SEGMENT INFORMATION:**

** **

Rockwood operates in fivereportable segments according to the nature and economic characteristics of itsproducts and services as well as the manner in which the information is usedinternally by the Company’s key decision maker, who is the Company’s ChiefExecutive Officer. The five segments are: (1) Specialty Chemicals, whichconsists of the surface treatment and fine chemicals business lines; (2) PerformanceAdditives, which consists of color pigments and services, timber treatmentchemicals, clay-based 

 

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additives and watertreatment chemicals business lines; (3) Titanium Dioxide Pigments; (4) AdvancedCeramics; and (5) Specialty Compounds.

 

Items that cannot bereadily attributed to individual segments have been classified as “Corporateand other.” Corporate and other operating loss primarily represents payroll,professional fees and other operating expenses of centralized functions such astreasury, tax, legal, internal audit and consolidation accounting as well asthe cost of operating our central offices (including some costs maintainedbased on legal or tax considerations). The primary components of Corporate andother loss, in addition to operating loss, are interest expense on externaldebt (including the amortization of deferred financing costs), foreign exchangelosses or gains, and mark-to-market gains or losses on derivatives. Majorcomponents within the reconciliation of income before taxes (described morefully below) include systems/organization establishment expenses, interestexpense on external debt, foreign exchange losses or gains, and refinancingexpenses related to external debt. Corporate and other identifiable assetsprimarily represent deferred financing costs that have been capitalized inconnection with corporate external debt financing, deferred income tax assetsand cash balances maintained in accordance with centralized cash managementtechniques. The Corporate and other classification also includes the results ofoperations, assets (primarily real estate) and liabilities (including pensionand environmental) of legacy businesses formerly belonging to Dynamit Nobel andthe wafer reclaim business. The European wafer reclaim business line is aprovider of semiconductor wafer refurbishment services with market positions inEurope. This business works with semiconductor manufacturers to refurbish usedtest wafers and return them to the manufacturer for reuse in test and processmonitor applications. In February 2007, the Company completed thesale of its U.S. wafer reclaim business. These operations are substantiallyunrelated by nature to businesses currently within the Company’s operatingsegments.

 

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

 
| **($in millions)**                    | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-------------------------------|------------|------------------|------------|
| **Three  months ended June 30, 2008** |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Net sales                                  |       | $                        | 335.5      |                       | $          | 254.7                           |       | $                      | 134.2      |                     | $          | 145.3                         |       | $                | 73.2       |   | $ | 2.6 |   | $ | 945.5 |   |
| Total Adjusted  EBITDA                     |       | 82.1                     |       | 39.1                       |       | 15.4                            |       | 44.9                   |       | 10.1                     |       | (13.3                         | )          | 178.3            |       |
| **Three  months ended June 30, 2007** |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Net sales                                  |       | $                        | 270.9      |                       | $          | 216.2                           |       | $                      | 123.3      |                     | $          | 118.6                         |       | $                | 70.8       |   | $ | 2.9 |   | $ | 802.7 |   |
| Total Adjusted  EBITDA (a)                 |       | 66.3                     |       | 45.5                       |       | 21.0                            |       | 32.7                   |       | 9.5                      |       | (14.5                         | )          | 160.5            |       |
| **Six  months ended June 30, 2008**   |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Net sales                                  |       | $                        | 647.2      |                       | $          | 466.3                           |       | $                      | 260.0      |                     | $          | 278.5                         |       | $                | 142.2      |   | $ | 5.3 |   | $ | 1,799.5 |   |
| Total Adjusted  EBITDA                     |       | 162.6                    |       | 70.3                       |       | 39.3                            |       | 83.4                   |       | 18.8                     |       | (27.7                         | )          | 346.7            |       |
| **Six  months ended June 30, 2007**   |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Net sales                                  |       | $                        | 538.8      |                       | $          | 401.0                           |       | $                      | 239.4      |                     | $          | 224.1                         |       | $                | 140.4      |   | $ | 6.7 |   | $ | 1,550.4 |   |
| Total Adjusted  EBITDA (a)                 |       | 134.6                    |       | 78.1                       |       | 43.4                            |       | 61.5                   |       | 17.6                     |       | (27.7                         | )          | 307.5            |       |

 
| ** **                  | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|----------------------------------------|------------|---------------------------|------------|------------------|------------|
| Identifiable  assets as of: |       |                     |       |                       |       |                            |       |                   |       |                     |       |                                   |       |                      |       |             |       |
| June 30,  2008         |       | $                        | 2,106.5    |                       | $          | 1,404.4                         |       | $                      | 853.2      |                     | $          | 920.3                                  |       | $                         | 290.5      |             | $          | 459.0 |   | $ | (216.7 | ) | $ | 5,817.2 |   |
| December 31,  2007     |       | 1,900.1                  |       | 1,384.4                    |       | 801.4                           |       | 843.6                  |       | 281.8                    |       | 459.6                                  |       | (159.1                    | )          | 5,511.8          |       |
|                             |            |                          |            |                            |            |                                 |            |                        |            |                          |            |                                        |            |                           |            |                  |            |  |  |  |  |  |  |  |  |

 

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(a)                This amount doesnot include $8.5 million and $17.7 million of Adjusted EBITDA for the three andsix months ended June 30, 2007, respectively, from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe six months ended June 30, 2007 from the former Groupe Novasep segmentsold on January 9, 2007.

 

(b)               This amountincludes $51.6 million and $47.4 million of assets from the legacy businessesformerly belonging to Dynamit Nobel at June 30, 2008 and December 31,2007, respectively.

 

(c)                Amounts containedin the “Eliminations” column represent the individual subsidiaries’ retainedinterest in their cumulative net cash balance (deposits less withdrawals)included in the corporate centralized cash system and within the identifiableassets of the respective segment. These amounts are eliminated as the corporatecentralized cash system is included in the Corporate segment’s identifiableassets.

 

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 4, “Segment Information,” in the Company’s 2007 Form 10-K.

 

On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by senior management to be non-recurring gains and chargesand certain items deemed by senior management to have little or no bearing onthe day-to-day operating performance of its business segments and reportingunits. The adjustments made to operating income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidated basispursuant to the senior secured credit agreement, which reflects management’sinterpretations thereof. The indenture governing the 2014 Notes excludescertain adjustments permitted under the senior credit agreement. Seniormanagement uses Adjusted EBITDA on a segment basis as the primary measure toevaluate the ongoing performance of the Company’s business segments andreporting units.

 

12

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The Company uses AdjustedEBITDA on a segment basis to assess its operating performance. Because theCompany views Adjusted EBITDA on a segment basis as an operating performancemeasure, the Company uses income (loss) from continuing operations before taxesand minority interest as the most comparable GAAP measure.

 

The following tablepresents a reconciliation of income (loss) from continuing operations beforetaxes and minority interest to Adjusted EBITDA on a segment GAAP basis:

 
| **($ in millions)**                    | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-------------------------------|------------|------------------|------------|
| **Three  months ended June 30, 2008**       |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Income (loss)  from continuing operations before |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| taxes and  minority interest                     |       | $                        | 51.5       |                       | $          | 11.6                            |       | $                      | (7.8       | )                        | $          | 24.1                          |       | $                | 4.7        |   | $ | 15.0 |   | $ | 99.1 |   |
| Interest expense  (a)                            |       | 13.6                     |       | 8.1                        |       | 9.0                             |       | 9.2                    |       | 2.3                      |       | (32.5                         | )          | 9.7              |       |
| Interest income                                  |       | (1.2                     | )          | 0.1                        |       | —                          |       | (0.1                   | )          | (0.1                     | )          | (0.1                          | )          | (1.4             | )          |
| Depreciation and  amortization                   |       | 17.1                     |       | 16.7                       |       | 13.4                            |       | 11.9                   |       | 2.8                      |       | 1.9                           |       | 63.8             |       |
| Restructuring  charges, net                      |       | 0.2                      |       | 1.0                        |       | —                          |       | 0.3                    |       | —                   |       | —                        |       | 1.5              |       |
| Systems/organization  establishment expenses     |       | 0.5                      |       | 1.5                        |       | —                          |       | 0.1                    |       | 0.1                      |       | —                        |       | 2.2              |       |
| Cancelled  acquisition and disposal costs        |       | —                   |       | —                     |       | —                          |       | —                 |       | 0.3                      |       | 0.4                           |       | 0.7              |       |
| Inventory  write-up charges                      |       | 0.1                      |       | —                     |       | —                          |       | —                 |       | —                   |       | —                        |       | 0.1              |       |
| Loss on sale of  assets and other                |       | —                   |       | —                     |       | 0.8                             |       | —                 |       | —                   |       | —                        |       | 0.8              |       |
| Foreign exchange  loss (gain), net               |       | 0.3                      |       | (0.2                       | )          | —                          |       | (0.6                   | )          | —                   |       | 1.3                           |       | 0.8              |       |
| Other                                            |       | —                   |       | 0.3                        |       | —                          |       | —                 |       | —                   |       | 0.7                           |       | 1.0              |       |
| Total Adjusted  EBITDA                           |       | $                        | 82.1       |                       | $          | 39.1                            |       | $                      | 15.4       |                     | $          | 44.9                          |       | $                | 10.1       |   | $ | (13.3 | ) | $ | 178.3 |   |
| **Three  months ended June 30, 2007**       |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Income (loss)  from continuing operations before |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| taxes and  minority interest                     |       | $                        | 43.9       |                       | $          | 27.8                            |       | $                      | 1.9        |                     | $          | 13.1                          |       | $                | 3.0        |   | $ | (42.3 | ) | $ | 47.4 |   |
| Interest expense  (a)                            |       | 9.6                      |       | 2.9                        |       | 8.0                             |       | 8.7                    |       | 2.3                      |       | 15.5                          |       | 47.0             |       |
| Interest income                                  |       | (0.9                     | )          | (0.3                       | )          | (0.1                            | )          | (0.2                   | )          | —                   |       | (2.1                          | )          | (3.6             | )          |
| Depreciation and  amortization                   |       | 13.6                     |       | 12.9                       |       | 10.5                            |       | 10.1                   |       | 2.8                      |       | 1.3                           |       | 51.2             |       |
| Restructuring  charges, net                      |       | 0.3                      |       | 0.3                        |       | —                          |       | 0.6                    |       | —                   |       | 0.8                           |       | 2.0              |       |
| Systems/organization  establishment expenses     |       | (0.4                     | )          | —                     |       | —                          |       | 0.4                    |       | 0.3                      |       | —                        |       | 0.3              |       |
| Cancelled  acquisition and disposal costs        |       | 0.1                      |       | —                     |       | 0.7                             |       | —                 |       | —                   |       | (0.1                          | )          | 0.7              |       |
| Inventory  write-up charges                      |       | —                   |       | —                     |       | —                          |       | 0.1                    |       | —                   |       | —                        |       | 0.1              |       |
| Loss on early  extinguishment of debt            |       | —                   |       | 1.9                        |       | —                          |       | —                 |       | 1.1                      |       | 16.1                          |       | 19.1             |       |
| Gain on sale of  assets and other                |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | (0.4                          | )          | (0.4             | )          |
| Foreign exchange  loss (gain), net               |       | 0.1                      |       | (0.1                       | )          | —                          |       | (0.1                   | )          | —                   |       | (3.3                          | )          | (3.4             | )          |
| Other                                            |       | —                   |       | 0.1                        |       | —                          |       | —                 |       | —                   |       | —                        |       | 0.1              |       |
| Total Adjusted  EBITDA (b)                       |       | $                        | 66.3       |                       | $          | 45.5                            |       | $                      | 21.0       |                     | $          | 32.7                          |       | $                | 9.5        |   | $ | (14.5 | ) | $ | 160.5 |   |
| **Six  months ended June 30, 2008**         |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Income (loss)  from continuing operations before |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| taxes and  minority interest                     |       | $                        | 104.2      |                       | $          | 16.8                            |       | $                      | (5.7       | )                        | $          | 42.2                          |       | $                | 8.3        |   | $ | (18.8 | ) | $ | 147.0 |   |
| Interest expense  (a)                            |       | 26.4                     |       | 16.2                       |       | 17.9                            |       | 17.9                   |       | 4.6                      |       | 0.4                           |       | 83.4             |       |
| Interest income                                  |       | (1.9                     | )          | 0.1                        |       | —                          |       | (0.2                   | )          | (0.3                     | )          | (1.3                          | )          | (3.6             | )          |
| Depreciation and  amortization                   |       | 33.2                     |       | 33.2                       |       | 26.3                            |       | 23.8                   |       | 5.7                      |       | 3.4                           |       | 125.6            |       |
| Restructuring  charges, net                      |       | 0.2                      |       | 1.6                        |       | —                          |       | 0.5                    |       | —                   |       | —                        |       | 2.3              |       |
| Systems/organization  establishment expenses     |       | 0.8                      |       | 2.2                        |       | —                          |       | 0.2                    |       | 0.2                      |       | —                        |       | 3.4              |       |
| Cancelled  acquisition and disposal costs        |       | —                   |       | —                     |       | —                          |       | —                 |       | 0.3                      |       | 0.4                           |       | 0.7              |       |
| Inventory  write-up charges                      |       | 0.5                      |       | —                     |       | —                          |       | —                 |       | —                   |       | —                        |       | 0.5              |       |
| Loss on sale of  assets and other                |       | —                   |       | —                     |       | 0.8                             |       | 0.1                    |       | —                   |       | —                        |       | 0.9              |       |
| Foreign exchange  gain, net                      |       | (0.3                     | )          | (0.2                       | )          | —                          |       | (1.1                   | )          | —                   |       | (12.7                         | )          | (14.3            | )          |
| Other                                            |       | (0.5                     | )          | 0.4                        |       | —                          |       | —                 |       | —                   |       | 0.9                           |       | 0.8              |       |
| Total Adjusted  EBITDA                           |       | $                        | 162.6      |                       | $          | 70.3                            |       | $                      | 39.3       |                     | $          | 83.4                          |       | $                | 18.8       |   | $ | (27.7 | ) | $ | 346.7 |   |
| **Six  months ended June 30, 2007**         |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| Income (loss)  from continuing operations before |       |                     |       |                       |       |                            |       |                   |       |                     |       |                          |       |             |       |
| taxes and  minority interest                     |       | $                        | 90.7       |                       | $          | 43.8                            |       | $                      | 6.1        |                     | $          | 23.9                          |       | $                | 6.0        |   | $ | (76.2 | ) | $ | 94.3 |   |
| Interest expense  (a)                            |       | 19.0                     |       | 6.2                        |       | 15.9                            |       | 16.6                   |       | 4.7                      |       | 39.3                          |       | 101.7            |       |
| Interest income                                  |       | (1.7                     | )          | (0.5                       | )          | (0.1                            | )          | —                 |       | (0.2                     | )          | (5.9                          | )          | (8.4             | )          |
| Depreciation and  amortization                   |       | 26.4                     |       | 25.5                       |       | 20.8                            |       | 19.7                   |       | 5.5                      |       | 2.6                           |       | 100.5            |       |
| Restructuring  charges, net                      |       | 0.5                      |       | 0.3                        |       | —                          |       | 0.7                    |       | —                   |       | 4.5                           |       | 6.0              |       |
| Systems/organization  establishment expenses     |       | (0.4                     | )          | 0.5                        |       | —                          |       | 0.6                    |       | 0.5                      |       | —                        |       | 1.2              |       |
| Cancelled  acquisition and disposal costs        |       | 0.1                      |       | —                     |       | 0.7                             |       | —                 |       | —                   |       | —                        |       | 0.8              |       |
| Inventory  write-up charges                      |       | —                   |       | —                     |       | —                          |       | 0.1                    |       | —                   |       | —                        |       | 0.1              |       |
| Loss on early  extinguishment of debt            |       | —                   |       | 1.9                        |       | —                          |       | —                 |       | 1.1                      |       | 16.1                          |       | 19.1             |       |
| Refinancing  expenses                            |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | 0.9                           |       | 0.9              |       |
| Loss (gain) on  sale of assets and other         |       | —                   |       | 0.1                        |       | —                          |       | —                 |       | —                   |       | (5.3                          | )          | (5.2             | )          |
| Foreign exchange  loss (gain), net               |       | 0.3                      |       | —                     |       | —                          |       | (0.1                   | )          | —                   |       | (3.7                          | )          | (3.5             | )          |
| Other                                            |       | (0.3                     | )          | 0.3                        |       | —                          |       | —                 |       | —                   |       | —                        |       | —           |       |
| Total Adjusted  EBITDA (b)                       |       | $                        | 134.6      |                       | $          | 78.1                            |       | $                      | 43.4       |                     | $          | 61.5                          |       | $                | 17.6       |   | $ | (27.7 | ) | $ | 307.5 |   |

 

13

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(a)                Includes gains of$34.0 million and $0.8 million for the three months ended June 30, 2008and 2007, respectively, and gains of $3.2 million for the six months ended June 30,2008 and losses of $2.0 million for the six months ended June 30 2007,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

 

(b)               This amount doesnot include $8.5 million and $17.7 million of Adjusted EBITDA for the monthsand six months ended June 30, 2007, respectively, from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe six months ended June 30, 2007 from the former Groupe Novasep segmentsold on January 9, 2007.

 

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*

* *

Certain items are addedto or subtracted from income (loss) from continuing operations before taxes andminority interest to derive Adjusted EBITDA, as defined below. These itemsinclude the following:

 

·             *Restructuring and related charges*: Restructuring charges of $1.5 million and $2.0 million were recorded in thethree months ended June 30, 2008 and 2007, respectively, and $2.3 millionand $6.0 million were recorded in the six months ended June 30, 2008 and2007, respectively, for miscellaneous restructuring activities, includingheadcount reductions and facility closures (see Note 12, “RestructuringLiability,” for further details).

 

·             *Systems/organization establishment expenses*: For the three and six months ended June 30, 2008, expenses of $2.2 millionand $3.4 million, respectively, were recorded related to the integration ofbusinesses acquired, primarily related to the acquisition of the Elementis plcbusiness in the Performance Additives segment in August 2007. For thethree and six months ended June 30, 2007, expenses of $0.3 million and$1.2 million, respectively, were recorded primarily in connection with theintegration of the Viance, LLC joint venture and the integration of businessesacquired in 2006 in the Advanced Ceramics and Specialty Compounds segments.

 

·             *Cancelled acquisition and disposal costs*: Costs of $0.7 million were recorded in the three months ended June 30,2008 and 2007 and costs of $0.7 million and $0.8 million were recorded for thesix months ended June 30, 2008 and 2007, respectively, in connection withnon-consummated acquisitions and dispositions.

 

·             *Inventory write-up charges*:  UnderSFAS 141,*Business Combinations*,all inventories acquired in an acquisition must be revalued to “fair value.” Inconnection with acquisitions, the Company allocates a portion of the totalpurchase price to inventory to reflect manufacturing profit in inventory at thedate of the acquisitions. This resulted in a reduction of gross profit of$0.1 million and $0.5 million for the three and six months ended June 30,2008, respectively, in the Specialty Chemicals segment and $0.1 million for thethree and six months ended June 30, 2007 in the Advanced Ceramics segmentas the inventory was sold in the normal course of business.

 

·             *Loss on*early*extinguishment of debt. *Inthe second quarter of 2007, the Company paid a redemption premium of $14.5million and wrote off $4.6 million of deferred financing costs associated withthe redemption of the 2011 Notes on May 15, 2007.

 

·             *Refinancing expenses: * In March 2007,the Company expensed $0.9 million related to the fourth amendment of the seniorsecured credit agreement to refinance all outstanding borrowings under thetranche F term loans with new tranche G term loans.

 

·             *(Gain) loss on sale of assets and other*: The Company recorded a charge of $0.8 million in the second quarter of 2008related to the liquidation of a joint venture in the Titanium Dioxide Pigmentssegment. For the six months ended June 30, 2007, a gain of $5.2 million wasrecorded primarily related to the sale of the U.S. wafer reclaim business.

 

·             *Foreign exchange (gain) loss, net*: For the three months ended June 30, 2008 and 2007, the Company recordedlosses of $0.8 million and gains of $3.4 million, respectively. Theforeign exchange loss reported in the second quarter of 2008 is due to the impactof the slightly weaker euro as of June 30, 2008 versus March 31, 2008related to non-operating euro-denominated transactions and intercompanyfinancing arrangements. For the six months ended June 30, 2008 and 2007,gains of $14.3 million and $3.5 million, respectively, were recorded. Theincrease in foreign exchange gains is due to the impact of the stronger euro asof June 30, 2008 versus December 31, 2007, related to non-operatingeuro-denominated transactions.

 

**4.        ACQUISITIONS:**

** **

Pursuant to the Company’sbusiness strategy of achieving profitable growth through selectiveacquisitions, the Company has acquired several businesses in recent years. Inaccordance with SFAS No. 142,*Goodwilland Other Intangible Assets,* any goodwill resulting from acquisitionsis tested for impairment at least annually.

 

14

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**Elementisplc Global Color Pigments Business**

 

On August 31, 2007,the Company completed the acquisition of the global color pigments business ofElementis plc for a purchase price of approximately $140.0 million. Thisacquisition includes facilities in North America, Europe and China and is beingintegrated into the Color Pigments and Services business, which is part of thePerformance Additives segment. The financial position of the business acquiredis included in the Consolidated Balance Sheet as of December 31, 2007 and June 30,2008. The results of operations and cash flows of the business acquired for theperiods after August 31, 2007 are included for the three and six monthsended June 30, 2008. The excess of the total purchase price over theestimated fair value of the net assets acquired at closing has been allocatedto goodwill and is estimated to be $23.0 million as of June 30, 2008.Certain environmental matters were assumed in the acquisition. The Companyestimates that the potential exposure range for these items is from $3.6million to $10.4 million. At June 30, 2008, $3.6 million of relatedreserves are recorded. The allocation of the purchase price to the identifiableassets acquired and the environmental liabilities assumed are preliminary andare subject to change upon the finalization of purchase accounting which isexpected to be completed during 2008.

 

In addition to theacquisition described above, the Company has completed other smalleracquisitions in 2007 and in the first six months of 2008. Depending on thetiming and complexity involved, the purchase price allocation to the net assetsacquired for certain acquisitions completed within the last year waspreliminary as of June 30, 2008.

 

The above acquisitionswere not material on an individual basis, or in the aggregate.

 

**5.        INVENTORIES:**

 

Inventories are comprisedof the following:

 
| **($ in millions)** | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials                 |       | $                       | 191.3      |                        | $          | 186.9 |   |
| Work-in-process               |       | 68.7                    |       | 61.0                        |       |
| Finished goods                |       | 311.5                   |       | 281.4                       |       |
| Packaging  materials          |       | 6.8                     |       | 6.1                         |       |
| Total                         |       | $                       | 578.3      |                        | $          | 535.4 |   |

 

**6.        GOODWILL:**

 

Below are goodwillbalances and activity by segment:

 
| **($ in millions)**                   | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-----------|------------|
| Balance,  December 31, 2007                |       | $                        | 684.1      |                       | $          | 515.4                           |       | $                      | 187.8      |                     | $          | 258.5     |       | $ | 121.2 |   | $ | 1,767.0 |   |
| Post closing  purchase price  consideration (a) |       | (18.2                    | )          | —                     |       | (6.0                            | )          | (4.9                   | )          | —                   |       | (29.1     | )          |
| Acquisitions (b)                                |       | (9.9                     | )          | —                     |       | —                          |       | —                 |       | —                   |       | (9.9      | )          |
| Foreign exchange  and other (c)                 |       | 53.1                     |       | 8.0                        |       | 14.9                            |       | 21.6                   |       | 1.0                      |       | 98.6      |       |
| Balance,  June 30, 2008                    |       | $                        | 709.1      |                       | $          | 523.4                           |       | $                      | 196.7      |                     | $          | 275.2     |       | $ | 122.2 |   | $ | 1,826.6 |   |

 

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(a)          Under the terms of thesale and purchase agreement entered into in connection with the Dynamit NobelAcquisition in April 2004, GEA Group and its subsidiary, GEA North AmericaInc. (“GEA North America”), were obligated to indemnify the Company for certainlegal, tax and environmental liabilities and obligations that relate to theperiod prior to the closing, subject to certain limits and exclusions. In March 2008,the Company entered into an agreement with GEA Group and GEA North America tosettle all existing and future non-tax related claims in consideration ofpayment to the Company of €18.8 million ($29.1 million) which was received on March 28,2008. This payment was considered an adjustment to the purchase price per theclaims settlement agreement between the Company and GEA Group and itssubsidiary. As a result, the Company has reported this as an adjustment to thepurchase price with a credit to goodwill in the first quarter of 2008. SeeNote 14, “Commitments and Contingencies,” for further details.

 

(b)         Primarily related to anadjustment to goodwill from a bolt-on acquisition made in December 2007.

 

(c)          Consists primarily offoreign currency changes.

 

15

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**7.        OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of June 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| **($ in millions)**            | ** ** | **Gross  Carrying  Amount (a)**        | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                           | 427.5      |                                            | $          | (141.9 | ) | $ | 285.6 |   | $ | 395.6 |   | $ | (116.7 | ) | $ | 278.9 |   |
| Trade names and  trademarks              |       | 147.2                                       |       | (27.5                                           | )          | 119.7 |   | 147.2 |   | (23.0 | ) | 124.2 |   |
| Customer  relationships                  |       | 307.9                                       |       | (73.7                                           | )          | 234.2 |   | 273.3 |   | (57.3 | ) | 216.0 |   |
| Supply  agreements                       |       | 32.6                                        |       | (4.6                                            | )          | 28.0 |   | 29.6 |   | (2.9 | ) | 26.7 |   |
| Other                                    |       | 58.3                                        |       | (32.6                                           | )          | 25.7 |   | 57.7 |   | (26.7 | ) | 31.0 |   |
| Total                                    |       | $                                           | 973.5      |                                            | $          | (280.3 | ) | $ | 693.2 |   | $ | 903.4 |   | $ | (226.6 | ) | $ | 676.8 |   |

 

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(a)                The increase from December 31,2007 is primarily related to the impact of currency changes and additions fromacquisitions.

 

Amortization of otherintangible assets was $19.9 million and $16.2 million for the three monthsended June 30, 2008 and 2007, respectively and $38.6 million and $31.3million for the six months ended June 30, 2008 and 2007, respectively.

 

Estimated amortizationexpense for each of the five succeeding fiscal years is as follows:

 
| **($ in millions)  Year ended** | ** ** | **Amortization  Expense** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|
| 2008                                           |       | $                         | 76.6       |   |
| 2009                                           |       | 68.0                      |       |
| 2010                                           |       | 65.8                      |       |
| 2011                                           |       | 62.7                      |       |
| 2012                                           |       | 60.6                      |       |
|                                                |            |                           |            |  |

 

**8.        LONG-TERM DEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| **($ , € and £ in millions)**                           | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Senior secured  credit facilities:                                                              |       |                    |       |                        |       |
| Tranche A-1 term  loans (€26.1 and €29.3, respectively)                               |       | $                       | 41.1       |                        | $          | 42.8 |   |
| Tranche A-2 term  loans (€113.6 and €127.8, respectively)                             |       | 179.0                   |       | 186.5                       |       |
| Tranche E term  loans                                                                           |       | 1,110.7                 |       | 1,116.4                     |       |
| Tranche G term  loans (€266.6 and €267.9, respectively)                               |       | 420.0                   |       | 390.9                       |       |
| 2014 Notes  (€375.0 and $200.0 as of June 30, 2008 and December 31, 2007)        |       | 790.8                   |       | 747.1                       |       |
| Other term loan  facilities                                                                     |       | 22.1                    |       | 24.2                        |       |
| Capitalized  lease obligations (€32.9 and €34.1, respectively)                        |       | 51.8                    |       | 49.7                        |       |
| Preferred stock  of subsidiary (£12.0 as of June 30, 2008 and December 31, 2007) |       | 23.9                    |       | 23.8                        |       |
|                                                                                            |       | 2,639.4                 |       | 2,581.4                     |       |
| Less current  maturities                                                                        |       | (105.5                  | )          | (107.4                      | )          |
|                                                                                            |       | $                       | 2,533.9    |                        | $          | 2,474.0 |   |

 

**9.        INCOME TAXES:**

 

Income tax expense has beencomputed based on the projected effective tax rate for the year. The effectivetax rate for the six months ended June 30, 2008 and 2007 was 27.7% and44.2%, respectively. The effective tax rate is lower in 2008 compared to 2007primarily as a result of lower statutory rates in various European countries,geographic mix and domestic income which is not tax effected as a result of afull valuation allowance for federal and certain state taxes. The differencebetween the effective tax rate and the U.S. federal statutory rate of 35.0% isprimarily a function of favorable foreign rate differentials and the impact ofthe valuation allowance on domestic earnings.

 

In the six months ended June 30,2008, the Company increased its worldwide valuation allowances by $33.3million. The increase in the valuation allowance was primarily due to adecrease of $2.1 million in deferred tax assets generally associated with theCompany’s domestic earnings, an increase of $37.3 million in othercomprehensive income and a decrease of $1.9 million due to the offset of net 

 

16

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operating losses againstuncertain tax benefit liabilities. The change in the valuation allowance forthe six months ended June 30, 2008 increased the tax provision by $2.1million. The following table reflects the activity in the valuation allowancefor worldwide net operating losses and other deferred income tax assets:

 
| **($ in millions)**                                                                  | ** ** | **Valuation  Allowance** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| Balance as of  December 31, 2007                                                          |       | $                        | 92.5       |   |
| Decrease as  reflected in income tax expense                                                   |       | (2.1                     | )          |
| Increase as  reflected in other comprehensive income (a)                                       |       | 37.3                     |       |
| Decrease due to  the offset of net operating losses against uncertain tax position liabilities |       | (1.9                     | )          |
| Balance as of  June 30, 2008                                                              |       | $                        | 125.8      |   |

 

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(a)                Primarily relatedto net investment hedge losses, as well as the mark-to-market of the Company’sEuro-denominated debt, recorded in accumulated other comprehensive income inthe Condensed Consolidated Balance Sheets.

 

In the six months ended June 30,2008, based on the Company’s policy and review of available information,including the Company’s steady-state analysis, it was determined that there wasnot sufficient positive evidence of future taxable income in order to releasethe U.S. valuation allowance that has been recorded. During the six monthsended June 30, 2008, the Company’s net deferred tax assets and liabilitieswere maintained at a zero level, other than a noncurrent deferred tax liabilityrelating to goodwill with an indefinite reversal period and a noncurrentdeferred tax asset relating to a Federal AMT Credit. It is the Company’s policythat the valuation allowance is reversed in the year management determines itis more likely than not that the deferred tax assets will be realized.

 

In the second quarter of2008, the Company determined that it was necessary to establish a valuationallowance for certain state deferred tax assets. This resulted in a $0.4million increase in the tax provision related to the beginning of perioddeferred tax balance.

 

Unrecognized tax benefitsat June 30, 2008 were $25.5 million. This includes $22.8 million of taxbenefits that, if recognized, would affect the effective tax rate, $2.2 millionof tax benefits that if recognized, would result in a decrease to goodwillrecorded in purchase business combinations and $0.5 million of tax benefitsthat, if recognized, would result in an adjustment to other tax accounts.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits in its income taxprovision. The Company had accrued $4.3 million for interest and penalties at December 31,2007. During the six months ended June 30, 2008, the accrual for interestand penalties was increased by $1.5 million. As of June 30, 2008, theCompany had accrued a total of $5.8 million.

 

During the next twelvemonths, it is reasonably possible that resolution of uncertain tax liabilitiescould result in a benefit of up to $3.0 million or a cost of up to $22.0million. Audit outcomes and the timing of audit settlements are subject tosignificant uncertainty.

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. The Company’stax filings in major jurisdictions are open to investigation by taxauthorities; in the U.S. from 2000, in the U.K. from 2003, and in Germany from2000.

 

**10.        STOCK-BASED COMPENSATION:**

 

Holdings has in place the2005 Amended and Restated Stock Purchase and Option Plan of Rockwood Holdings, Inc.and Subsidiaries (the “Plan”). Under the Plan, Holdings may grant stockoptions, restricted stock and other stock-based awards to its employees anddirectors and allow employees and directors to purchase shares of its commonstock. There are 10,000,000 authorized shares available for grant under thePlan.

 

In December 2007,Holdings awarded 167,951 performance restricted stock units to management andkey employees which will vest on December 31, 2010 as long as the employeecontinues to be employed by the Company on this date and upon the achievementof certain performance targets. The number of shares of Holdings’ common stockultimately awarded upon vesting is determined based on the achievement ofspecified performance criteria over the period January 1, 2008 through December 31,2010. However, in accordance with SFAS No. 123R, the Company did notrecognize any compensation cost in 2007 for this issuance because theperformance measures that form the basis for vesting of these restricted stockunits were not known as of December 31, 2007. These performance measureswere established on February 29, 2008, when Holdings’ financial statementsfor 2007 were filed with the Securities and Exchange Commission. The weightedaverage grant date fair value of these restricted stock units was $30.69 perstock unit.

 

The compensation cost forstock options, restricted stock units and Holdings’ Board of Director stockgrants recorded under the Plan resulted in a decrease to income from continuingoperations before taxes and minority interest of $2.2 million and $0.7 millionfor the three months ended June 30, 2008 and 2007, respectively, and $4.1million and $0.8 million for the six months ended June 30, 2008 and 2007,respectively.  The total tax benefitrecognized related to stock options was $0.2 million and $0.1 million for thethree months ended June 30, 2008 and 2007, respectively, and $0.4 millionand $0.1 million for the six months ended June 30, 2008 and 2007,respectively.

 

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**11.        EMPLOYEE BENEFIT PLANS:**

 

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R)*:

 
| ** **                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in millions)**         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                          |       | $                                               | 1.9        |                                          | $          | 1.9 |   | $ | 3.7 |   | $ | 3.8 |   |
| Interest cost                         |       | 7.3                                             |       | 5.8                                           |       | 14.3 |   | 11.5 |   |
| Expected return  on assets            |       | (2.8                                            | )          | (2.1                                          | )          | (5.5 | ) | (4.2 | ) |
| Net amortization  of actuarial losses |       | (0.1                                            | )          | 0.1                                           |       | (0.1 | ) | 0.2 |   |
| Total pension  cost                   |       | $                                               | 6.3        |                                          | $          | 5.7 |   | $ | 12.4 |   | $ | 11.3 |   |

 

**12.        RESTRUCTURING LIABILITY:**

 

The Company recordedrestructuring charges of $1.5 million and $2.0 million for the three monthsended June 30, 2008 and 2007, respectively and $2.3 million and $6.0million of restructuring charges for the six months ended June 30, 2008and 2007, respectively. The Company records restructuring liabilities thatrepresent charges incurred in connection with consolidations and cessations ofcertain of its operations, including operations from acquisitions, as well asheadcount reduction programs. These charges consist primarily of write-offs ofassets and severance costs. Severance charges are based on various factors includingthe employee’s length of service, contract provisions, salary levels and localgovernmental legislation. At the time a related charge is recorded, the Companycalculates its best estimate based upon detailed analysis. Although significantchanges are not expected, actual costs may differ from these estimates.

 

During the six monthsended June 30, 2008, the Company expensed $2.3 million of restructuringcharges. In the Performance Additives segment, the Company implemented arestructuring plan in its Color Pigments and Services business in connectionwith the integration of the business acquired from Elementis plc which includesthe reorganization and relocation of its North American Finance and IT servicesand the closure of three manufacturing facilities by the end of 2008. For thesix months ended June 30, 2008, the Company recorded $1.6 million ofseverance costs related to this restructuring plan and expects to recordapproximately $0.5 million of additional costs during the remainder of 2008. Inthe Advanced Ceramics and Specialty Chemicals segments, $0.5 million and $0.2million, respectively, were recorded in 2008 for miscellaneous headcountreductions.

 

During the six monthsended June 30, 2007, the Company expensed $6.0 million of restructuringcharges. In the Corporate and other segment, facility closure and severancecosts of $4.5 million were recorded primarily related to the restructuring ofthe wafer reclaim business. In addition, $0.5 million was recorded in theSpecialty Chemicals segment and $0.7 million was recorded in the AdvancedCeramics segment for miscellaneous headcount reductions. In the PerformanceAdditives segment, $0.3 million was recorded for miscellaneous headcountreductions and facility closures.

 

In 2006, the Company recordedrestructuring charges for miscellaneous restructuring items, includingmiscellaneous headcount reductions and the closure of an administrative officein the Specialty Chemicals segment. In the Corporate and other segment, chargeswere recorded primarily related to the restructuring of the wafer reclaimbusiness. This included severance and related costs for employees in connectionwith the closure of two wafer reclaim facilities. The Company closed a waferreclaim facility in the U.K. in January 2006 and one of the facilities inthe U.S. in March 2006. In addition, charges were recorded in thePerformance Additives and Advanced Ceramics segments primarily formiscellaneous headcount reductions.

 

In 2005, the Companyrecorded restructuring charges for miscellaneous restructuring actions,including the announced closure of the Baulking, United Kingdom facility in theClay-based Additives business and the announced restructuring of the waferreclaim business. The Company recorded severance and related costs foremployees in connection with the closure of the wafer reclaim facilities (oneeach in the U.K. and U.S.). In addition, miscellaneous headcount reductionswere recorded in the Specialty Chemicals, Performance Additives and AdvancedCeramics segments.

 

In 2004, the Companyrecorded restructuring charges to involuntarily terminate or relocate certainemployees and/or exit certain activities as a result of the Dynamit NobelAcquisition. As a result, the Company closed the former corporate office ofDyanmit Nobel and recorded charges related to this closure including severancecosts for personnel, the closure costs on the building and the relocation costsof the remaining employees who were relocated to the Company’s new location.Also, as part of the acquisition of the Pigments and Dispersions business ofJohnson Matthey, the Company enacted a restructuring program and eliminatedcertain positions.

 

18

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Selected information forthe 2008 restructuring actions follows:

 
| **($ in millions)  2008**        | ** ** | **Severance** | ** ** | **Facility  Closure** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------|------------|-----------|------------|
| Liability  balance, December 31, 2007 |       | $             | —     |                  | $          | —    |       | $ | — |   |
| Restructuring  charge in 2008              |       | 2.3           |       | 0.1                   |       | 2.4       |       |
| Utilized in 2008                           |       | (1.8          | )          | (0.1                  | )          | (1.9      | )          |
| Liability  balance, June 30, 2008     |       | $             | 0.5        |                  | $          | —    |       | $ | 0.5 |   |

 

These actions areexpected to be completed during 2008.

 

Selected information forthe 2007 restructuring actions follows:

 
| **($ in millions)  2007**        | ** ** | **Severance** | ** ** | **Facility  Closure** | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | ** **    | ** ** | ** **            | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007 |       | $             | 6.1        |                  | $          | 0.3            |       | $          | 0.3        |   | $ | 6.7 |   |
| Utilized in 2008                           |       | (1.0          | )          | (0.1                  | )          | —         |       | (1.1       | )          |
| Foreign exchange  and other                |       | (2.8          | )          | 2.6                   |       | —         |       | (0.2       | )          |
| Liability  balance, June 30, 2008     |       | $             | 2.3        |                  | $          | 2.8            |       | $          | 0.3        |   | $ | 5.4 |   |

 

These actions areexpected to be completed during 2008 and 2009.

 

Selected information forthe 2006 restructuring actions follows:

 
| **($ in millions)  2006**        | ** ** | **Severance** | ** ** | **Facility  Closure** | ** ** | **Relocation** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------|------------|----------------|------------|-----------|------------|
| Liability  balance, December 31, 2007 |       | $             | 1.3        |                  | $          | 4.1            |       | $         | 0.1        |   | $ | 5.5 |   |
| Utilized in 2008                           |       | (1.5          | )          | (1.1                  | )          | —         |       | (2.6      | )          |
| Foreign exchange  and other                |       | 0.3           |       | (0.3                  | )          | —         |       | —    |       |
| Liability  balance, June 30, 2008     |       | $             | 0.1        |                  | $          | 2.7            |       | $         | 0.1        |   | $ | 2.9 |   |

 

The severance andrelocation costs related to the acquisition in the Specialty Compounds segmentare expected to be completed during 2008. The facility closure costs from the2006 restructuring actions primarily relate to the restructuring of the waferreclaim business and the closure of two wafer reclaim facilities. Thefacility closure costs are expected to be completed when the lease expires in2018.

 

Selected information forthe 2005 restructuring actions follows:

 
| **($ in millions)  2005**        | ** ** | **Severance** | ** ** | **Facility  Closure** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------|------------|-----------|------------|
| Liability  balance, December 31, 2007 |       | $             | 0.2        |                  | $          | 0.2       |       | $ | 0.4 |   |
| Foreign exchange  and other                |       | (0.2          | )          | —                |       | (0.2      | )          |
| Liability  balance, June 30, 2008     |       | $             | —     |                  | $          | 0.2       |       | $ | 0.2 |   |

 

These actions areexpected to be completed in 2008.

 

Selected information forthe 2004 restructuring actions follows:

 
| **($ in millions)  2004**        | ** ** | **Severance** | ** ** | **Facility  Closure** | ** ** | **Relocation** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------|------------|----------------|------------|-----------|------------|
| Liability  balance, December 31, 2007 |       | $             | 0.8        |                  | $          | 0.2            |       | $         | 0.4        |   | $ | 1.4 |   |
| Restructuring  charge in 2008              |       | (0.1          | )          | —                |       | —         |       | (0.1      | )          |
| Utilized in 2008                           |       | (0.1          | )          | (0.1                  | )          | —         |       | (0.2      | )          |
| Foreign exchange  and other                |       | —        |       | —                |       | (0.4           | )          | (0.4      | )          |
| Liability  balance, June 30, 2008     |       | $             | 0.6        |                  | $          | 0.1            |       | $         | —     |   | $ | 0.7 |   |

 

These actions are expected to be substantially completed by the end of2008.

 

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Restructuring reserves bysegment are as follows:

 
| **($ in millions)** | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Specialty  Chemicals          |       | $                       | 1.9        |                        | $          | 3.4 |   |
| Performance  Additives        |       | 4.3                     |       | 4.6                         |       |
| Advanced  Ceramics            |       | 0.4                     |       | 0.8                         |       |
| Specialty  Compounds          |       | 0.4                     |       | 2.4                         |       |
| Corporate and  other          |       | 2.7                     |       | 2.8                         |       |
|                          |       | $                       | 9.7        |                        | $          | 14.0 |   |

 

**13.        FAIR VALUE MEASUREMENTS:**

 

As discussed in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” SFAS No. 157,*Fair Value Measurements*, was issued in September 2006.This statement defines fair value, establishes a framework for measuring fairvalue in GAAP, and creates a fair value hierarchy in order to increase theconsistency and comparability of fair value measurements and the relateddisclosures. This statement does not require any new fair value measurements,but requires disclosure of how the fair values of any assets and liabilitiesthat are measured at fair value on a recurring basis are determined. Certainprovisions of this standard were effective for the Company as of January 1,2008 and are disclosed below. However, the FASB has deferred theimplementation of SFAS No. 157 by one year for non-financial assets andliabilities. Under SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities* —*Including an Amendment of FASB Statement No. 115,*entities are permitted to choose whether to measure many financial instrumentsand certain other items at fair value. The Company has elected not tomeasure any instruments at fair value under SFAS No. 159.

 

As of June 30, 2008,the only assets and liabilities that the Company currently measures at fairvalue on a recurring basis are derivatives and marketable securities. TheCompany’s financial assets and liabilities are measured using inputs from thethree levels of the fair value hierarchy. The three levels are as follows:

 

Level1 – Inputs are unadjusted quoted market prices in active markets for identicalassets or liabilities that the Company has the ability to access at themeasurement date.

 

Level2 – Inputs are directly or indirectly observable, which include quoted pricesfor similar assets and liabilities in active markets, quoted prices foridentical or similar assets or liabilities in markets that are not active,inputs other than quoted prices that are observable for the asset or liabilityand inputs that are derived principally from or corroborated by observablemarket data by correlation or other means.

 

Level3 – Inputs are unobservable inputs that are used to measure fair value to theextent observable inputs are not available. The Company does not have anyfinancial assets or liabilities that are classified as Level 3 inputs as of June 30,2008.

 

In accordance with thefair value hierarchy, the following table provides the fair value of theCompany’s financial assets and liabilities that are required to be measured atfair value as of June 30, 2008:

 
| ** **                                                     | ** ** | **As of**              | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **June 30, 2008** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable  securities (a)                                     |       | $                           | 191.1      |                                  | $          | 191.1 |   | $ | — |   | $ | — |   |
| Interest rate  swaps (b)                                       |       | 13.5                        |       | —                                |       | 13.5 |   | — |   |
| Total assets at  fair value                                    |       | $                           | 204.6      |                                  | $          | 191.1 |   | $ | 13.5 |   | $ | — |   |
|                                                           |       |                        |       |                                  |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate  swaps (b)                                       |       | $                           | 20.4       |                                  | $          | — |   | $ | 20.4 |   | $ | — |   |
| Cross-currency  interest rate swaps (c)                        |       | 8.3                         |       | —                                |       | 8.3 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (d) |       | 41.6                        |       | —                                |       | 41.6 |   | — |   |
| Raw material  purchase hedge (e)                               |       | 0.7                         |       | —                                |       | 0.7 |   | — |   |
| Total  liabilities at fair value                               |       | $                           | 71.0       |                                  | $          | — |   | $ | 71.0 |   | $ | — |   |

 

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(a)                These primarilyrepresent money market funds with an original maturity of three months or less.

 

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(b)               The Company hashistorically entered into interest rate swaps to manage its exposure to changesin interest rates related to variable rate debt. As of June 30, 2008,these contracts cover notional amounts of $725.0 million (at an interest rateof 4.499%) and €405.8 million (at interest rates ranging from 2.498% to4.529%). These derivative contracts effectively convert the senior securedcredit obligations to fixed rate obligations. These hedges expired in July 2008and were effectively replaced by swaps that will mature between November 2009and July 2012. The Company has elected not to apply hedge accounting forthese interest rate swaps and has recorded the mark-to-market of thesederivatives as a component of interest expense in the Condensed Consolidated Statementsof Operations.

 

(c)                The Companyentered into cross-currency interest rate swaps with current notional amountsof $19.4 million and €17.1 million that effectively convert U.S. dollarborrowings into euro-based obligations at an effective interest rate of EURIBORplus 4%. These contracts have final maturity dates of July 2010. TheCompany has elected not to apply hedge accounting for these interest rate swapsand has recorded the mark-to-market of these derivatives as a component ofinterest expense in the Condensed Consolidated Statements of Operations.

 

 (d)            In connection with the offering of the 2014Notes, the Company entered into a cross-currency interest rate swap in November 2004with a notional amount of €155.6 million that effectively converts the U.S.dollar fixed rate debt in respect of the 2014 dollar-denominated notes soldinto euro fixed rate debt. This swap has a final maturity date of November 2009.The Company designated this contract as a hedge of the foreign currencyexposure of its net investment in its euro-denominated operations. As a result,any foreign currency gains and losses resulting from the translation of thiseuro-denominated debt is accounted for as a component of accumulated other comprehensiveincome for as long as the hedge remains effective.

 

(e)                In March 2008,the Titanium Dioxide Pigments segment entered into a derivative contract toprotect a portion of its exposure to movements in certain raw material prices.The Company has elected not to apply hedge accounting for this derivativecontract and has recorded the mark-to-market of this derivative in cost ofproducts sold in the Condensed Consolidated Statements of Operations.

 

The fair values ofmarketable securities are based on unadjusted quoted market prices from variousfinancial information service providers and securities exchanges. The fairvalues of derivatives are based on quoted market prices from various banks forsimilar instruments.

 

**14.****                               COMMITMENTSAND CONTINGENCIES:**

 

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters in accordance with SFAS No. 5,*Accounting for Contingencies*, if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of the Company’s wholly-owned subsidiaries in its SpecialtyCompounds segment alleging claims for negligence, negligent misrepresentation,estoppel, fraud, third party beneficiary breach of contract and unfair tradepractices as a result of the subsidiary providing PVC compound to its customer.Hospira is seeking damages of approximately $16.0 million for costs allegedlyrelated to its recall and destruction of intravenous administration kits thatincorporated components made with this compound, and further seeks trebledamages of approximately $48.0 million, plus attorneys’ fees and interest,under the North Carolina unfair trade practice statute. The Court dismissedHospira’s negligence and estoppel claims, but initially denied the subsidiary’smotion to dismiss the other claims. Following discovery, the Company’ssubsidiary filed a motion for summary judgment to dismiss the remaining claimsand, on November 9, 2007, the trial court granted the Company’s motion forsummary judgment and dismissed all of the plaintiff’s claims. The plaintiff hasappealed this decision and the Company cannot predict how this decision willimpact the ultimate resolution of the case; however, the Company will continueto vigorously defend this matter. While the Company believes its subsidiary hasmeritorious defenses against Hospira’s claims and does not believe thatresolution of this matter will have a material adverse effect on its businessor financial condition, the Company cannot predict the ultimate outcome of thislitigation and resolution of this claim may have a material adverse effect onits results of operations or cash flows in any quarterly or annual reportingperiod.

 

In addition, a subsidiaryin the Specialty Chemicals segment that formerly manufactured sealants forinsulating glass and resins for laminated glass prior to and after the sale ofthis business has been named as a defendant in several lawsuits relating toalleged negligent manufacturing of those products. Pursuant to the sale andpurchase agreement with respect to the divested “glass” business, thissubsidiary may be required to pay indemnity claims related to these lawsuits.Although the Company expects its subsidiary to have coverage under its productliability insurance policies should damages ultimately be awarded or agreed to,in such an event, its insurance may not cover such claims and, if not, itssubsidiary may not have sufficient cash flow to pay these claims. Although theCompany does not believe that resolution of these matters will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of this litigation, and the resolution of one ormore of these claims may have a material adverse effect on its results ofoperations or cash flows in any quarterly or annual reporting period.

 

Although the Company expectsto continue to pay legal fees in connection with the above matters and otherlegal actions related to 

 

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chromated copper arsenateand other product liability matters, based on currently available facts, theCompany does not believe that these actions will have a material effect on thefinancial condition, results of operations or liquidity of the Company.

 

Reserves in connectionwith product liability matters do not individually exceed $3.0 million and inthe aggregate $8.0 million as of June 30, 2008. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal and external legal counsel, past experience, and, in someinstances where defense costs are being paid by its insurer, known insurancerecoveries. The Company is unable to estimate the amount or range of anypotential incremental charges should facts and circumstances change and may inthe future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

***Indemnity Matters***—Under the terms ofthe Business and Share Sale and Purchase Agreement, the Deed of Tax Covenantand the Environmental Deed entered into in connection with the KKR Acquisition,Degussa U.K. Holdings Ltd., as successor to Laporte Plc, is obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing of the KKRAcquisition. Under the terms of the 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”)) were obligated to indemnify the Company for certainlegal, tax and environmental liabilities and obligations that relate to theperiod prior to the closing, subject to certain limits and exclusions. Pursuantto these agreements, the Company has various claims for indemnification withEvonik Degussa and GEA Group. However, in March 2008, the Company enteredinto an agreement with GEA Group and GEA North America to settle all existingand future non tax-related indemnities under the sale and purchase agreementrelating to the Dynamit Nobel Acquisition in consideration of payment to theCompany of €18.8 million ($29.1 million), which was received on March 28,2008. These indemnities primarily relate to environmental matters.

 

In addition, the Companymay be subject to indemnity claims relating to properties or businesses itdivested. For example, as discussed below, the Company is required to indemnifythe buyer of its Electronics business for certain known and unknownenvironmental actions which may arise in the future that relate to the periodprior to the closing. In the opinion of management, and based upon informationcurrently available, the ultimate resolution of any indemnification obligationsowed to the Company or by the Company will not have a material effect on theCompany’s financial condition, results of operations or cash flows.

 

**Safety,Health and Environmental Matters**

 

***General***

 

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

 

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

 

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

 

***SHE Capital Expenditures***

 

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2007, the capital expenditures for SHEmatters totaled $29.6 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2008, 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 June 2007, theUnited States Department of Homeland Security Agency’s regulation on ChemicalPlant Security became effective. This rule seeks to regulate security atfacilities that store certain listed substances. Twelve of the Company’sfacilities in the United States have provided the information necessary tocomplete the first step known as the Top Screen. After gathering informationduring the Top Screen process, Homeland Security will develop four tiers ofrisk with Tier 1 being the highest risk sites and Tier 4 

 

22

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representing thelowest. For national security reasons, the Department will not publish theranking criteria. The Company believes that following Top Screen, several ofthe Company’s locations may receive a ranking and be asked to undertake thesecond step of the regulation, which is to prepare a Site VulnerabilityAnalysis (which includes identification of critical assets, threat assessments,identification of potential security vulnerabilities and analysis ofcountermeasures to a terrorist attack) and a Site Security Plan (whichdescribes the security measures that will address each identifiedvulnerability). Each Site Vulnerability Analysis and Site Security Planmust be reviewed and approved by the Department of Homeland Security. Althoughsome security improvements may be required at certain of the Company’sfacilities, the Company does not expect compliance with this regulation to havea material impact on its cash flows or results of operations.

 

On June 1, 2007, theRegistration, Evaluation and Authorization of Chemicals (“REACH”) legislationbecame effective in the EU. REACH requires manufacturers and importers ofcertain chemicals to register those chemicals, perform health and environmentalrisk analyses of those chemicals, and in certain instances, obtainauthorizations for the use of the chemicals. Covered substances must bepre-registered by December 31, 2008. Currently, REACH is expected to beimplemented in three phases over the next eleven years based on known producthazards and/or volume of product in commerce. Under REACH, where warranted by arisk assessment, specified uses of some hazardous substances may be restricted.As a specialty 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. The Company is taking steps to complywith REACH and is evaluating the potential costs of compliance. The Companydoes not believe these costs will have a material impact on its financial statements.In addition, it is possible that REACH may affect raw material supply, customerdemand for certain products and the Company’s decision to continue tomanufacture and sell certain products.

 

Under the European UnionIntegrated Pollution Prevention and Control Directive (“IPPC”), EU membergovernments are to adopt rules and implement a cross-media (air, water andwaste) environmental permitting program for individual facilities. IPPCrequires a consistent application of Best Available Techniques throughout theEU. While the EU countries are at varying stages in their respectiveimplementation of the IPPC permit program, the Company has submitted allnecessary IPPC permit applications required to date, and in some cases receivedcompleted permits from the applicable government agency. The Company expects tosubmit all other IPPC applications and related documents on a timely basis asthe various countries implement the IPPC permit program. Although it is notknown with certainty what each IPPC permit will require, the Company believes,based upon its experience with the permits received to date, that the costs ofcompliance with the IPPC permit program will not be material to its results ofoperations, financial position or liquidity.

 

The Kyoto Protocol is anamendment to an international treaty on global warming. The Protocolestablishes significant emission reduction targets for six gases considered tohave global warming potential, referred to as greenhouse gases. The Protocolwas adopted in 1997 and became effective in February 2005 in over 140countries that have ratified it. The EU, including Germany and other countrieswhere the Company has interests, ratified the Kyoto Protocol in 2002 and, indoing so, have enacted regulations that reduce the emission of greenhouse gasesand have established a trading system covering carbon dioxide emissions, whichbecame effective at the start of 2005. The regulations directly affect theCompany’s power plants at the Duisburg and Langelsheim sites in Germany, as wellas the power plant being operated by a third party on one of the Company’ssites. Rockwood and such third party are required to purchase carbon dioxidecredits, which could result in increased operating costs, and may be requiredto develop additional cost-effective methods to reduce carbon dioxideemissions, which could result in increased capital expenditures. The newregulation indirectly affects the Company’s other operations in the EU, whichmay experience higher energy 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 asignificant effect on the nature and scope of any clean-up of contamination atcurrent and former operating facilities, the costs of transportation andstorage of chemicals and finished products and the costs of the storage anddisposal of wastes. In addition, “Superfund” statutes in the United States aswell as statutes in other jurisdictions impose strict, joint and severalliability for clean-up costs on the entities that generated waste and/orarranged for its disposal at contaminated third party sites, as well as thepast and present owners and operators of contaminated sites. All responsibleparties may be required to bear some or all clean-up costs regardless of fault,legality of the original disposal or ownership of the disposal site.

 

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The following tableprovides a list of the Company’s present and former facilities withenvironmental contamination for which we have reserved for at June 30,2008:

 
| **Country**     | ** ** | **Location**                     | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** | ** ** |
|-----------------|------------|----------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|------------|
| Brazil          |       | Diadema                          |       |    |       |    |       | X       |       |    |       |    |       |
| China           |       | Shenzhen                         |       |    |       |    |       | X       |       |    |       |    |       |
| Germany         |       | Duisburg                         |       | X       |       |    |       |    |       | X       |       |    |       |
|            |       | Hainhausen                       |       | X       |       |    |       |    |       |    |       |    |       |
|            |       | Ibbenburen                       |       |    |       |    |       |    |       | X       |       |    |       |
|            |       | Marktredwitz                     |       |    |       | X       |       |    |       |    |       |    |       |
|            |       | Plochingen                       |       |    |       | X       |       |    |       |    |       |    |       |
|            |       | Stadeln                          |       | X       |       |    |       |    |       |    |       |    |       |
|            |       | Troisdorf                        |       | X       |       |    |       | X       |       |    |       |    |       |
| Italy           |       | Turin                            |       |    |       |    |       | X       |       |    |       |    |       |
| The Netherlands |       | Oss                              |       | X       |       |    |       |    |       |    |       |    |       |
| United Kingdom  |       | Barrow-in Furness                |       | X       |       |    |       |    |       |    |       |    |       |
|            |       | Birtley                          |       |    |       |    |       | X       |       |    |       |    |       |
|            |       | Kidsgrove                        |       |    |       |    |       | X       |       |    |       |    |       |
| United States   |       | Beltsville, MD                   |       | X       |       |    |       | X       |       |    |       |    |       |
|            |       | East St. Louis,  IL              |       |    |       |    |       | X       |       |    |       |    |       |
|            |       | Easton, PA                       |       | X       |       |    |       |    |       |    |       |    |       |
|            |       | Gonzales, TX                     |       |    |       |    |       |    |       | X       |       |    |       |
|            |       | Harrisburg, NC                   |       | X       |       |    |       | X       |       |    |       |    |       |
|            |       | La Mirada, CA                    |       |    |       |    |       | X       |       |    |       |    |       |
|            |       | Laurens, SC                      |       |    |       | X       |       |    |       |    |       |    |       |
|            |       | Middletown, NY  (formerly owned) |       |    |       |    |       | X       |       |    |       | X       |       |
|            |       | New  Johnsonville, TN            |       |    |       | X       |       |    |       |    |       |    |       |
|            |       | Silver Peak, NV                  |       | X       |       |    |       |    |       | X       |       |    |       |
|            |       | Sunbright, VA  (facility closed) |       | X       |       |    |       |    |       |    |       | X       |       |
|            |       | Valdosta, GA                     |       | X       |       |    |       |    |       |    |       |    |       |

 

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(a)                The Company iscurrently operating groundwater monitoring and/or remediation systems at theselocations.

 

(b)               The Company iscurrently operating groundwater monitoring and/or remediation systems at theselocations for which prior owners or insurers have assumed responsibility.

 

(c)                The Company iscurrently conducting investigations into additional possible soil and/orgroundwater contamination at these locations.

 

(d)               The Company hasland restoration obligations relating to landfill activities or surface miningat these locations.

 

(e)                The Company isresponsible for liabilities related to environmental matters at these closedfacilities.

 

The Company is also responsiblefor environmental matters at some of its former off-site disposal locationsowned by third parties. These sites are considered Superfund sites as definedby the EPA or state regulatory authority. The Company is a potentiallyresponsible party or*de minimis*participant at the following Superfund locations: Casmalia, CA; Laurel, MD;Niagara Falls, NY; South Gate, CA; and Whittier, CA and has reserves for thesematters totaling $0.2 million at June 30, 2008.

 

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

 

***Government Enforcement Proceedings and Civil Litigation***

 

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. Currently, the Company is a party to a consent order withthe Metropolitan Sewer District (“MSD”) in St. Louis, Missouri to reduceammonia concentrations in wastewater discharge to a city treatment plant. MSD’snew National Pollution Discharge Elimination System (“NPDES”) permit requiresthe Company to reduce the facility’s ammonia discharge by December 31,2008. The Company will be required to make capital expenditures of up to $3.0million in connection with this matter.

 

24

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***Environmental Indemnity Obligations***

 

Pursuant to the sharepurchase agreement entered into in connection with the sale of the GroupeNovasep segment, the Company agreed to indemnify the buyers for certain knownand unknown environmental actions which may arise in the future related toperiods prior to closing of the sale. These obligations expire three yearsafter the closing; however, the Company’s liability for such obligations wasreduced from 90% of any qualifying environmental liability claim to 70% of suchclaims 15 months after the closing. In addition, the Company is required toindemnify the purchaser of the Company’s U.S. wafer reclaim business for sixyears for any unknown environmental actions attributable to the conduct of suchbusiness prior to the closing of the transaction in February 2007. Thebusiness purchase agreement provides that the Company must indemnify the buyerfor 100% of claims related to contamination of the business’ site or themigration of any hazardous substances from such site if notice of any suchclaim is given within four years of the closing of the transaction and 50% ofsuch claims if notice is given after the fourth but before the sixthanniversary of the closing.

 

Likewise, pursuant to thestock purchase agreement entered into in connection with the sale of theElectronics business, the Company agreed to indemnify the buyer for certainknown and unknown environmental actions which may arise in the future relatedto periods prior to the closing of the sale. The obligation to indemnify thebuyer for environmental liabilities arising at the former Electronics business’sites expires five years after the closing, while the obligation to indemnifyfor off-site matters survives for a period of seven years following theclosing. The Company also agreed to indemnify the buyer for any environmentalactions at sites formerly owned or operated by the business resulting from thebusiness’ prior activities.

 

***Environmental Indemnities***

 

Pursuant to theenvironmental deed entered into in connection with the KKR Acquisition, EvonikDegussa, as successor to Laporte, is required to indemnify the Company and itssubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR Acquisition. The environmental deedprovides that Evonik Degussa will indemnify the Company and its subsidiariesfor claims relating to properties that were formerly owned, occupied or used asof November 20, 2000, as well as properties owned by third parties(inclusive of disposal of waste and certain other identified issues prior to November 20,2000). The environmental deed provides that in this instance, Evonik Degussawill be responsible for reasonable costs and expenses incurred.

 

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition in April 2004, GEA Group and its subsidiary, GEA NorthAmerica, were required to indemnify the Company and its subsidiaries for 50% ofthe excess amount of losses over the amount of the related reserves (in thecase of known claims) and 50% of claims (in the case of unknown claims) relatedto the contamination of the Company or its subsidiaries’ properties and certainenvironmental damage claims unknown at closing, if notified within ten yearsfrom closing (which occurred on July 31, 2004). GEA Group and GEA NorthAmerica were also obligated to indemnify the Company for 85% of claims relatedto legacy site matters, if notified within ten years from closing, and for 50%of the excess amount of losses over the amount of the related reserves foroperational compliance matters for which the Company provided notice by December 31,2006. However, as discussed above, the Company entered into an agreement withGEA Group and GEA North America in March 2008 to settle all environmentalindemnities under the sale and purchase agreement.

 

Although the Company hasno reason to believe that the financial condition of those parties who may haveindemnification obligations to the Company is other than sound, in the eventthe Company seeks indemnity under any of these agreements or through othermeans, there can be no assurance that Evonik Degussa or any other party who mayhave obligations to indemnify the Company will adhere to their obligations andthe Company may have to resort to legal action to enforce its rights under theindemnities. In cases where the Company’s indemnification claims to thirdparties are uncontested, the Company expects to realize recoveries within theshort term. In addition, the Company may be required to make indemnity paymentsin connection with certain environmental matters. However, the Company does notbelieve that resolution of the known environmental matters subject toindemnification obligations owed to the Company will have a material adverseeffect on its business or financial condition, but may have a material adverseeffect on the Company’s results of operations or cash flow in any quarterly orannual reporting period.

 

***Environmental Reserves***

 

The Company hasestablished financial reserves relating to anticipated environmental cleanupobligations, site reclamation and remediation and closure costs, which arereviewed at least quarterly based on currently available information.Liabilities are recorded when potential liabilities are either known orbelieved to be probable and can be reasonably estimated. In the event that theCompany establishes a financial reserve in connection with site remediationcosts, the Company records a reserve for the estimated cost of the remediation,even though the costs of the remediation will likely be spread out over manyyears. The Company does not include unasserted claims in its reserves.

 

The Company’s liabilityestimates are based upon available facts, existing technology, indemnities fromthird parties, past experience and, in some instances, insurance recoverieswhere the remediation costs are being paid directly by its insurers and aregenerated by several means, including State-mandated schedules, environmentalconsultants and internal experts, depending on the circumstances. On aconsolidated basis, the Company has accrued $42.9 million and $40.7 million forknown environmental liabilities as of June 30, 2008 and December 31,2007, respectively, all of which were classified as other non-currentliabilities in the Consolidated Balance 

 

25

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Sheets. The environmentalliabilities assumed are subject to change upon the finalization of purchaseaccounting. Included in the $42.9 million as of June 30, 2008 is $22.8million that is discounted using discount rates ranging from 5.0% to 7.5%, withthe undiscounted amount of these reserves equaling $32.9 million. Included inthe $40.7 million as of December 31, 2007 is $15.8 million that isdiscounted using discount rates ranging from 5.0% to 7.0%, with theundiscounted amount of these reserves equaling $22.5 million. In certain cases,the Company’s remediation liabilities are payable over periods of up to 30years. The Company estimates that the potential range for such environmentalmatters as of June 30, 2008 is from $42.9 million to $63.8 million. For the sixmonths ended June 30, 2008, the Company recorded charges of $2.3 millionto increase its environmental liabilities and made payments of $1.4 million forclean-up and remediation costs, which reduced its environmental liabilities.For the six months ended June 30, 2008, the recurring cost of managinghazardous substances for ongoing operations is $27.7 million. At a number ofthe sites described above, the extent of contamination has not yet been fullyinvestigated or the final scope of remediation is not yet determinable andcould potentially affect the range identified above.

 

The Company is obligatedto undertake soil remediation at two facilities in Europe in the eventmanufacturing operations are discontinued there at some future date. Inaddition, in the event that manufacturing operations are discontinued at any ofthe Company’s other facilities with known contamination, regulatory authoritiesmay impose more stringent requirements on the Company including soilremediation. The Company does not contemplate any such action occurring in theforeseeable future, as these facilities’ remaining lives are indefinite. Giventhe indeterminate useful life of these facilities and the correspondingindeterminate settlement date of any soil remediation obligations, the Companydoes not have sufficient information to estimate a range of potentialsettlement dates for its obligations. Consequently, the Company cannot employ apresent value technique to estimate fair value and, accordingly, has notaccrued for any environmental related costs to remediate soil at thesefacilities.

 

The Company believesthese accruals are adequate based on currently available information. TheCompany may incur losses in excess of the amounts accrued; however, based oncurrently available information it does not believe the additional amount ofpotential losses would have a material effect on its results of operations orfinancial condition, but may have a material effect on the results ofoperations or cash flow in any given quarterly or annual reporting period. TheCompany does not believe that any known individual environmental matter wouldhave a material effect on its results of operations or financial condition. 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.

 

**15.****                               CONSOLIDATINGFINANCIAL INFORMATION:**

 

The Company issued the2014 Notes in November 2004. The following consolidating financialstatements present the results of operations, financial condition and cashflows in separate columns of the parent company (Rockwood Specialties Group, Inc.),which is the issuer of the 2014 Notes, guarantor subsidiaries, non-guarantorsubsidiaries, elimination adjustments and consolidated totals.

 

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2008**

**(Dollars in millions)**

 
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                     |       | $           | —     |             | $          | 227.0             |       | $                | 718.5      |   | $ | 945.5 |   |
| Cost of products  sold                        |       | —      |       | 167.4            |       | 488.6             |       | 656.0            |       |
| Gross profit                                  |       | —      |       | 59.6             |       | 229.9             |       | 289.5            |       |
| Selling, general  and administrative expenses |       | 0.1         |       | 43.0             |       | 136.0             |       | 179.1            |       |
| Restructuring  charges, net                   |       | —      |       | 0.1              |       | 1.4               |       | 1.5              |       |
| Loss on sale of  assets and other             |       | —      |       | —           |       | 0.8               |       | 0.8              |       |
| Operating (loss)  income                      |       | (0.1        | )          | 16.5             |       | 91.7              |       | 108.1            |       |
| Other income  (expenses):                     |       |        |       |             |       |              |       |             |       |
| Intergroup interest,  net                     |       | 28.3        |       | (9.4             | )          | (18.9             | )          | —           |       |
| Interest expense                              |       | (2.2        | )          | (0.4             | )          | (7.1              | )          | (9.7             | )          |
| Interest income                               |       | 1.3         |       | —           |       | 0.1               |       | 1.4              |       |
| Intergroup  other, net                        |       | —      |       | 2.7              |       | (2.7              | )          | —           |       |
| Foreign exchange  (loss) gain, net            |       | (1.8        | )          | (0.1             | )          | 1.1               |       | (0.8             | )          |
| Other, net                                    |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Other income  (expenses), net                 |       | 25.6        |       | (7.2             | )          | (27.4             | )          | (9.0             | )          |
| Income before  taxes and minority interest    |       | 25.5        |       | 9.3              |       | 64.3              |       | 99.1             |       |
| Income tax  provision                         |       | 0.6         |       | 3.6              |       | 16.9              |       | 21.1             |       |
| Income before  minority interest              |       | 24.9        |       | 5.7              |       | 47.4              |       | 78.0             |       |
| Minority  interest, net of tax                |       | —      |       | —           |       | —            |       | —           |       |
| Net income                                    |       | $           | 24.9       |             | $          | 5.7               |       | $                | 47.4       |   | $ | 78.0 |   |

 

**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED JUNE 30, 2008**

**(Dollars in millions)**

 
| ** **                                    | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                     |       | $           | —     |             | $          | 422.7             |       | $                | 1,376.8    |   | $ | 1,799.5 |   |
| Cost of products  sold                        |       | —      |       | 310.3            |       | 924.8             |       | 1,235.1          |       |
| Gross profit                                  |       | —      |       | 112.4            |       | 452.0             |       | 564.4            |       |
| Selling, general  and administrative expenses |       | 0.1         |       | 87.7             |       | 261.4             |       | 349.2            |       |
| Restructuring  charges, net                   |       | —      |       | 0.5              |       | 1.8               |       | 2.3              |       |
| Loss on sale of  assets and other             |       | —      |       | —           |       | 0.9               |       | 0.9              |       |
| Operating (loss)  income                      |       | (0.1        | )          | 24.2             |       | 187.9             |       | 212.0            |       |
| Other income  (expenses):                     |       |        |       |             |       |              |       |             |       |
| Intergroup interest,  net                     |       | 56.0        |       | (18.9            | )          | (37.1             | )          | —           |       |
| Interest expense                              |       | (66.7       | )          | (0.9             | )          | (15.8             | )          | (83.4            | )          |
| Interest income                               |       | 4.0         |       | (0.1             | )          | (0.3              | )          | 3.6              |       |
| Intergroup  other, net                        |       | —      |       | 4.1              |       | (4.1              | )          | —           |       |
| Foreign exchange  gain (loss), net            |       | 19.4        |       | (0.3             | )          | (4.8              | )          | 14.3             |       |
| Other, net                                    |       | (0.4        | )          | 0.4              |       | 0.5               |       | 0.5              |       |
| Other income  (expenses), net                 |       | 12.3        |       | (15.7            | )          | (61.6             | )          | (65.0            | )          |
| Income before  taxes and minority interest    |       | 12.2        |       | 8.5              |       | 126.3             |       | 147.0            |       |
| Income tax  provision                         |       | 0.9         |       | 5.1              |       | 34.7              |       | 40.7             |       |
| Income before  minority interest              |       | 11.3        |       | 3.4              |       | 91.6              |       | 106.3            |       |
| Minority  interest, net of tax                |       | —      |       | —           |       | (0.6              | )          | (0.6             | )          |
| Net income                                    |       | $           | 11.3       |             | $          | 3.4               |       | $                | 91.0       |   | $ | 105.7 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED JUNE 30, 2007**

**(Dollarsin millions)**

 
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 191.9             |       | $                | 610.8      |   | $ | 802.7 |   |
| Cost of products  sold                                                       |       | —      |       | 132.3            |       | 409.8             |       | 542.1            |       |
| Gross profit                                                                 |       | —      |       | 59.6             |       | 201.0             |       | 260.6            |       |
| Selling, general  and administrative expenses                                |       | —      |       | 38.7             |       | 113.9             |       | 152.6            |       |
| Restructuring  charges, net                                                  |       | —      |       | 0.3              |       | 1.7               |       | 2.0              |       |
| Loss (gain) on  sale of assets and other                                     |       | —      |       | 0.1              |       | (0.5              | )          | (0.4             | )          |
| Operating (loss)  income                                                     |       | —      |       | 20.5             |       | 85.9              |       | 106.4            |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                    |       | 18.3        |       | (5.0             | )          | (13.3             | )          | —           |       |
| Interest expense                                                             |       | (40.2       | )          | (0.6             | )          | (6.2              | )          | (47.0            | )          |
| Interest income                                                              |       | 5.8         |       | 0.3              |       | (2.5              | )          | 3.6              |       |
| Intergroup  other, net                                                       |       | 17.3        |       | 4.5              |       | (21.8             | )          | —           |       |
| Loss on early  extinguishment on debt                                        |       | (15.6       | )          | (3.0             | )          | (0.5              | )          | (19.1            | )          |
| Refinancing  expenses                                                        |       | —      |       | —           |       | —            |       | —           |       |
| Foreign exchange  gain (loss), net                                           |       | 2.1         |       | (0.2             | )          | 1.5               |       | 3.4              |       |
| Other, net                                                                   |       | 0.3         |       | (0.3             | )          | 0.1               |       | 0.1              |       |
| Other income  (expenses), net                                                |       | (12.0       | )          | (4.3             | )          | (42.7             | )          | (59.0            | )          |
| (Loss) income  from continuing operations before taxes and minority interest |       | (12.0       | )          | 16.2             |       | 43.2              |       | 47.4             |       |
| Income tax  provision                                                        |       | 0.2         |       | 0.3              |       | 20.4              |       | 20.9             |       |
| (Loss) income  from continuing operations before minority interest           |       | (12.2       | )          | 15.9             |       | 22.8              |       | 26.5             |       |
| Minority  interest in continuing operations, net of tax                      |       | —      |       | —           |       | (2.3              | )          | (2.3             | )          |
| Net (loss)  income from continuing operations                                |       | (12.2       | )          | 15.9             |       | 20.5              |       | 24.2             |       |
| Income from  discontinued operations, net of tax                             |       | —      |       | 1.8              |       | 2.0               |       | 3.8              |       |
| (Loss) gain on  sale of discontinued operations, net of tax                  |       | —      |       | (9.1             | )          | 9.1               |       | —           |       |
| Net (loss)  income                                                           |       | $           | (12.2      | )                | $          | 8.6               |       | $                | 31.6       |   | $ | 28.0 |   |

 

28

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**SIXMONTHS ENDED JUNE 30, 2007**

**(Dollarsin millions)**

 
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 367.5             |       | $                | 1,182.9    |   | $ | 1,550.4 |   |
| Cost of products  sold                                                       |       | —      |       | 258.7            |       | 787.0             |       | 1,045.7          |       |
| Gross profit                                                                 |       | —      |       | 108.8            |       | 395.9             |       | 504.7            |       |
| Selling, general  and administrative expenses                                |       | 0.1         |       | 78.1             |       | 221.6             |       | 299.8            |       |
| Restructuring  charges, net                                                  |       | —      |       | 0.8              |       | 5.2               |       | 6.0              |       |
| Loss (gain) on  sale of assets and other                                     |       | 0.1         |       | (4.2             | )          | (1.1              | )          | (5.2             | )          |
| Operating (loss)  income                                                     |       | (0.2        | )          | 34.1             |       | 170.2             |       | 204.1            |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                    |       | 36.6        |       | (10.5            | )          | (26.1             | )          | —           |       |
| Interest expense                                                             |       | (87.8       | )          | (1.3             | )          | (12.6             | )          | (101.7           | )          |
| Interest income                                                              |       | 13.4        |       | 0.3              |       | (5.3              | )          | 8.4              |       |
| Intergroup  other, net                                                       |       | 17.6        |       | 8.5              |       | (26.1             | )          | —           |       |
| Loss on early  extinguishment on debt                                        |       | (15.6       | )          | (3.0             | )          | (0.5              | )          | (19.1            | )          |
| Refinancing  expenses                                                        |       | (0.9        | )          | —           |       | —            |       | (0.9             | )          |
| Foreign exchange  gain (loss), net                                           |       | 3.4         |       | (0.3             | )          | 0.4               |       | 3.5              |       |
| Other, net                                                                   |       | 0.3         |       | (0.3             | )          | —            |       | —           |       |
| Other income  (expenses), net                                                |       | (33.0       | )          | (6.6             | )          | (70.2             | )          | (109.8           | )          |
| (Loss) income  from continuing operations before taxes and minority interest |       | (33.2       | )          | 27.5             |       | 100.0             |       | 94.3             |       |
| Income tax  provision                                                        |       | 0.6         |       | 3.8              |       | 37.3              |       | 41.7             |       |
| (Loss) income  from continuing operations before minority interest           |       | (33.8       | )          | 23.7             |       | 62.7              |       | 52.6             |       |
| Minority  interest in continuing operations, net of tax                      |       | —      |       | —           |       | (3.4              | )          | (3.4             | )          |
| Net (loss)  income from continuing operations                                |       | (33.8       | )          | 23.7             |       | 59.3              |       | 49.2             |       |
| Income from  discontinued operations, net of tax                             |       | —      |       | 3.5              |       | 5.0               |       | 8.5              |       |
| (Loss) gain on  sale of discontinued operations, net of tax                  |       | —      |       | (9.1             | )          | 124.8             |       | 115.7            |       |
| Minority  interest in discontinued operations, net of tax                    |       | —      |       | —           |       | (0.1              | )          | (0.1             | )          |
| Net (loss)  income                                                           |       | $           | (33.8      | )                | $          | 18.1              |       | $                | 189.0      |   | $ | 173.3 |   |

 

29

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEET**

**JUNE30, 2008**

**(Dollarsin millions)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 414.5      |             | $          | (167.4            | )          | $                | 90.0       |             | $          | — |   | $ | 337.1 |   |
| Accounts  receivable, net                        |       | —      |       | 138.1            |       | 456.8             |       | —           |       | 594.9            |       |
| Inventories                                      |       | —      |       | 152.0            |       | 426.3             |       | —           |       | 578.3            |       |
| Deferred income  taxes                           |       | 2.3         |       | 11.9             |       | 5.2               |       | —           |       | 19.4             |       |
| Prepaid expenses  and other current assets       |       | 2.5         |       | 10.4             |       | 45.8              |       | —           |       | 58.7             |       |
| Total current  assets                            |       | 419.3       |       | 145.0            |       | 1,024.1           |       | —           |       | 1,588.4          |       |
| Property, plant  and equipment, net              |       | —      |       | 239.2            |       | 1,355.4           |       | —           |       | 1,594.6          |       |
| Investment in  subsidiary                        |       | 1,423.4     |       | 91.7             |       | —            |       | (1,515.1         | )          | —           |       |
| Goodwill                                         |       | —      |       | 349.9            |       | 1,476.7           |       | —           |       | 1,826.6          |       |
| Intergroup  receivable                           |       | 1,724.8     |       | 699.6            |       | 4,468.3           |       | (6,892.7         | )          | —           |       |
| Other intangible  assets, net                    |       | —      |       | 76.2             |       | 617.0             |       | —           |       | 693.2            |       |
| Deferred debt  issuance costs, net               |       | 1.9         |       | 3.6              |       | 36.6              |       | —           |       | 42.1             |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 15.9              |       | —           |       | 15.9             |       |
| Other assets                                     |       | 10.1        |       | 3.6              |       | 42.7              |       | —           |       | 56.4             |       |
| Total assets                                     |       | $           | 3,579.5    |             | $          | 1,608.8           |       | $                | 9,036.7    |             | $          | (8,407.8 | ) | $ | 5,817.2 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| Current liabilities:                             |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 74.5              |       | $                | 202.9      |             | $          | — |   | $ | 277.4 |   |
| Income taxes  payable                            |       | 0.5         |       | 0.1              |       | 12.4              |       | —           |       | 13.0             |       |
| Accrued  compensation                            |       | —      |       | 11.3             |       | 65.4              |       | —           |       | 76.7             |       |
| Restructuring  liability                         |       | —      |       | 2.1              |       | 7.6               |       | —           |       | 9.7              |       |
| Accrued expenses  and other current liabilities  |       | 23.9        |       | 46.5             |       | 120.8             |       | —           |       | 191.2            |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 8.6               |       | —           |       | 8.6              |       |
| Long-term debt,  current portion                 |       | 26.0        |       | —           |       | 79.5              |       | —           |       | 105.5            |       |
| Total current  liabilities                       |       | 50.4        |       | 134.5            |       | 497.2             |       | —           |       | 682.1            |       |
| Long-term debt                                   |       | 2,336.5     |       | —           |       | 197.4             |       | —           |       | 2,533.9          |       |
| Pension and  related liabilities                 |       | —      |       | 5.2              |       | 348.4             |       | —           |       | 353.6            |       |
| Intergroup  payable                              |       | —      |       | 1,366.7          |       | 5,526.0           |       | (6,892.7         | )          | —           |       |
| Deferred income  taxes                           |       | 11.8        |       | (3.0             | )          | 117.3             |       | —           |       | 126.1            |       |
| Other  liabilities                               |       | 73.0        |       | 34.8             |       | 81.9              |       | —           |       | 189.7            |       |
| Total  liabilities                               |       | 2,471.7     |       | 1,538.2          |       | 6,768.2           |       | (6,892.7         | )          | 3,885.4          |       |
| Minority  interest                               |       | —      |       | —           |       | 173.0             |       | —           |       | 173.0            |       |
| Stockholder’s  equity:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,035.4     |       | 102.2            |       | 1,057.6           |       | (1,159.8         | )          | 1,035.4          |       |
| Accumulated  other comprehensive income          |       | (15.9       | )          | 0.3              |       | 476.9             |       | —           |       | 461.3            |       |
| Retained  earnings (deficit)                     |       | 88.3        |       | (222.5           | )          | 396.3             |       | —           |       | 262.1            |       |
| Total  stockholder’s equity                 |       | 1,107.8     |       | 70.6             |       | 2,095.5           |       | (1,515.1         | )          | 1,758.8          |       |
| Total  liabilities and stockholder’s equity |       | $           | 3,579.5    |             | $          | 1,608.8           |       | $                | 9,036.7    |             | $          | (8,407.8 | ) | $ | 5,817.2 |   |

 

30

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**DECEMBER31, 2007**

**(Dollarsin millions)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 370.7      |             | $          | (82.2             | )          | $                | 58.4       |             | $          | — |   | $ | 346.9 |   |
| Accounts  receivable, net                        |       | —      |       | 112.8            |       | 370.9             |       | —           |       | 483.7            |       |
| Inventories                                      |       | —      |       | 138.2            |       | 397.2             |       | —           |       | 535.4            |       |
| Deferred income  taxes                           |       | 2.5         |       | 14.0             |       | 6.2               |       | —           |       | 22.7             |       |
| Prepaid expenses  and other current assets       |       | 6.5         |       | 11.8             |       | 52.4              |       | —           |       | 70.7             |       |
| Total current  assets                            |       | 379.7       |       | 194.6            |       | 885.1             |       | —           |       | 1,459.4          |       |
| Property, plant  and equipment, net              |       | —      |       | 241.8            |       | 1,271.0           |       | —           |       | 1,512.8          |       |
| Investment in  subsidiary                        |       | 1,433.5     |       | 94.6             |       | —            |       | (1,528.1         | )          | —           |       |
| Goodwill                                         |       | —      |       | 372.2            |       | 1,394.8           |       | —           |       | 1,767.0          |       |
| Intergroup  receivable                           |       | 1,706.5     |       | 712.9            |       | 4,224.6           |       | (6,644.0         | )          | —           |       |
| Other intangible  assets, net                    |       | —      |       | 82.0             |       | 594.8             |       | —           |       | 676.8            |       |
| Deferred debt  issuance costs, net               |       | 2.2         |       | 4.1              |       | 34.8              |       | —           |       | 41.1             |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 15.5              |       | —           |       | 15.5             |       |
| Other assets                                     |       | —      |       | 5.0              |       | 34.2              |       | —           |       | 39.2             |       |
| Total assets                                     |       | $           | 3,521.9    |             | $          | 1,707.2           |       | $                | 8,454.8    |             | $          | (8,172.1 | ) | $ | 5,511.8 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 72.8              |       | $                | 220.4      |             | $          | — |   | $ | 293.2 |   |
| Income taxes  payable                            |       | 0.4         |       | 3.6              |       | 8.7               |       | —           |       | 12.7             |       |
| Accrued  compensation                            |       | —      |       | 20.9             |       | 62.2              |       | —           |       | 83.1             |       |
| Restructuring  liability                         |       | —      |       | 3.0              |       | 11.0              |       | —           |       | 14.0             |       |
| Accrued expenses  and other current liabilities  |       | 24.4        |       | 47.6             |       | 100.8             |       | —           |       | 172.8            |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 7.2               |       | —           |       | 7.2              |       |
| Long-term debt,  current portion                 |       | 25.0        |       | —           |       | 82.4              |       | —           |       | 107.4            |       |
| Total current  liabilities                       |       | 49.8        |       | 147.9            |       | 492.7             |       | —           |       | 690.4            |       |
| Long-term debt                                   |       | 2,272.2     |       | —           |       | 201.8             |       | —           |       | 2,474.0          |       |
| Pension and  related liabilities                 |       | —      |       | 5.5              |       | 322.0             |       | —           |       | 327.5            |       |
| Intergroup  payable                              |       | —      |       | 1,452.1          |       | 5,191.9           |       | (6,644.0         | )          | —           |       |
| Deferred income  taxes                           |       | 14.8        |       | (0.6             | )          | 98.4              |       | —           |       | 112.6            |       |
| Other  liabilities                               |       | 55.6        |       | 35.0             |       | 76.1              |       | —           |       | 166.7            |       |
| Total  liabilities                               |       | 2,392.4     |       | 1,639.9          |       | 6,382.9           |       | (6,644.0         | )          | 3,771.2          |       |
| Minority  interest                               |       | —      |       | —           |       | 175.3             |       | —           |       | 175.3            |       |
| Stockholder’s  equity:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,035.2     |       | 102.2            |       | 1,070.6           |       | (1,172.8         | )          | 1,035.2          |       |
| Accumulated  other comprehensive income          |       | 17.3        |       | 0.4              |       | 356.0             |       | —           |       | 373.7            |       |
| Retained  earnings (deficit)                     |       | 77.0        |       | (225.9           | )          | 305.3             |       | —           |       | 156.4            |       |
| Total  stockholder’s equity                 |       | 1,129.5     |       | 67.3             |       | 1,896.6           |       | (1,528.1         | )          | 1,565.3          |       |
| Total liabilities  and stockholder’s equity |       | $           | 3,521.9    |             | $          | 1,707.2           |       | $                | 8,454.8    |             | $          | (8,172.1 | ) | $ | 5,511.8 |   |

 

31

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**SIXMONTHS ENDED JUNE 30, 2008**

**(Dollarsin millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net income                                                                                               |       | $           | 11.3       |             | $          | 3.4               |       | $                | 91.0       |   | $ | 105.7 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities:             |       |        |       |             |       |              |       |             |       |
| Depreciation and  amortization                                                                           |       | —      |       | 22.9             |       | 102.7             |       | 125.6            |       |
| Deferred  financing costs amortization                                                                   |       | 0.2         |       | 0.5              |       | 4.0               |       | 4.7              |       |
| Foreign exchange  (gain) loss                                                                            |       | (19.4       | )          | 0.3              |       | 4.8               |       | (14.3            | )          |
| Fair value  adjustment of derivatives                                                                    |       | (6.4        | )          | —           |       | 3.2               |       | (3.2             | )          |
| Bad debt  provision                                                                                      |       | —      |       | (0.3             | )          | 1.3               |       | 1.0              |       |
| Stock-based  compensation                                                                                |       | —      |       | 2.6              |       | 1.5               |       | 4.1              |       |
| Deferred income  taxes                                                                                   |       | (0.9        | )          | 3.7              |       | 13.9              |       | 16.7             |       |
| Loss on sale of  assets and other                                                                        |       | —      |       | —           |       | 0.4               |       | 0.4              |       |
| Minority  interest in continuing operations                                                              |       | —      |       | —           |       | 0.6               |       | 0.6              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | (24.9            | )          | (62.5             | )          | (87.4            | )          |
| Inventories, including  inventory write-up reversal                                                      |       | —      |       | (15.6            | )          | (1.6              | )          | (17.2            | )          |
| Prepaid expenses  and other assets                                                                       |       | 2.8         |       | 0.5              |       | 4.6               |       | 7.9              |       |
| Accounts payable                                                                                         |       | —      |       | 2.2              |       | (13.9             | )          | (11.7            | )          |
| Income taxes  payable                                                                                    |       | 0.9         |       | (2.2             | )          | 1.5               |       | 0.2              |       |
| Accrued expenses  and other liabilities                                                                  |       | (3.0        | )          | (9.6             | )          | 3.2               |       | (9.4             | )          |
| Intercompany  operating activities, net                                                                  |       | 2.5         |       | 17.3             |       | (19.8             | )          | —           |       |
| Net cash (used  in) provided by operating activities of continuing operations                            |       | (12.0       | )          | 0.8              |       | 134.9             |       | 123.7            |       |
| Net cash  provided by operating activities of discontinued operations                                    |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash (used in) provided by operating activities**                                                 |       | (12.0       | )          | 0.8              |       | 134.9             |       | 123.7            |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | (1.6             | )          | (9.8              | )          | (11.4            | )          |
| Post closing  purchase price consideration                                                               |       | —      |       | —           |       | 29.1              |       | 29.1             |       |
| Post closing  purchase price consideration, related intercompany                                         |       | 10.0        |       | —           |       | (10.0             | )          | —           |       |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (15.0            | )          | (89.8             | )          | (104.8           | )          |
| Proceeds on sale  of assets                                                                              |       | —      |       | 2.2              |       | 0.7               |       | 2.9              |       |
| Net cash used in  investing activities of continuing operations                                          |       | 10.0        |       | (14.4            | )          | (79.8             | )          | (84.2            | )          |
| Net cash used in  investing activities of discontinued operations                                        |       | —      |       | (4.3             | )          | —            |       | (4.3             | )          |
| **Net  cash used in investing activities**                                                               |       | 10.0        |       | (18.7            | )          | (79.8             | )          | (88.5            | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Repayment of  senior secured credit facilities                                                           |       | (12.6       | )          | —           |       | (20.9             | )          | (33.5            | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (5.6              | )          | (5.6             | )          |
| Equity  contribution                                                                                     |       | 0.2         |       | —           |       | —            |       | 0.2              |       |
| Financing costs                                                                                          |       | —      |       | —           |       | (3.0              | )          | (3.0             | )          |
| Distribution to  minority shareholder                                                                    |       | —      |       | —           |       | (2.9              | )          | (2.9             | )          |
| Intercompany  financing related activity                                                                 |       | 59.3        |       | (67.0            | )          | 7.7               |       | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                            |       | 46.9        |       | (67.0            | )          | (24.7             | )          | (44.8            | )          |
| Net cash used in  financing activities of discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) financing activities**                                                 |       | 46.9        |       | (67.0            | )          | (24.7             | )          | (44.8            | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                            |       | (1.1        | )          | (0.3             | )          | 1.2               |       | (0.2             | )          |
| Net increase  (decrease) in cash and cash equivalents                                                    |       | 43.8        |       | (85.2            | )          | 31.6              |       | (9.8             | )          |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                        |       | —      |       | —           |       | —            |       | —           |       |
| Increase  (decrease) in cash and cash equivalents from continuing operations                             |       | 43.8        |       | (85.2            | )          | 31.6              |       | (9.8             | )          |
| Cash and cash  equivalents of continuing operations, beginning of period                                 |       | 370.7       |       | (82.2            | )          | 58.4              |       | 346.9            |       |
| Cash and cash  equivalents of continuing operations, end of period                                       |       | $           | 414.5      |             | $          | (167.4            | )          | $                | 90.0       |   | $ | 337.1 |   |

 

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(a) -Excludes $4.3 of sale-related cash outflows, net

 

32

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**SIXMONTHS ENDED JUNE 30, 2007**

**(Dollarsin millions)**

 
| ** **                                                                                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                          | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                          |       |        |       |             |       |              |       |             |       |
| Net (loss)  income                                                                                                  |       | $           | (33.8      | )                | $          | 18.1              |       | $                | 189.0      |   | $ | 173.3 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities:                |       |        |       |             |       |              |       |             |       |
| Income from  discontinued operations, net of tax                                                                    |       | —      |       | (3.5             | )          | (5.0              | )          | (8.5             | )          |
| Gain on sale of  discontinued operations                                                                            |       | —      |       | —           |       | (115.7            | )          | (115.7           | )          |
| Minority  interest in discontinued operations                                                                       |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Depreciation and  amortization                                                                                      |       | —      |       | 17.1             |       | 83.4              |       | 100.5            |       |
| Deferred  financing costs amortization                                                                              |       | 0.3         |       | 0.8              |       | 3.6               |       | 4.7              |       |
| Loss on early  extinguishment of debt (including $4.6 million of noncash write-offs on  deferred financing costs)   |       | 15.5        |       | 3.0              |       | 0.6               |       | 19.1             |       |
| Foreign exchange  (gain) loss                                                                                       |       | (3.4        | )          | 0.3              |       | (0.4              | )          | (3.5             | )          |
| Fair value  adjustment of derivatives                                                                               |       | 1.7         |       | —           |       | 0.3               |       | 2.0              |       |
| Bad debt  provision                                                                                                 |       | —      |       | 0.3              |       | 0.6               |       | 0.9              |       |
| Stock-based compensation                                                                                            |       | —      |       | 0.5              |       | 0.2               |       | 0.7              |       |
| Deferred income  taxes                                                                                              |       | 0.3         |       | 0.9              |       | 18.8              |       | 20.0             |       |
| Loss (gain) on  sale of assets and other                                                                            |       | 0.1         |       | (0.3             | )          | (5.0              | )          | (5.2             | )          |
| Minority  interest in continuing operations                                                                         |       | —      |       | —           |       | 3.4               |       | 3.4              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:            |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                                |       | —      |       | (2.4             | )          | (55.7             | )          | (58.1            | )          |
| Inventories,  including inventory write-up reversal                                                                 |       | —      |       | (3.5             | )          | 10.8              |       | 7.3              |       |
| Prepaid expenses  and other assets                                                                                  |       | (1.0        | )          | (4.2             | )          | (1.6              | )          | (6.8             | )          |
| Accounts payable                                                                                                    |       | —      |       | 6.8              |       | (19.9             | )          | (13.1            | )          |
| Income taxes  payable                                                                                               |       | 0.3         |       | 0.5              |       | (0.2              | )          | 0.6              |       |
| Accrued expenses  and other liabilities                                                                             |       | (3.8        | )          | 7.1              |       | 11.3              |       | 14.6             |       |
| Intercompany  operating activities, net                                                                             |       | 20.8        |       | (33.1            | )          | 12.3              |       | —           |       |
| Net cash (used in)  provided by operating activities of continuing operations                                       |       | (3.0        | )          | 8.4              |       | 130.9             |       | 136.3            |       |
| Net cash  provided by operating activities of discontinued operations                                               |       | 0.1         |       | 3.3              |       | 8.6               |       | 12.0             |       |
| **Net  cash (used in) provided by operating activities**                                                            |       | (2.9        | )          | 11.7             |       | 139.5             |       | 148.3            |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                          |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                |       | —      |       | —           |       | (33.4             | )          | (33.4            | )          |
| Acquisitions,  related intercompany                                                                                 |       | (35.5       | )          | —           |       | 35.5              |       | —           |       |
| Capital  expenditures, excluding capital leases                                                                     |       | —      |       | (12.8            | )          | (77.9             | )          | (90.7            | )          |
| Proceeds from  formation of Viance joint venture, net                                                               |       | —      |       | 46.1             |       | 30.5              |       | 76.6             |       |
| Proceeds on sale  of assets                                                                                         |       | (0.1        | )          | 6.6              |       | 3.5               |       | 10.0             |       |
| Net cash (used  in) provided by investing activities of continuing operations                                       |       | (35.6       | )          | 39.9             |       | (41.8             | )          | (37.5            | )          |
| Net cash (used  in) provided by investing activities of discontinued operations, including  sale proceeds of $421.4 |       | —      |       | (4.2             | )          | 422.5             |       | 418.3            |       |
| **Net  cash (used in) provided by investing activities**                                                            |       | (35.6       | )          | 35.7             |       | 380.7             |       | 380.8            |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                          |       |        |       |             |       |              |       |             |       |
| Repayment of  2011 Notes                                                                                            |       | (273.4      | )          | —           |       | —            |       | (273.4           | )          |
| Repayment of  senior secured credit facilities                                                                      |       | (11.3       | )          | —           |       | (16.6             | )          | (27.9            | )          |
| Repayment of  senior secured credit facilities revolver                                                             |       | (37.0       | )          | —           |       | —            |       | (37.0            | )          |
| Payments on  other long-term debt                                                                                   |       | —      |       | —           |       | (4.1              | )          | (4.1             | )          |
| Payments related  to early extinguishment of debt                                                                   |       | (14.5       | )          | —           |       | —            |       | (14.5            | )          |
| Intercompany  financing related activity                                                                            |       | 398.7       |       | (6.0             | )          | (392.7            | )          | —           |       |
| Net cash provided  by (used in) financing activities of continuing operations                                       |       | 62.5        |       | (6.0             | )          | (413.4            | )          | (356.9           | )          |
| Net cash used in  financing activities of discontinued operations                                                   |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) financing activities**                                                            |       | 62.5        |       | (6.0             | )          | (413.4            | )          | (356.9           | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                                       |       | 2.5         |       | (0.2             | )          | (7.3              | )          | (5.0             | )          |
| Net increase in  cash and cash equivalents                                                                          |       | 26.5        |       | 41.2             |       | 99.5              |       | 167.2            |       |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                                   |       | —      |       | —           |       | (1.6              | )          | (1.6             | )          |
| Increase in cash  and cash equivalents from continuing operations                                                   |       | 26.5        |       | 41.2             |       | 97.9              |       | 165.6            |       |
| Cash and cash  equivalents of continuing operations, beginning of period                                            |       | 463.7       |       | (168.4           | )          | (269.4            | )          | 25.9             |       |
| Cash and cash equivalents  of continuing operations, end of period                                                  |       | $           | 490.2      |             | $          | (127.2            | )          | $                | (171.5     | ) | $ | 191.5 |   |

 

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(a) -Excludes sale proceeds of $421.4 and intercompany transfers of $7.3

 

33

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**16.****                               SUBSEQUENTEVENTS:**

 

On July 21, 2008, the Company announced that itentered into an agreement with Yule Catto & Co. plc to purchaseHolliday Pigments, the leading global manufacturer of technical gradeultramarine blue and manganese violet pigments. The purchase price isapproximately €46.0 million. Holliday Pigments manufactures inorganicultramarine pigments for a wide range of applications, including plastics,cosmetics, coatings and inks. Holliday Pigments will be incorporated into theColor Pigments and Services business, which is part of the PerformanceAdditives segment. This transaction is subject to regulatory approval and isexpected to close in the third quarter of 2008.

 

On July 25, 2008, the Company announced that itentered into an agreement with Nalco Holdings, Inc. (“Nalco”) to acquireNalco’s Finishing Technologies business. The purchase price is approximately$75.0 million. Nalco’s Finishing Technologies business provides chemicals andservices for pre-treating of metal and will become part of the ChemetallAmericas surface treatment business which is part of the Specialty Chemicalssegment. In addition, Nalco’s Finishing Technologies plant in Jackson, Michiganis included in the transaction. The transaction is subject to regulatoryapproval and is expected to close in the third quarter of 2008.

 

**Item2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

*In2007, we completed the sale of our Groupe Novasep and Electronics segments,excluding our European wafer reclaim business. As a result, our condensedconsolidated financial statements have been reclassified to reflect thesesegments as discontinued operations. See Note 2, “Discontinued Operations,” forfurther details. The European wafer reclaim business retained has been reportedin the “Corporate and other” category for segment reporting purposes for allperiods presented.*

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth in “Forward-Looking Statements” at theend of this Management Discussion and Analysis section and the risk factorssection of the Company’s 2007 Form 10-K. You should read the followingdiscussion and analysis together with our condensed consolidated financialstatements and the notes to those statements that appear elsewhere in thisQuarterly Report. Amounts may not recalculate due to rounding differences.*

 

*Unless otherwise noted, allamounts which are denominated in currencies other than the U.S. dollar areconverted at the June 30,2008 exchange rate of €1.00 = $1.5755.*

 

**General**

 

We are a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-added specialty chemicals and advanced materials. We serve more than60,000 customers across a wide variety of industries and geographic areas. Weoperate through five business segments: (1) Specialty Chemicals; (2) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; and (5) SpecialtyCompounds.

 

Our net sales consist ofsales of our products, net of sales discounts, product returns and allowances.In addition, net sales include shipping and handling costs billed to customers.Sales are primarily made on a purchase order basis.

 

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

 

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

 

We are focused on growth,productivity, cost reduction, margin expansion, bolt-on acquisitions,divestment of non-core businesses and debt reduction. In connection with thisfocus, among other things:

 

·            Wehave cut costs, reduced overhead and eliminated duplicative positions in bothacquired and existing businesses. In 2007, we closed two U.K. facilitiesacquired in an October 2006 acquisition by our Specialty Compoundssegment. We also implemented other restructuring measures in our othersegments, including the closure of our Baulking, U.K. facility in ourClay-based Additives business;

 

·            Weacquired the global color pigments business of Elementis plc in August 2007which is being integrated into our Color Pigments and Service business withinour Performance Additives segment;

 

·            Wecompleted the sale of our Groupe Novasep segment in January 2007 and ourUnited States wafer reclaim business in

 

34

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February 2007. In December 2007,we completed the sale of our Electronics business, excluding our European waferreclaim business; and

 

·            InMarch 2008, we implemented a restructuring plan in our Color Pigments andServices business in connection with the business acquired from Elementis plcwhich includes the reorganization and relocation of its North American Financeand IT services and the closure of three manufacturing facilities by the end of2008.

 

**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

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

 

***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. Sales growth in the SurfaceTreatment business occurred in 2007 and has continued in the first six monthsof 2008 in all markets and regions served, especially in the Europeanautomotive, general industrial and aerospace industries, as price and volumeincreases and the impact of a bolt-on acquisition made in December 2007more than offset raw material cost increases. We expect the Surface Treatmentbusiness to continue to grow in the remainder of 2008.

 

·            Demandfor our lithium products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven by demand for lithium carbonate inindustrial applications, the aluminum business, glass ceramics, cement and thegeneral demand in China. Sales of lithium products specifically used in lifescience applications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. Growth in the FineChemicals business occurred in 2007 and has continued in the first six monthsof 2008 in most market segments, driven by higher sales volumes of lithiumspecialties and price increases for lithium products, partially offset by lowerdemand for lithium carbonate. Growth in the Fine Chemicals business is expectedto continue in most lithium applications for the remainder of 2008.

 

***Performance Additives***

 

·            Generally,a trend towards the increased use of colored concrete products in the NorthAmerican construction market has historically had a positive effect on ourColor Pigments and Services business line. However, a general slowdown inthe construction market negatively impacted North American construction salesin 2007. As a result of this continued slowdown, North American volumeswere lower in the first six months of 2008 and are expected to continue todecline throughout the year. However, sales in our Color Pigments and Servicesbusiness in North America were favorably impacted in the first six months of2008 by higher selling prices implemented to help recover raw material andenergy cost increases and the acquisition of the global color pigments businessof Elementis plc made in August 2007. We expect this trend to continue for the remainder of 2008.  Unlike North America, construction volumes inEurope in our Color Pigments and Services business increased slightly in 2007.However, weaker economic conditions in Europe have resulted in a reduction inEuropean construction volumes in the first six months of 2008 and we expectthis trend to continue throughout the remainder of 2008.

 

·            Thechange in the market to environmentally advanced wood treatment chemicalproducts, such as alkaline copper quaternary, or ACQ, and the phase out ofchromated copper arsenate, or CCA, for residential use previously had apositive impact on the Timber Treatment Chemicals business, which is a leadingsupplier of these higher margin products. However, the market position of ACQwas negatively impacted in 2007 and the first six months of 2008 by customerlosses, a general slowdown in the construction market and the increasing use ofwood substitutes. The expiration of the ACQ patent in May 2007 had anegative impact on our results of operations, as one new competitor has enteredthe market and others may follow. Although we commercialized the nextgeneration non-metallic timber treatment preservatives system (Ecolife) in thethird quarter of 2007 through our joint venture with Rohm and Haas, we do notexpect this to have a significant impact in 2008.

 

·            Inthe Clay-based Additives business, sales were up slightly in 2007 and continuedto increase in the first six months of 2008 as higher oilfield volumes andincreased selling prices for coatings and inks were partially offset by lowercarbonless applications. We expect sales growth to continue for the remainderof 2008 in oilfield applications.

 

·            Rawmaterial costs have increased in general in the Performance Additives segmentand continue to trend upward. In the Color Pigments and Services and Clay-basedAdditives businesses, selling price increases helped offset the increases inraw material and energy costs, specifically iron oxide for Color Pigments andServices and quaternary amine (“quat”) for Clay-basedAdditives. Continuing unfavorable foreign exchange rates are also expectedto result in substantial cost increases in Chinese manufactured raw materialsused in our Color Pigments and Services business. The Timber TreatmentChemicals business continues to experience high costs for copper, a primary componentin ACQ.  In addition, costs were higherfor

 

35

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monoethanolamine (“MEA”).  Selling price increases were implemented in2007 and were essentially maintained in the first six months of 2008 to partiallyoffset higher copper and MEA costs. Our ability to pass on additional sellingprice increases throughout 2008 is uncertain in these businesses.

 

***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. Volumes and selling prices in the fiberanatase business decreased in 2007 and continued to decline in the first sixmonths of 2008. We expect this trend to continue for the remainder of 2008.While sales of titanium dioxide products in rutile grade were up slightly in2007 on increased volumes, sales of these products were down in the first sixmonths of 2008 due to lower volumes and selling prices and are expected to belower for the remainder of 2008. Our functional additives business increased in2007 on higher selling prices and volumes, but was flat in the first six monthsof 2008 as higher selling prices were offset by lower volumes. We expect salesin the functional additives business to be up in 2008 as compared to 2007.

 

·            Asdiscussed in Note 1, “Description of Business and Summary of SignificantAccounting Policies,” to the Condensed Consolidated Financial Statements, weentered into a definitive agreement with Kemira Oyj (“Kemira”) on May 21,2008 to form a joint venture that will focus on specialty titanium dioxidepigments. The joint venture will focus on producing and marketing specialtytitanium dioxide pigments for the synthetic fiber, packaging inks, cosmetics,pharmaceutical and food industries.

 

***Advanced Ceramics***

 

·            Demandfor our ceramic medical devices is mainly tied to the aging population inEurope and the United States. Although the volume of our products used inmedical device applications sold experienced double-digit growth each year from2001 through 2005, in 2006 some customers in the U.S. reduced their demand dueto high inventory levels and delayed approvals resulting in lower volumes.However, sales of our medical device applications increased in 2007 on highervolumes and continued to increase in the first six months of 2008. We expectthis trend to continue throughout 2008.

 

·            Despitethe negative impact of pricing pressure from Asian competitors, sales ofceramic products for use in cutting tool products were higher in 2007 and inthe first six months of 2008 due to volume increases and new customer projects.This growth is expected to continue for the remainder of 2008. Sales ofmechanical systems and applications were up in 2007, but were lower in thefirst six months of 2008 on decreased volumes and are expected to continue tobe down throughout 2008. Sales in our electronic products business were lowerin 2007 primarily on decreased volumes and continued to decrease in the firstsix months of 2008 on lower selling prices and volumes. We expect this trend tocontinue throughout this year. Sales of our multi-functional applications werehigher in 2007 from increased volumes, but were down in the first six months of2008 from lower selling prices and are expected to be down for the remainder of2008 on lower volumes.

 

***Specialty Compounds***

 

·            Ourlargest product line in the Specialty Compounds segment is wire and cablecompounds. Sales within this product line are dependent upon thetelecommunications market and related sectors, specifically demand for high-endvoice and data communication wire and cable, for which our Specialty Compoundssegment is a significant provider of sheathing materials. Newly developednon-halogen products for wire and cable data communication, military and otherapplications have expanded business in North America for those applications andcreated opportunities in Europe. Although sales of wire and cable products wereup slightly in 2007, sales growth was due to the acquisition of the Megolondivision of Scapa Group, plc., while the wire and cable business was negativelyimpacted by a general downturn in the wire and cable market. Despite continuedweakness in the wire and cable market and relatively flat sales in the firstsix months of 2008, sales of wire and cable products are expected to be upslightly for the remainder of 2008.

 

·            Mostof the other end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product, but many are alsoapplication specific, such as automotive. We are focusing more of our effortstowards increasing high margin specialty products, in particular, thermoplasticelastomers, and less of our efforts in automotive and footwear. Our net salesin consumer/industrial thermoplastic elastomers were up in 2007 and in thefirst six months of 2008. We expect this trend to continue throughout 2008. Netsales of regulated packaging were lower in 2007 and the first six months of2008 and are expected to continue to decline for the remainder of 2008.

 

·            Rawmaterial prices for ammonium octamolybdate and polyvinyl chloride (“PVC”) resinand plasticizers, key raw materials used in the production of wire and cableproducts, were slightly lower in 2007, but were up in the first six months of2008 and are expected to be higher throughout the remainder of 2008.

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2007 net sales, 52% were shipments toEurope, 31% to North America

 

36

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(predominantly the UnitedStates) and 17% to the rest of the world. For a geographic description of theorigin of our net sales and location of our long-lived assets, see Note 4, “SegmentInformation” in our 2007 Form 10-K.

 

We estimate that we sold to customers in more than 60 countries duringthis period. Currently, we serve our diverse and extensive customer base with91 manufacturing facilities in 25 countries. Consequently, we are exposed toglobal economic and political changes, particularly currency fluctuations thatcould impact our profitability and demand for our products.

 

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe three and six months ended June 30, 2008, the average exchange rate ofthe euro against the U.S. dollar was higher compared to the same period in2007. As a result, our net sales, gross profit and operating income werepositively impacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

**RawMaterials**

 

Raw materials constitutedapproximately 54% of our 2007 cost of products sold. We have a broad rawmaterial base, with the cost of no single raw material representing more than3% of our cost of products sold in 2007. Nonetheless, the significant pricefluctuations our raw materials have experienced in the past during periods ofhigh demand have had an adverse impact on our results of operations. We cannotaccurately predict the impact of any future price increases for raw materialsor any raw material shortages on our business as a whole or in specificgeographic regions. In addition, we may not be able to pass on raw materialprice increases to our customers. See details of our ten most significantraw materials (in terms of dollars) in 2007 in Item 1, “Business — RawMaterials” in our 2007 Form 10-K.

 

**EnergyCosts**

 

In 2007, energy purchasesrepresented approximately 5% of our cost of products sold. However, withincertain business lines, such as our Titanium Dioxide Pigments segment and theColor Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments and Servicesand Clay-based Additives, increases when the price of natural gas in NorthAmerica rises. Natural gas prices in North America were relatively stable in2007, but were higher during the first six months of 2008. Natural gas pricesin Europe, where our Titanium Dioxide Pigments segment is located, havehistorically been relatively stable, although prices were higher in 2007 and inthe first six months of 2008.

 

**IncomeTaxes**

 

The effective tax ratefor the second quarter of 2008 was 21.3%. This rate was favorably impacted bydomestic income, including gains on mark-to-market swaps, which was not taxeffected due to the Company’s valuation allowance position, favorable Europeanrate changes and geographic earnings mix. In the second quarter of 2008, the worldwidevaluation allowance decreased by $11.2 million. The decrease in the valuationallowance was primarily due to a decrease of $8.2 million in deferred taxassets associated with the Company’s domestic earnings, a decrease of $1.1million in other comprehensive income and a decrease of $1.9 million due to theoffset of net operating losses against uncertain tax benefit liabilities. Ofthe $11.2 million decrease in the valuation allowance for the second quarter of2008, $8.2 million impacted the tax provision.

 

**Acquisitions**

 

During the periodspresented, we made acquisitions pursuant to our business strategy of achievingprofitable growth. See Note 4, “Acquisitions,” for further details.  Inaddition, see Note 16, “Subsequent Events,” for a discussion of the agreementsentered into in July 2008 to purchase Holliday Pigments and Nalco’sFinishing Technologies business.

 

**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that includesystems/organization establishment expenses, restructuring and related charges,foreign exchange gains and losses and inventory write-up charges. See “Itemsexcluded from Adjusted EBITDA” section in Note 3, “Segment Information,” for adiscussion of special charges and credits recorded in the three and six monthsended June 30, 2008 and 2007.

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

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

 

37

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**Definitionof Adjusted EBITDA**

 

The presentation ofconsolidated Adjusted EBITDA contained in this report is calculated using thedefinition set forth in the senior secured credit agreement as a basis andreflects management’s interpretations thereof. Adjusted EBITDA, which isreferred to under the senior secured credit agreement as “Consolidated EBITDA,”is defined in the senior secured credit agreement as consolidated earnings (which,as defined in the senior secured credit agreement, equals income (loss) beforethe deduction of income taxes of Rockwood Specialties Group, Inc. and theRestricted Subsidiaries (as such term is defined in the senior secured creditagreement), excluding extraordinary items) plus:

 

·    interest expense;

·    depreciationexpense;

·    amortizationexpense, including amortization of deferred financing fees;

·    extraordinary lossesand non-recurring charges;

·    non-cash charges;

·    losses on asset sales;

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

·    expenses paid by usor any of our subsidiaries in connection with the Dynamit Nobel Acquisition,the senior secured credit agreement, the granting of liens under the securitydocuments (as such term is defined in the senior secured credit agreement), theindenture governing the 2014 Notes and the offering of the 2014 Notes and anyother related transactions;

·    any expenses orcharges incurred in connection with any issuance of debt or equity securities;

·    any fees andexpenses related to permitted acquisitions;

·    any deduction forminority interest expense; and

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

 

less:

 

·    extraordinary gainsand non-recurring gains;

·    non-cash gains; and

·    gains on assetsales,

 

in all cases, subject tocertain exclusions.

 

For presentation purposeswithin this report, we use the computation set forth in our senior securedcredit agreement as a basis which reflects management’s interpretationsthereof. Management has determined that stock-based compensation costs, whichare non-cash charges, will not be an adjustment in calculating Adjusted EBITDAas these costs will be an ongoing recurring cost to the Company. These costsare recorded in selling, general and administrative expenses in theConsolidated Statements of Operations. Specifically, calculation of AdjustedEBITDA according to the indenture underlying our 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’sUses**

 

We use Adjusted EBITDA ona consolidated basis to assess our operating performance. We believe thisfinancial measure on a consolidated basis is helpful in highlighting trends inour overall business because the items excluded in calculating Adjusted EBITDAhave been deemed by management to have little or no bearing on our day-to-dayoperating performance. It is also the most significant criterion in ourcalculation of performance-based cash bonuses and our determination of whethercertain performance-based stock options and restricted stock units vest, all ofwhich are tied to Adjusted EBITDA targets.

 

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated basis is important in analyzing ourliquidity because our senior secured credit agreement and indenture governingthe 2014 Notes contain financial covenants that are determined based onAdjusted EBITDA. These covenants are material terms of these agreements,because they govern substantially all of our long-term debt, which in turnrepresents a substantial portion of our capitalization. Non-compliance withthese financial covenants under our senior secured credit facilities—ourmaximum total leverage ratio and our minimum interest coverage ratio, inparticular—could result in the lenders requiring us to immediately repay allamounts borrowed. Any such acceleration could also lead to the noteholdersaccelerating the maturity of the 2014 Notes. In addition, if we cannot satisfythese financial covenants in the indenture governing the 2014 Notes, we cannotengage in certain activities, such as incurring additional indebtedness ormaking certain payments. Consequently, Adjusted EBITDA is critical to ourassessment of our liquidity.

 

We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker, our Chief Executive Officer, to evaluate the ongoingperformance of our business segments and reporting units. On a segment basis,we define 

 

38

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Adjusted EBITDA asoperating income excluding depreciation and amortization, certain non-cashgains and charges, certain other special gains and charges determined by oursenior management to be non-recurring gains and charges and certain itemsdeemed by our senior management to have little or no bearing on the day-to-dayoperating performance of our business segments and reporting units. Theadjustments made to operating income directly correlate with the adjustments tonet income in calculating Adjusted EBITDA on a consolidated basis pursuant tothe senior secured credit agreement, which reflects management’sinterpretations thereof.

 

**Limitations**

 

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

 

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

 

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

 

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

 

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

 

Adjusted EBITDA is not analternative to net income (loss) or income (loss) from continuing operationsbefore taxes and minority interest 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 U.S. GAAP financial measures and other financialinformation, in each case included elsewhere in this Annual Report. We alsostrongly urge you not to rely on any single financial measure to evaluate ourbusiness. Our measure of Adjusted EBITDA may not be comparable to those ofother companies.

 

**Resultsof Operations**

 

**ActualResults of Operations**

 

The following tablepresents the major components of our operations on an actual basis and AdjustedEBITDA (the reconciliation to net income is set forth in—Reconciliation of NetIncome to Adjusted EBITDA for the three and six months ended June 30, 2008and 2007), including as a percentage of net sales, for the periods presented.See Note 3, “Segment Information,” for segment information and a reconciliationto income from continuing operations before taxes and minority interest toAdjusted EBITDA on a segment basis.

 

39

----

 
| ** **                                                                | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                             | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Statement  of operations data:**                                        |       |                             |       |                           |       |   |   |   |   |
| **Net  sales:**                                                           |       |                             |       |                           |       |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                | 335.5      |                           | $          | 270.9 |   | $ | 647.2 |   | $ | 538.8 |   |
| Performance  Additives                                                    |       | 254.7                            |       | 216.2                          |       | 466.3 |   | 401.0 |   |
| Titanium Dioxide  Pigments                                                |       | 134.2                            |       | 123.3                          |       | 260.0 |   | 239.4 |   |
| Advanced  Ceramics                                                        |       | 145.3                            |       | 118.6                          |       | 278.5 |   | 224.1 |   |
| Specialty  Compounds                                                      |       | 73.2                             |       | 70.8                           |       | 142.2 |   | 140.4 |   |
| Corporate and  other                                                      |       | 2.6                              |       | 2.9                            |       | 5.3 |   | 6.7 |   |
| Total net sales                                                           |       | 945.5                            |       | 802.7                          |       | 1,799.5 |   | 1,550.4 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                                              |       | 289.5                            |       | 260.6                          |       | 564.4 |   | 504.7 |   |
|                                                                      |       | 30.6                             | %          | 32.5                           | %          | 31.4 | % | 32.6 | % |
| Selling, general  and administrative expenses                             |       | 179.1                            |       | 152.6                          |       | 349.2 |   | 299.8 |   |
|                                                                      |       | 18.9                             | %          | 19.0                           | %          | 19.4 | % | 19.3 | % |
| Restructuring  charges, net                                               |       | 1.5                              |       | 2.0                            |       | 2.3 |   | 6.0 |   |
| Loss (gain) on  sale of assets and other                                  |       | 0.8                              |       | (0.4                           | )          | 0.9 |   | (5.2 | ) |
| **Operating  income (loss):**                                             |       |                             |       |                           |       |   |   |   |   |
| Specialty  Chemicals                                                      |       | 64.3                             |       | 52.7                           |       | 127.9 |   | 108.3 |   |
|                                                                      |       | 19.2                             | %          | 19.5                           | %          | 19.8 | % | 20.1 | % |
| Performance  Additives                                                    |       | 19.6                             |       | 32.1                           |       | 32.9 |   | 51.4 |   |
|                                                                      |       | 7.7                              | %          | 14.8                           | %          | 7.1 | % | 12.8 | % |
| Titanium Dioxide  Pigments                                                |       | 1.2                              |       | 9.8                            |       | 12.2 |   | 21.9 |   |
|                                                                      |       | 0.9                              | %          | 7.9                            | %          | 4.7 | % | 9.1 | % |
| Advanced  Ceramics                                                        |       | 32.6                             |       | 21.5                           |       | 58.9 |   | 40.4 |   |
|                                                                      |       | 22.4                             | %          | 18.1                           | %          | 21.1 | % | 18.0 | % |
| Specialty  Compounds                                                      |       | 6.9                              |       | 6.5                            |       | 12.6 |   | 11.6 |   |
|                                                                      |       | 9.4                              | %          | 9.2                            | %          | 8.9 | % | 8.3 | % |
| Corporate and  other                                                      |       | (16.5                            | )          | (16.2                          | )          | (32.5 | ) | (29.5 | ) |
| Total operating  income                                                   |       | 108.1                            |       | 106.4                          |       | 212.0 |   | 204.1 |   |
| **Other  income (expenses):**                                             |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                          |       | (9.7                             | )          | (47.0                          | )          | (83.4 | ) | (101.7 | ) |
| Interest income                                                           |       | 1.4                              |       | 3.6                            |       | 3.6 |   | 8.4 |   |
| Loss on early  extinguishment of debt                                     |       | —                           |       | (19.1                          | )          | — |   | (19.1 | ) |
| Refinancing  expenses                                                     |       | —                           |       | —                         |       | — |   | (0.9 | ) |
| Foreign exchange  (loss) gain, net                                        |       | (0.8                             | )          | 3.4                            |       | 14.3 |   | 3.5 |   |
| Other, net                                                                |       | 0.1                              |       | 0.1                            |       | 0.5 |   | — |   |
| **Income  from continuing operations before taxes and minority interest** |       | 99.1                             |       | 47.4                           |       | 147.0 |   | 94.3 |   |
| Income tax  provision                                                     |       | 21.1                             |       | 20.9                           |       | 40.7 |   | 41.7 |   |
| Income from  continuing operations before minority interest               |       | 78.0                             |       | 26.5                           |       | 106.3 |   | 52.6 |   |
| Minority  interest in continuing operations, net of tax                   |       | —                           |       | (2.3                           | )          | (0.6 | ) | (3.4 | ) |
| Net income from  continuing operations                                    |       | 78.0                             |       | 24.2                           |       | 105.7 |   | 49.2 |   |
| Income from  discontinued operations, net of tax                          |       | —                           |       | 3.8                            |       | — |   | 8.5 |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                           |       | —                         |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax                 |       | —                           |       | —                         |       | — |   | (0.1 | ) |
| Net income                                                                |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
| **Adjusted  EBITDA:**                                                     |       |                             |       |                           |       |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                | 82.1       |                           | $          | 66.3 |   | $ | 162.6 |   | $ | 134.6 |   |
|                                                                      |       | 24.5                             | %          | 24.5                           | %          | 25.1 | % | 25.0 | % |
| Performance  Additives                                                    |       | 39.1                             |       | 45.5                           |       | 70.3 |   | 78.1 |   |
|                                                                      |       | 15.4                             | %          | 21.0                           | %          | 15.1 | % | 19.5 | % |
| Titanium Dioxide  Pigments                                                |       | 15.4                             |       | 21.0                           |       | 39.3 |   | 43.4 |   |
|                                                                      |       | 11.5                             | %          | 17.0                           | %          | 15.1 | % | 18.1 | % |
| Advanced  Ceramics                                                        |       | 44.9                             |       | 32.7                           |       | 83.4 |   | 61.5 |   |
|                                                                      |       | 30.9                             | %          | 27.6                           | %          | 29.9 | % | 27.4 | % |
| Specialty  Compounds                                                      |       | 10.1                             |       | 9.5                            |       | 18.8 |   | 17.6 |   |
|                                                                      |       | 13.8                             | %          | 13.4                           | %          | 13.2 | % | 12.5 | % |
| Corporate and  other                                                      |       | (13.3                            | )          | (14.5                          | )          | (27.7 | ) | (27.7 | ) |
| Total Adjusted  EBITDA (a)                                                |       | $                                | 178.3      |                           | $          | 160.5 |   | $ | 346.7 |   | $ | 307.5 |   |

 

----

(a)                This amount doesnot include $8.5 million and $17.7 million of Adjusted EBITDA for the three andsix months ended June 30, 2007, respectively, from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe six months ended June 30, 2007 from the former Groupe Novasep segmentsold on January 9, 2007.

 

40

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The following table presents the changes in the major components of ouroperations on a historical basis in dollars and percentages:

 
| ** **                                                | ** ** | **Change: Three months ended June 30, 2008 versus 2007** | ** ** | **Change: Six months ended June 30, 2008 versus 2007** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                                                       | ** ** | ** **                                                                                     | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                | ** ** | ** **                                                                                       | ** ** | **%**                                                                                          | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                             | ** ** | **Total**                                                                                        | ** ** | **Change**                                                                                     | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement  of operations data:**                        |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  sales:**                                           |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                      |       | $                                                                                                | 64.6       |                                                                                           | 23.8       | % | $ | 31.3 |   | $ | 33.3 |   | $ | 108.4 |   | 20.1 | % | $ | 59.0 |   | $ | 49.4 |   |
| Performance  Additives                                    |       | 38.5                                                                                             |       | 17.8                                                                                           |       | 5.5 |   | 33.0 |   | 65.3 |   | 16.3 |   | 10.2 |   | 55.1 |   |
| Titanium Dioxide  Pigments                                |       | 10.9                                                                                             |       | 8.8                                                                                            |       | 18.5 |   | (7.6 | ) | 20.6 |   | 8.6 |   | 34.3 |   | (13.7 | ) |
| Advanced Ceramics                                         |       | 26.7                                                                                             |       | 22.5                                                                                           |       | 18.6 |   | 8.1 |   | 54.4 |   | 24.3 |   | 34.2 |   | 20.2 |   |
| Specialty  Compounds                                      |       | 2.4                                                                                              |       | 3.4                                                                                            |       | 0.9 |   | 1.5 |   | 1.8 |   | 1.3 |   | 2.3 |   | (0.5 | ) |
| Corporate and  other                                      |       | (0.3                                                                                             | )          | (10.3                                                                                          | )          | 0.4 |   | (0.7 | ) | (1.4 | ) | (20.9 | ) | 0.7 |   | (2.1 | ) |
| Total net sales                                           |       | 142.8                                                                                            |       | 17.8                                                                                           |       | 75.2 |   | 67.6 |   | 249.1 |   | 16.1 |   | 140.7 |   | 108.4 |   |
|                                                      |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                              |       | 28.9                                                                                             |       | 11.1                                                                                           |       | 25.4 |   | 3.5 |   | 59.7 |   | 11.8 |   | 48.1 |   | 11.6 |   |
|                                                      |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses             |       | 26.5                                                                                             |       | 17.4                                                                                           |       | 15.8 |   | 10.7 |   | 49.4 |   | 16.5 |   | 29.2 |   | 20.2 |   |
| Restructuring  charges                                    |       | (0.5                                                                                             | )          |                                                                                           |       |   |   | (0.5 | ) | (3.7 | ) |   |   |   |   | (3.7 | ) |
| Loss (gain) on  sale of assets and other                  |       | 1.2                                                                                              |       |                                                                                           |       |   |   | 1.2 |   | 6.1 |   |   |   |   |   | 6.1 |   |
| Total operating  expenses                                 |       | 27.2                                                                                             |       | 17.6                                                                                           |       | 15.8 |   | 11.4 |   | 51.8 |   | 17.2 |   | 29.2 |   | 22.6 |   |
| **Operating  income (loss):**                             |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                      |       | 11.6                                                                                             |       | 22.0                                                                                           |       | 4.9 |   | 6.7 |   | 19.6 |   | 18.1 |   | 9.5 |   | 10.1 |   |
| Performance  Additives                                    |       | (12.5                                                                                            | )          | (38.9                                                                                          | )          | 0.5 |   | (13.0 | ) | (18.5 | ) | (36.0 | ) | 0.5 |   | (19.0 | ) |
| Titanium Dioxide  Pigments                                |       | (8.6                                                                                             | )          | (87.8                                                                                          | )          | 0.1 |   | (8.7 | ) | (9.7 | ) | (44.3 | ) | 1.5 |   | (11.2 | ) |
| Advanced Ceramics                                         |       | 11.1                                                                                             |       | 51.6                                                                                           |       | 4.6 |   | 6.5 |   | 18.5 |   | 45.8 |   | 8.1 |   | 10.4 |   |
| Specialty  Compounds                                      |       | 0.4                                                                                              |       | 6.2                                                                                            |       | 0.1 |   | 0.3 |   | 1.0 |   | 8.6 |   | 0.2 |   | 0.8 |   |
| Corporate and  other                                      |       | (0.3                                                                                             | )          | (1.9                                                                                           | )          | (0.6 | ) | 0.3 |   | (3.0 | ) | (10.2 | ) | (0.9 | ) | (2.1 | ) |
| Total                                                     |       | 1.7                                                                                              |       | 1.6                                                                                            |       | 9.6 |   | (7.9 | ) | 7.9 |   | 3.9 |   | 18.9 |   | (11.0 | ) |
| **Other  income (expenses):**                             |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                          |       | 37.3                                                                                             |       | (79.4                                                                                          | )          | 1.3 |   | 36.0 |   | 18.3 |   | (18.0 | ) | 0.9 |   | 17.4 |   |
| Interest income                                           |       | (2.2                                                                                             | )          | (61.1                                                                                          | )          | — |   | (2.2 | ) | (4.8 | ) | (57.1 | ) | — |   | (4.8 | ) |
| Loss on early  extinguishment of debt                     |       | 19.1                                                                                             |       |                                                                                           |       |   |   |   |   | 19.1 |   |   |   |   |   |   |   |
| Refinancing  expenses                                     |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | 0.9 |   |   |   |   |   |   |   |
| Foreign exchange  (loss) gain, net                        |       | (4.2                                                                                             | )          |                                                                                           |       |   |   |   |   | 10.8 |   |   |   |   |   |   |   |
| Other, net                                                |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | 0.5 |   |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and**   |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **minority  interest**                                    |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                      |       | 7.6                                                                                              |       |                                                                                           |       |   |   |   |   | 13.5 |   |   |   |   |   |   |   |
| Performance  Additives                                    |       | (16.2                                                                                            | )          |                                                                                           |       |   |   |   |   | (27.0 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                |       | (9.7                                                                                             | )          |                                                                                           |       |   |   |   |   | (11.8 | ) |   |   |   |   |   |   |
| Advanced Ceramics                                         |       | 11.0                                                                                             |       |                                                                                           |       |   |   |   |   | 18.3 |   |   |   |   |   |   |   |
| Specialty  Compounds                                      |       | 1.7                                                                                              |       |                                                                                           |       |   |   |   |   | 2.3 |   |   |   |   |   |   |   |
| Corporate and  other                                      |       | 57.3                                                                                             |       |                                                                                           |       |   |   |   |   | 57.4 |   |   |   |   |   |   |   |
| Total                                                     |       | 51.7                                                                                             |       |                                                                                           |       |   |   |   |   | 52.7 |   |   |   |   |   |   |   |
| Income tax  provision                                     |       | 0.2                                                                                              |       |                                                                                           |       |   |   |   |   | (1.0 | ) |   |   |   |   |   |   |
| Income from  continuing operations before                 |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| minority interest                                         |       | 51.5                                                                                             |       |                                                                                           |       |   |   |   |   | 53.7 |   |   |   |   |   |   |   |
| Minority interest  in continuing operations, net of tax   |       | 2.3                                                                                              |       |                                                                                           |       |   |   |   |   | 2.8 |   |   |   |   |   |   |   |
| Net income from  continuing operations                    |       | 53.8                                                                                             |       |                                                                                           |       |   |   |   |   | 56.5 |   |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax          |       | (3.8                                                                                             | )          |                                                                                           |       |   |   |   |   | (8.5 | ) |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax      |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | (115.7 | ) |   |   |   |   |   |   |
| Minority interest  in discontinued operations, net of tax |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | 0.1 |   |   |   |   |   |   |   |
| Net income                                                |       | $                                                                                                | 50.0       |                                                                                           |       |   |   |   |   |   | $ | (67.6 | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                     |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                      |       | $                                                                                                | 15.8       |                                                                                           | 23.8       | % | $ | 6.4 |   | $ | 9.4 |   | $ | 28.0 |   | 20.8 | % | $ | 12.4 |   | $ | 15.6 |   |
| Performance  Additives                                    |       | (6.4                                                                                             | )          | (14.1                                                                                          | )          | 1.2 |   | (7.6 | ) | (7.8 | ) | (10.0 | ) | 2.0 |   | (9.8 | ) |
| Titanium Dioxide  Pigments                                |       | (5.6                                                                                             | )          | (26.7                                                                                          | )          | 2.1 |   | (7.7 | ) | (4.1 | ) | (9.4 | ) | 5.1 |   | (9.2 | ) |
| Advanced Ceramics                                         |       | 12.2                                                                                             |       | 37.3                                                                                           |       | 6.4 |   | 5.8 |   | 21.9 |   | 35.6 |   | 11.3 |   | 10.6 |   |
| Specialty  Compounds                                      |       | 0.6                                                                                              |       | 6.3                                                                                            |       | 0.2 |   | 0.4 |   | 1.2 |   | 6.8 |   | 0.4 |   | 0.8 |   |
| Corporate and  other                                      |       | 1.2                                                                                              |       | 8.3                                                                                            |       | (0.4 | ) | 1.6 |   | — |   | — |   | (0.7 | ) | 0.7 |   |
| Total Adjusted  EBITDA                                    |       | $                                                                                                | 17.8       |                                                                                           | 11.1       | % | $ | 15.9 |   | $ | 1.9 |   | $ | 39.2 |   | 12.7 | % | $ | 30.5 |   | $ | 8.7 |   |

 

----

(a)          The constant currencyeffect is the translation impact calculated based on the change in theapplicable rate, primarily the euro, to the U.S. dollar exchange rate for theapplicable period.

 

***Three months endedJune 30, 2008 compared to three months ended June 30, 2007***

 

**Overview**

 

Net sales increased $142.8 million in the second quarter of 2008compared with the same period in the prior year primarily due to the positiveimpact of currency changes of $75.2 million, the acquisition of the globalcolor pigments business of Elementis plc completed on August 31, 2007 andincreased selling prices of $21.1 million. Higher volumes, particularly inour Specialty Chemicals and Advanced Ceramics segments, also had a favorableimpact on net sales. See further discussion by segment below.

 

Operating income and Adjusted EBITDA also increased in the secondquarter of 2008 compared with the same period in the prior year due to thepositive impact of currency changes and the sales increases noted above.Operating income and Adjusted EBITDA were

 

41

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negatively impacted by higher raw material and energy costs in mostbusinesses.

 

Net income from continuing operations increased $53.8 million comparedwith the same period in the prior year primarily due to costs of $19.1 millionincurred in the second quarter of 2007 to redeem our 2011 Notes and lowerinterest expense recorded due to higher mark-to-market gains on our interestrate hedging instruments.

 

Income from discontinued operations, net of tax was $3.8 million in thesecond quarter of 2007 and was comprised of income from operating theElectronics business, excluding the European wafer reclaim business.

 

Net income increased $50.0 million in the second quarter of 2008compared with the same period in the prior year due to the reasons noted above.

 

**Net sales**

 

*Specialty Chemicals*.  Net sales increased $64.6 million over the prior year, including the positiveimpact of currency changes of $31.3 million. In the Fine Chemicals business,higher selling prices of lithium products, as well as increased volumes, had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by higher selling prices, increased volumes in all markets,particularly in European automotive, aerospace and general industrialapplications, and the impact of a bolt-on acquisition made inDecember 2007.

 

*Performance Additives*.  Net sales increased $38.5 million over the prior year primarily due to theacquisition of the global color pigments business of Elementis plc. Also,increased selling prices in our Color Pigments and Services and Clay-basedAdditives businesses and the positive impact of currency changes of $5.5million were partially offset by lower volumes of construction-related productsin our Color Pigments and Services and Timber Treatment Chemicals businesses.

 

*Titanium Dioxide Pigments*.  Net sales increased $10.9 million over the prior year due to the positiveimpact of currency changes of $18.5 million, partially offset by lowervolumes and selling prices of titanium dioxide products, primarily commoditygrade.

 

*Advanced Ceramics*.  Net sales increased $26.7 million over the prior year primarily due to thepositive impact of currency changes of $18.6 million and increased volumes ofmedical and cutting tool applications. This was partially offset by volumedeclines in mechanical systems and mechanical applications.

 

*Specialty Compounds*.  Net sales increased $2.4 million over the prior year due to increased sellingprices and the positive impact of currency changes of $0.9 million, partiallyoffset by lower volumes, particularly in wire and cable and footwearapplications.

 

*Corporate and other*.  Net sales decreased $0.3 million over the prior year primarily due to lowervolumes and selling prices in the European wafer reclaim business.

 

**Gross profit**

 

Gross profit increased $28.9 million over the prior year primarily dueto the positive impact of currency changes of $25.4 million. Sales increasesnoted above, in particular selling price increases, were partially offset byraw material cost increases, particularly from the impact of higher tin andphosphoric acid costs in our Specialty Chemicals segment, higher iron-oxide andcobalt costs in our Color Pigments and Services business and higher PVC resincosts in our Specialty Compounds segment. We also experienced lower volumes inour Color Pigments and Services, Timber Treatment Chemicals and TitaniumDioxide Pigments businesses. In addition, depreciation and amortization costswere higher in most businesses, in part from the impact of acquisitions. Grossprofit as a percentage of net sales decreased to 30.6% in the second quarter of2008 from 32.5% in the second quarter of 2007.

 

**Selling, general and administrativeexpenses**

 

Selling, general and administrative expenses, or SG&A, increased$26.5 million over the prior year primarily due to the impact of currencychanges of $15.8 million. Higher SG&A costs were also recorded in a fewsegments, particularly in the Specialty Chemicals and Advanced Ceramicssegments, related to increased sales volumes. SG&A expenses as a percentageof net sales were 18.9% and 19.0% in the second quarter of 2008 and 2007,respectively.

 

**Restructuring charges, net**

 

We recorded $1.5 million of restructuring charges in the second quarterof 2008 for restructuring actions in the Specialty Chemicals, PerformanceAdditives and Advanced Ceramics segments for miscellaneous headcountreductions. We recorded $2.0 million of restructuring charges in the secondquarter of 2007 primarily related to headcount reductions and facility closuresin the Specialty Chemicals, Performance Additives, Advanced Ceramics and “Corporateand other” segments. See Note 12, “Restructuring Liability,” for furtherdetails.

 

**Loss (gain) on sale of assets andother**

 

We recorded a loss of $0.8 million in the second quarter of 2008 relatedto the liquidation of a joint venture in the Titanium Dioxide

 

42

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Pigments segment and a gain of $0.4 million in the second quarter of2007 related to the sale of assets.

 

**Operating income**

 

*Specialty Chemicals*.  Operating income increased $11.6 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $4.9 million. Thisincrease was partially offset by higher raw material costs of $4.7 million,primarily for tin and phosphoric acid, and increased depreciation andamortization costs, including the impact of a bolt-on acquisition made inDecember 2007.

 

*Performance Additives*.  Operating income decreased $12.5 million over the prior year due to the lowersales volumes discussed above, and higher raw material costs of $13.0 million,particularly iron-oxide and cobalt costs in the Color Pigments and Servicesbusiness, MEA costs in our Timber Treatment Chemicals business and higher quatcosts in our Clay-based Additives business. Higher depreciation andamortization costs of $3.8 million primarily due to the acquisition of theglobal color pigments business of Elementis plc also had an unfavorable impacton operating income. These decreases were partially offset by the salesincreases noted above.

 

*Titanium Dioxide Pigments*.  Operating income decreased $8.6 million over the prior year primarily due tothe lower sales volumes and selling prices noted above, increased depreciationand amortization costs of $2.9 million and higher energy costs of $1.3 million.

 

*Advanced Ceramics*.  Operating income increased $11.1 million over the prior year primarily due tothe impact of the increased sales volumes noted above, productivityimprovements and the positive impact of currency changes of $4.6 million. Thisincrease was partially offset by lower selling prices.

 

*Specialty Compounds*.  Operating income increased $0.4 million over the prior year due to higherselling prices and lower operating costs relating to the closure of a U.K.facility in December 2007. This was partially offset by higher rawmaterial costs of $4.2 million, particularly PVC resin costs, and lower salesvolumes.

 

**Other income (expenses)**

 

*Interest expense*.  Interestexpense decreased $37.3 million in the second quarter of 2008 compared to thesame period in the prior year. The second quarter of 2008 and 2007 includedgains of $34.0 million and $0.8 million, respectively, representing themovement in the mark-to-market valuation of our interest rate hedginginstruments. The remaining interest expense decrease of $4.1 million is primarilydue to the redemption of the 2011 Notes in May 2007 in the aggregate amount of$273.4 million.

 

*Interest income*.  Interestincome decreased $2.2 million in the second quarter of 2008 compared to thesame period in the prior year due to lower short-term interest rates and loweraverage cash balances in the second quarter of 2008 compared to the second quarterof 2007.

 

*Loss on early extinguishment ofdebt.*   In the second quarter of 2007, we paid aredemption premium of $14.5 million and wrote off $4.6 million of deferredfinancing costs associated with the redemption of the 2011 Notes in May 2007.

 

*Foreign exchange gain, net*.  In the second quarter of 2008, we had foreign exchange losses of $0.8 millioncompared to foreign exchange gains of $3.4 million recorded in the same periodin the prior year. The foreign exchange loss reported in the second quarterof 2008 is primarily due to the impact of a slightly weaker euro as of June 30,2008 versus March 31, 2008 related to intercompany financing arrangements andnon-operating euro denominated transactions.

 

**Provision for income taxes**

 

The effective income tax rate for the second quarter of 2008 was 21.3%and an income tax provision of $21.1 million was recorded for the secondquarter of 2008. The effective income tax rate compared to the federalstatutory rate was positively impacted by domestic income which is not taxeffected as a result of a full valuation allowance, primarily related tomark-to-market gains on interest rate hedges, favorable European rate changesand geographic earnings mix. The effective income tax rate was 44.1% forthe second quarter of 2007 and was negatively impacted by the absence of a taxbenefit for the Company’s domestic losses as a result of a full valuationallowance.

 

**Minority interest in continuingoperations**

 

Minority interest represents the minority interest portion of the Viance,LLC joint venture completed in January 2007 between our Timber TreatmentChemicals business and Rohm and Haas Company.

 

**Net income from continuing operations**

 

Net income from continuing operations for the second quarter of 2008was $78.0 million as compared to net income from continuing operations of $24.2million for the second quarter of 2007 for the reasons described above.

 

43

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**Income from discontinued operations,net of tax**

 

Income from discontinued operations, net of tax was $3.8 million in thesecond quarter of 2007 and was due to income from operating the Electronicsbusiness in the second quarter of 2007.

 

**Net income**

 

Net income for the second quarter of 2008 was $78.0 million as comparedto net income of $28.0 million for the second quarter of 2007 for the reasonsdescribed above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.  Adjusted EBITDA increased $15.8 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $6.4 million. Thisincrease was partially offset by higher raw material costs of $4.7 million asdiscussed above.

 

*Performance Additives*.  Adjusted EBITDA decreased $6.4 million over the prior year due to lower salesvolumes and higher raw material costs of $13.0 million as discussedabove. These decreases were partially offset by the selling priceincreases noted above.

 

*Titanium Dioxide Pigments*.  Adjusted EBITDA decreased $5.6 million over the prior year primarily due to thelower sales volumes and selling prices noted above and higher energy costs of$1.3 million. This was partially offset by the impact of currency changesof $2.1 million.

 

*Advanced Ceramics*.  Adjusted EBITDA increased $12.2 million over the prior year primarily due tothe impact of the increased sales volumes noted above, productivityimprovements and the positive impact of currency changes of $6.4 million. Thisincrease was partially offset by lower selling prices.

 

*Specialty Compounds*.  Adjusted EBITDA increased $0.6 million over the prior year due to higherselling prices and lower operating costs relating to the closure of a U.K.facility in December 2007. This was partially offset by higher raw materialcosts of $4.2 million, particularly PVC resin costs, and lower sales volumes.

 

*Corporate and other*.  Adjusted EBITDA increased $1.2 million over the prior year due to lowerprofessional fees partially offset by additional stock compensation expenserelated to stock-based awards made in 2008 and 2007.

 

***Six months endedJune 30, 2008 compared to six months ended June 30, 2007***

 

**Overview**

 

Net sales increased $249.1 million in the first six months of 2008compared with the same period in the prior year primarily due to the positiveimpact of currency changes of $140.7 million, the acquisition of the globalcolor pigments business of Elementis plc and increased selling prices of $39.6million. Higher volumes in our Specialty Chemicals and Advanced Ceramicssegments also had a favorable impact on net sales. See further discussion bysegment below.

 

Operating income and Adjusted EBITDA also increased in the first sixmonths of 2008 compared with the same period in the prior year due to thepositive impact of currency changes and the sales increases noted above.Operating income and Adjusted EBITDA were negatively impacted by higher rawmaterial and energy costs in most businesses.

 

Net income from continuing operations increased $56.5 million comparedwith the same period in the prior year primarily due to lower interest expensedue to mark-to-market gains on our interest rate hedging instruments, costs of$19.1 million incurred in the second quarter of 2007 to redeem our 2011 Notesand increased foreign exchange gains due to the impact of the stronger euro.

 

Income from discontinued operations, net of tax was $8.5 million in thefirst six months of 2007 and was primarily comprised of income from operatingthe Electronics business, excluding the European wafer reclaim business.

 

The gain on sale of discontinued operations, net of tax of $115.7million recorded in the first six months of 2007 is related to the sale ofGroupe Novasep in January 2007.

 

Net income decreased $67.6 million in the first six months of 2008compared with the same period in the prior year due to the reasons noted above.

 

**Net sales**

 

*Specialty Chemicals*.  Net sales increased $108.4 million over the prior year, including the positiveimpact of currency changes of $59.0 million. In the Fine Chemicals business,higher selling prices of lithium products, as well as increased volumes had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by higher selling prices, increased volumes

 

44

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in all markets, particularly in European automotive and generalindustrial applications, and the impact of a bolt-on acquisition made inDecember 2007.

 

*Performance Additives*.  Net sales increased $65.3 million over the prior year due to the acquisition ofthe global color pigments business of Elementis plc, as well as increasedselling prices in our Color Pigments and Services and Clay-based Additivesbusinesses and the positive impact of currency changes of $10.2 million. Thiswas partially offset by lower volumes of construction-related products in ourColor Pigments and Services and Timber Treatment Chemicals businesses.

 

*Titanium Dioxide Pigments*.  Net sales increased $20.6 million over the prior year due to the positiveimpact of currency changes of $34.3 million, partially offset by lowervolumes and selling prices of titanium dioxide products and lower volumes offunctional additives.

 

*Advanced Ceramics*.  Net sales increased $54.4 million over the prior year primarily due to thepositive impact of currency changes of $34.2 million, increased volumes ofmedical and cutting tool applications and the impact of a bolt-on acquisitionmade in April 2007. This was partially offset by lower selling prices andvolume declines in mechanical systems and mechanical applications.

 

*Specialty Compounds*.  Net sales increased $1.8 million over the prior year due to the positive impactof currency changes of $2.3 million and higher selling prices, partially offsetby lower volumes in wire and cable and medical applications.

 

*Corporate and other*.  Net sales decreased $1.4 million over the prior year primarily due to the saleof our U.S. wafer reclaim business in the first quarter of 2007 and lowervolumes and selling prices in the European wafer reclaim business.

 

**Gross profit**

 

Gross profit increased $59.7 million over the prior year primarily dueto the positive impact of currency changes of $48.1 million and the salesincreases noted above, in particular selling price increases. This waspartially offset by raw material cost increases, particularly from the impactof higher tin and phosphoric acid costs in our Specialty Chemicals segment,higher iron-oxide and cobalt costs in our Color Pigments and Services businessand higher PVC resin costs in our Specialty Compounds segment. We alsoexperienced lower volumes in our Color Pigments and Services, Timber TreatmentChemicals and Titanium Dioxide Pigments businesses and higher depreciation andamortization costs in most businesses including the impact of acquisitions. Grossprofit as a percentage of net sales decreased to 31.4% for the six months endedJune 30, 2008 from 32.6% for the six months ended June 30, 2007.

 

**Selling, general and administrativeexpenses**

 

Selling, general and administrative expenses, or SG&A, increased$49.4 million over the prior year primarily due to the impact of currencychanges of $29.2 million. Higher SG&A costs were also recorded in a fewsegments, particularly in Specialty Chemicals and Advanced Ceramics, related toincreased sales volumes. SG&A expenses as a percentage of net sales was19.4% for the six months ended June 30, 2008 versus 19.3% for the six monthsended June 30, 2007.

 

**Restructuring charges, net**

 

We recorded $2.3 million of restructuring charges for the six monthsended June 30, 2008 for restructuring actions in the Performance Additives,Specialty Chemicals and Advanced Ceramics segments for miscellaneous headcountreductions. We recorded $6.0 million of restructuring charges for the six monthsended June 30, 2007 primarily related to facility closures in the Corporate andother segment related to the restructuring of the wafer reclaim business. SeeNote 13, “Restructuring Liability,” for further details.

 

**Loss (gain) on sale of assets**

 

We recorded a loss of $0.9 million in the six months ended June 30,2008 primarily related to the liquidation of a joint venture in the TitaniumDioxide Pigments segment and a gain of $5.2 million in the six months endedJune 30, 2007 primarily related to the sale of our U.S. wafer reclaim business.

 

**Operating income**

 

*Specialty Chemicals*.  Operating income increased $19.6 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $9.5 million. Thisincrease was partially offset by higher raw material costs of $9.4 million,primarily for tin and phosphoric acid, and increased depreciation andamortization costs, including the impact of a bolt-on acquisition made inDecember 2007.

 

*Performance Additives*.  Operating income decreased $18.5 million over the prior year due to the lowersales volumes discussed above, and higher raw material costs of $17.6 million,particularly iron-oxide and cobalt costs in the Color Pigments and Servicesbusiness, MEA costs in our Timber Treatment Chemicals business and higher quatcosts in our Clay-based Additives business. Higher depreciation andamortization costs of $7.7 million primarily due to the acquisition of theglobal color pigments business of Elementis plc also had an unfavorable impacton operating income. These decreases were partially offset by the salesincreases noted above.

 

45

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*Titanium Dioxide Pigments*.  Operating income decreased $9.7 million over the prior year primarily due tothe lower sales volumes and selling prices noted above, increased depreciationand amortization costs of $5.5 million and higher energy costs of $2.2 million.

 

*Advanced Ceramics*.  Operating income increased $18.5 million over the prior year primarily due tothe impact of the increased sales volumes noted above, productivityimprovements and the positive impact of currency changes of $8.1 million. Theimpact of a bolt-on acquisition made in April 2007 also had a favorableimpact on operating income. This increase was partially offset by lower sellingprices and increased depreciation and amortization costs of $4.1 millionprimarily related to the acquisition discussed above.

 

*Specialty Compounds*.  Operating income increased $1.0 million over the prior year due to loweroperating costs relating to the closure of a U.K. facility inDecember 2007 and higher selling prices. This was partially offset byhigher raw material costs of $6.8 million, particularly PVC resin costs, andlower sales volumes.

 

*Corporate and other.*  Operating loss increased $3.0 million over the prior year primarily dueto additional stock compensation expense related to stock-based awards made in2008 and 2007.

 

**Other income (expenses)**

 

*Interest expense*.  Interestexpense decreased $18.3 million for the six months ended June 30, 2008 comparedto the same period in the prior year. The six months ended June 30, 2008 and2007 included gains of $3.2 million and losses of $2.0 million, respectively,representing the movement in the mark-to-market valuation of our interest ratehedging instruments. The remaining interest expense decrease of $13.1 millionis primarily due to the redemption of the 2011 Notes in May 2007 in theaggregate amount of $273.4 million.

 

*Interest income*.  Interestincome decreased $4.8 million for the six months ended June 30, 2008 comparedto the same period in the prior year primarily related to lower average cashbalances in the first six months of 2008 compared to the first six months of2007 and lower short-term interest rates.

 

*Loss on early extinguishment ofdebt.*   In the second quarter of 2007, we paid aredemption premium of $14.5 million and wrote off $4.6 million of deferredfinancing costs associated with the redemption of the 2011 Notes in May 2007.

 

*Refinancing expenses*. In March2007, we expensed $0.9 million related to the fourth amendment of the seniorsecured credit agreement resulting in a 50 basis point reduction on our trancheG term loans.

 

*Foreign exchange gain, net*.  For the six months ended June 30, 2008 and 2007, we had foreign exchange gainsof $14.3 million and $3.5 million, respectively. The increase from the prioryear is primarily due to the impact of the stronger euro as of June 30, 2008versus December 31, 2007 related to intercompany financing arrangements.

 

**Provision for income taxes**

 

The effective income tax rate for the six months ended June 30, 2008was 27.7% and an income tax provision of $40.7 million was recorded for the sixmonths ended June 30, 2008. The effective income tax rate compared to thefederal statutory rate was positively impacted by domestic income which is nottax effected as a result of a full valuation allowance, favorable European ratechanges and geographic earnings mix, including mark-to-market gains on interestrate hedges. The effective income tax rate was 44.2% for the six months endedJune 30, 2007. This was negatively impacted by the absence of a tax benefit forthe Company’s domestic losses as a result of a full valuation allowance.

 

**Minority interest in continuingoperations**

 

Minority interest represents the minority interest portion of theViance, LLC joint venture completed in January 2007 between our TimberTreatment Chemicals business and Rohm and Haas Company.

 

**Net income from continuing operations**

 

Net income from continuing operations for six months ended June 30,2008 was $105.7 million as compared to net income from continuing operations of$49.2 million for the same period in the prior year for the reasons describedabove.

 

**Income from discontinued operations,net of tax**

 

Income from discontinued operations, net of tax was $8.5 million forthe six months ended June 30, 2007 and was primarily due to income fromoperating the Electronics business in 2007.

 

**Gain on sale of discontinued operations, net oftax**

 

The gain on sale of discontinued operations, net of tax, of $115.7million recorded for the six months ended June 30, 2007 is related to the saleof Groupe Novasep in January 2007.

 

46

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**Minority interest in discontinued operations**

 

Minority interest in discontinued operations represents the minorityinterest portion of Groupe Novasep’s net income for the six months ended June30, 2007.

 

**Net income**

 

Net income for the six months ended June 30, 2008 was $105.7 million ascompared to net income of $173.3 million for the six months ended June 30, 2007for the reasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.  Adjusted EBITDA increased $28.0 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $12.4 million. Thisincrease was partially offset by higher raw material costs of $9.4 million asdiscussed above.

 

*Performance Additives*.  Adjusted EBITDA decreased $7.8 million over the prior year due to lower salesvolumes and higher raw material costs of $17.6 million as discussedabove. These decreases were partially offset by the sales increases notedabove.

 

*Titanium Dioxide Pigments*.  Adjusted EBITDA decreased $4.1 million over the prior year primarily due to thelower sales volumes and selling prices noted above and higher energy costs of$2.2 million, partially offset by the positive impact of currency changes of$5.1 million.

 

*Advanced Ceramics*.  Adjusted EBITDA increased $21.9 million over the prior year primarily due tothe impact of the increased sales volumes noted above, productivity improvementsand the positive impact of currency changes of $11.3 million. The impact of abolt-on acquisition made in April 2007 also had a favorable impact onAdjusted EBITDA. This increase was partially offset by lower selling prices.

 

*Specialty Compounds*.  Adjusted EBITDA increased $1.2 million primarily due to lower operating costsrelating to the closure of a U.K. facility in December 2007 and higherselling prices. This was partially offset by higher raw material costs of $6.8million as discussed above and lower sales volumes.

 

47

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

 

Because we view Adjusted EBITDA on both a consolidated basis andsegment basis as an operating performance measure, we use net income as themost comparable U.S. GAAP measure on a consolidated basis. The following table,which sets forth the applicable components of Adjusted EBITDA, presents areconciliation of net income to Adjusted EBITDA on a consolidated basis:

 

 
| ** **                                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                         | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                            |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | (3.8                           | )          | — |   | (8.5 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                         |       | — |   | (115.7 | ) |
| Minority  interest in discontinued operations, net of tax             |       | —                           |       | —                         |       | — |   | 0.1 |   |
| Net income from  continuing operations                                |       | 78.0                             |       | 24.2                           |       | 105.7 |   | 49.2 |   |
| Income tax  provision                                                 |       | 21.1                             |       | 20.9                           |       | 40.7 |   | 41.7 |   |
| Minority  interest in continuing operations, net of tax               |       | —                           |       | 2.3                            |       | 0.6 |   | 3.4 |   |
| Income from  continuing operations before taxes and minority interest |       | 99.1                             |       | 47.4                           |       | 147.0 |   | 94.3 |   |
| Interest expense  (a)                                                 |       | 9.7                              |       | 47.0                           |       | 83.4 |   | 101.7 |   |
| Interest income                                                       |       | (1.4                             | )          | (3.6                           | )          | (3.6 | ) | (8.4 | ) |
| Depreciation and  amortization                                        |       | 63.8                             |       | 51.2                           |       | 125.6 |   | 100.5 |   |
| Restructuring  and related charges                                    |       | 1.5                              |       | 2.0                            |       | 2.3 |   | 6.0 |   |
| Systems/organization  establishment expenses                          |       | 2.2                              |       | 0.3                            |       | 3.4 |   | 1.2 |   |
| Cancelled  acquisition and disposal costs                             |       | 0.7                              |       | 0.7                            |       | 0.7 |   | 0.8 |   |
| Inventory  write-up charges                                           |       | 0.1                              |       | 0.1                            |       | 0.5 |   | 0.1 |   |
| Refinancing  expenses                                                 |       | —                           |       | —                         |       | — |   | 0.9 |   |
| Loss on early  extinguishment of debt                                 |       | —                           |       | 19.1                           |       | — |   | 19.1 |   |
| Loss (gain) on  sale of assets and other                              |       | 0.8                              |       | (0.4                           | )          | 0.9 |   | (5.2 | ) |
| Foreign exchange  gain                                                |       | 0.8                              |       | (3.4                           | )          | (14.3 | ) | (3.5 | ) |
| Other                                                                 |       | 1.0                              |       | 0.1                            |       | 0.8 |   | — |   |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 178.3      |                           | $          | 160.5 |   | $ | 346.7 |   | $ | 307.5 |   |

 

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(a)          Includes gains of $34.0million and $0.8 million for the three months ended June 30, 2008 and 2007,respectively, and gains of $3.2 million and losses of $2.0 million for the sixmonths ended June 30, 2008 and 2007, respectively, representing the movement inthe mark-to-market valuation of the Company’s interest rate and cross-currencyhedging instruments.

 

(b)         This amount does notinclude $8.5 million and $17.7 million of Adjusted EBITDA for the three and sixmonths ended June 30, 2007, respectively, from the Electronics business sold onDecember 31, 2007 and $1.8 million of Adjusted EBITDA for the six monthsended June 30, 2007 from the former Groupe Novasep segment sold onJanuary 9, 2007.

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

*Operating Activities*.  Net cash provided by operating activities was $123.7 million and $148.3 millionfor the six months ended June 30, 2008 and 2007, respectively. Net cash fromoperating activities decreased primarily from higher use of operating cash fromworking capital changes and the lack of operating cash flows due to thedivestiture of the Electronics business, partially offset by higher operating incomeand lower cash interest expense.

 

*Investing Activities*.  Net cash (used in) provided by investing activities was $(88.5)million and $380.8 million for the six months ended June 30, 2008 and 2007,respectively. Net cash used in investing activities decreased primarily due tothe proceeds received in the first quarter of 2007 from the sale of the GroupeNovasep segment and from the formation of the Viance, LLC joint venture. Thiswas partially offset by funds received related to the claim settlement betweenthe Company and GEA Group in the first quarter of 2008. See Note 6, “Goodwill,”for further details.

 

*Financing Activities*.  Net cash used in financing activities was $44.8 million and $356.9 million forthe six months ended June 30, 2008 and 2007, respectively, and was comprised ofscheduled payments for long-term debt and revolver payments. For the six monthsended June 30, 2007, net cash used in financing activities included the paymentof our 10 5/8% Senior Subordinated Notes due in 2011 in the aggregate principalamount of $273.4 million and related redemption premiums of $14.5 million.

 

48

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**Liquidity**

 

Our primary source of liquidity has been and will continue to be cashgenerated from the operations of our subsidiaries. Events that have had animpact on our liquidity include:

 

·                  OnJanuary 2, 2007, CSI, our wholly-owned subsidiary and Rohm and HaasCompany formed Viance, LLC, a joint venture company. We received net cashproceeds of $73.0 million. We also paid approximately $1.0 million in fees andexpenses associated with this transaction and the remainder was used forgeneral corporate purposes.

 

·                  OnJanuary 9, 2007, we sold our Groupe Novasep segment and received net cashproceeds of $420.7 million. The proceeds were used to redeem ouroutstanding 2011 Notes and for general corporate purposes.

 

·                  OnFebruary 12, 2007, we completed the sale of our U.S. wafer reclaimbusiness for approximately $11.0 million in cash and a long-term notesreceivable. The proceeds were used for general corporate purposes.

 

·                  OnMay 15, 2007, we redeemed our outstanding 10 5/8% Senior SubordinatedNotes that were due in 2011 in the aggregate principal amount of $273.4million. In connection with this repayment, we paid redemption premiums of$14.5 million.

 

·                  OnAugust 31, 2007, we completed the acquisition of the global color pigmentsbusiness of Elementis plc for a purchase price of $140.0 million.

 

·                  OnDecember 31, 2007, we completed the sale of our Electronics business,excluding our European wafer reclaim business, and received net cash proceedsof $311.0 million. The proceeds will be used for general corporate purposes.

 

·                  OnMarch 28, 2008, we received €18.8 million ($29.1 million) from GEA Groupand GEA North America for the settlement of all existing and future non-taxrelated claims resulting from the sale and purchase agreement entered into inconnection with the Dynamit Nobel Acquisition in April 2004.

 

As discussed in Note 1, “Description of Business and Summary ofSignificant Accounting Policies,” we entered into a definitive agreement in May2008 with Kemira to form a joint venture that will focus on specialty titaniumdioxide pigments. It is expected that the joint venture will acquire the sharesof the Rockwood and Kemira entities in part with borrowings under a term loanof up to €300 million. In addition, the joint venture expects to enter into a€30 million revolving credit facility to finance its operations. Thecontributed net assets of Kemira include notes payable of approximately €25.0million. The Company expects to receive a cash payment funded from the termloan borrowings based on its ownership percentage. Prior to the closing of thistransaction, the Company and Kemira may develop an alternative capitalstructure, contribute cash to the joint venture, reduce the amount ofindebtedness incurred by the joint venture and/or revise the ownershipstructure of the joint venture.

 

Our primary liquidity requirements are working capital, debt service,capital expenditures and acquisitions. Our debt service requirements and othercontractual obligations and commitments over the next several years aresignificant and are substantially higher than historical amounts. We believethat our currently available sources of liquidity will be sufficient for theseneeds. Furthermore, any future major acquisitions, business combinations orsimilar transactions will likely require additional capital resources. If ourpresent operating performance and current market conditions continue, webelieve that such resources will be available to us for certain transactions.We would need access to alternative sources of liquidity for largeracquisitions such as through additional borrowings, equity issuances or othersources, and we may not have access to these sources for a variety of reasons.See Item 1, “Business,” and Item 1A, “Risk Factors” in our 2007Form 10-K.

 

We believe that based on current and anticipated levels of operationsand conditions in our industry and markets, cash flows from operations andborrowings available under our revolving credit facility will be adequate for2008 and the foreseeable future to make required payments of principal andinterest on our debt and fund our working capital and capital expenditurerequirements. We continue to take actions to reduce costs and exit unprofitablebusinesses, in part to improve our long-term liquidity. We expect this tofurther improve our short and long-term liquidity. If our cash flow fromoperations and borrowings under our revolving credit facility are insufficientto fund our currently existing liquidity requirements, we may be forced to useother means available to us, such as to reduce or delay capital expendituresand seek additional capital. We may not have adequate capital for futureacquisitions, business combinations or similar transactions.

 

As of June 30, 2008, we had actual total indebtedness of $2,639.4million. As of June 30, 2008, the revolving credit facility under the seniorsecured credit facilities provided for additional borrowings of up to $225.3million. As of June 30, 2008, there were no outstanding borrowings under therevolving credit facility.

 

As of June 30, 2008, we had cash and cash equivalents of $337.1 millionprimarily from cash from operations and the net cash proceeds received from thesale of the Electronics business in December 2007, less cash used forcertain selective acquisitions.

 

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

 

·                  trancheA-1 term loans in an aggregate principal amount of €26.1 million (or $41.1million at June 30, 2008) and tranche A-2 

 

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term loans in an aggregate principal amount of €113.6million (or $179.0 million at June 30, 2008), each maturing on July 30, 2011and bearing interest at Adjusted EURIBOR plus 1.75%;

 

·                  trancheE term loans in an aggregate principal amount of $1,110.7 million at June 30,2008, maturing on July 30, 2012 and bearing interest at the Company’soption of either (i) Adjusted LIBOR plus 1.50% or (ii) ABR plus0.75%. For the three months ended June 30, 2008, we have elected to use option(i) Adjusted LIBOR plus 1.50%;

 

·                  trancheG term loans in an aggregate principal amount of €266.6 million (or $420.0million at June 30, 2008) maturing on July 30, 2012 and bearing interestof Adjusted LIBOR plus 1.75%; and

 

·                  arevolving credit facility in an aggregate principal amount of$250.0 million maturing on July 30, 2010, bearing interest at theCompany’s option of either (i) Adjusted LIBOR plus 1.75% or (ii) ABRplus 1.00%. As of June 30, 2008, we had no borrowings outstanding under thisfacility and had outstanding letters of credit of $24.7 million that reducedour availability under the credit facility.

 

In each case, the interest rates are subject to step-downs determinedby reference to a performance test. Adjusted LIBOR is the London inter-bankoffered rate adjusted for statutory reserves. ABR is the alternate base rate,which is the highest of Credit Suisse’s prime rate and the federal funds effectiverate plus 0.5%. Tranche A-1 and A-2 term loans are payable inJanuary and July of each year at escalating percentages of theoriginal principal amount. Tranche E and tranche G term loans arepayable in January and July of each year at amounts equal to 0.5% ofthe principal amount of the former tranche D term loans and tranche Fterm loans, respectively, with the remainder due at the final maturity date.

 

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

 

In addition to the financial covenants described below under “CovenantCompliance,” the Company’s senior secured credit facilities contain variousaffirmative and restrictive covenants. The restrictive covenants limit ourability to, among other things, incur indebtedness and other liabilities;create liens; merge or consolidate; dispose of assets; make investments; paydividends and make payments to shareholders; make payments on certainindebtedness or to amend documents related to certain indebtedness and to enterinto sale leaseback transactions. In connection with the fourth amendment ofour senior secured credit agreement, substantially all of the baskets relatingto the above restrictions were reset.

 

*2014 Notes.*  The 2014 Notes have an aggregate principal amount of €375.0 million ($590.8million at June 30, 2008) in the case of the Euro notes and $200.0 million inthe case of the U.S. Dollar notes, and mature on November 15, 2014.Interest on the 2014 Notes is payable semi-annually on May 15 andNovember 15. Interest on the 2014 Notes accrues at the rate of 7.625% inthe case of the Euro notes and 7.500% in the case of the U.S. Dollar notes.Certain of our domestic subsidiaries guarantee the 2014 Notes on a seniorsubordinated unsecured basis (see Note 15, Consolidating Financial Information,”for further details).

 

The 2014 Notes contain various affirmative and restrictive covenants.The restrictive covenants limit our ability, and the ability of our restrictedsubsidiaries, to, among other things, incur or guarantee additionalindebtedness (as described below under “Covenant Compliance”), pay dividends ormake other equity distributions or repurchase capital stock, make investmentsor other restricted payments, create liens, transfer or sell assets, restrictdividends or other payments to us, engage in transactions with affiliates, andmerge or consolidate with other companies or sell substantially all of ourassets.

 

*Covenant compliance.*  In addition to the affirmative and restrictive covenants, the senior securedcredit agreement contains the following financial covenants that are determinedbased on our Adjusted EBITDA, which reflects management’s interpretationsthereof:

 

·                  aleverage ratio: for the twelve-month period ended June 30, 2008, net debt(total debt plus capital lease obligations, minus cash up to a maximum of$100.0 million) to Adjusted EBITDA must be less than 4.75 to 1; for suchperiod, our ratio equaled 3.75 to 1; and

 

·                  aninterest coverage ratio: for the twelve-month period ended June 30, 2008,Adjusted EBITDA to cash interest expense (interest expense, net excludingdeferred debt issuance cost amortization and the movements in the mark-tomarket value of our interest rate and cross-currency interest rate derivatives)must be at least 1.95 to 1; for such period, our ratio equaled 4.12 to 1.

 

See Item 7, Management’s Discussion and Analysis of Financial Conditionand Results of Operations—”Definitions of Adjusted EBITDA,” for a discussion ofthe definition of Adjusted EBITDA used in calculating our financial covenants.

 

These covenants are material terms of the senior secured creditagreement. Non-compliance with these covenants or other covenants could resultin a default under the senior secured credit agreement and the lenders couldelect to declare all amounts borrowed immediately due and payable. Any suchacceleration would also result in a default under the indenture governing the2014 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. Because the indenture governing the 2014 Notes defines an event ofdefault to include, among other

 

50

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things, a default under any other debt obligation in excess of $35.0million that could cause the acceleration of such obligation, any accelerationunder the senior secured credit agreement would also result in a default underthe indenture governing these notes, which could lead to the note holderselecting to declare the principal, premium, if any, and interest on the thenoutstanding notes immediately due and payable. The senior secured creditagreement contains a similar cross default provision for indebtedness in excessof $30.0 million; therefore, a default under the indenture governing the 2014Notes or other indebtedness may likewise cause the lenders to declare theprincipal and interest on the then outstanding senior secured credit facilitiesimmediately due and payable.

 

The indenture governing the 2014 Notes prohibits 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 indentureprohibits 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 June 30, 2008, the fixedcharge coverage ratio equaled 4.12 to 1. This covenant is a material term ofthe indenture governing the 2014 Notes.

 

We were in compliance with all of the above covenants as of June 30,2008 and December 31, 2007.

 

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

 

 
| ** **                                                                                                             | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                             | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                                                                          | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                              | 123.7      |   | $ | 136.3 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 113.1                          |       | 60.0 |   |
| Current portion  of income tax provision                                                                               |       | 24.0                           |       | 21.7 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and unrealized  losses/gains on derivatives |       | 78.3                           |       | 86.6 |   |
| Restructuring  and related charges                                                                                     |       | 2.3                            |       | 6.0 |   |
| Systems/organization  establishment expenses                                                                           |       | 3.4                            |       | 1.2 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.7                            |       | 0.8 |   |
| Refinancing  expenses                                                                                                  |       | —                         |       | 0.9 |   |
| Inventory write-up  charges                                                                                            |       | 0.5                            |       | 0.1 |   |
| Bad debt  provision                                                                                                    |       | (1.0                           | )          | (0.9 | ) |
| Loss (gain) on  sale of assets                                                                                         |       | 0.9                            |       | (5.2 | ) |
| Other                                                                                                                  |       | 0.8                            |       | — |   |
| Total Adjusted  EBITDA                                                                                                 |       | $                              | 346.7      |   | $ | 307.5 |   |

 

***ContractualObligations***

 

The Company is obligated to make future payments under variouscontracts such as debt agreements (including scheduled cash interest payments),operating lease agreements, and unconditional purchase obligations. Adiscussion of these contractual obligations is included in the Company’s 2007Form 10-K. Liabilities for unrecognized tax benefits in the amount of$26.7 million as of December 31, 2007 related to Financial AccountingStandards Board (“FASB”) Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109,* were excluded fromthe Contractual Obligations table as we were unable to make a reasonablyreliable estimate of the period of cash settlement with the respective taxingauthorities. Liabilities for these unrecognized tax benefits are classified asnon-current income tax liabilities (other liabilities) unless expected to bepaid in one year. There have not been significant changes to these contractualobligations as of June 30, 2008.

 

***CapitalExpenditures***

 

Rockwood’s capital expenditures for the six months ended June 30, 2008consisted primarily of replacements of worn, obsolete or damaged equipment aswell as investments in new equipment.

 

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For the six months ended June 30, 2008 and 2007, our capital expenditures,excluding capital leases, were $104.8 million and $90.7 million, respectively.Capital expenditures for each of our reporting segments are provided in thefollowing table:

 
| ** **                      | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|---------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| Six months ended  June 30, 2008 |       | $             | 33.7       |            | $          | 20.6         |       | $            | 20.3       |          | $          | 20.6               |       | $                | 6.4        |   | $ | 3.2 |   | $ | 104.8 |   |
| Six months ended  June 30, 2007 |       | 26.5          |       | 14.8            |       | 20.2         |       | 14.4         |       | 12.6          |       | 2.2                |       | 90.7             |       |
|                                 |            |               |            |                 |            |              |            |              |            |               |            |                    |            |                  |            |  |  |  |  |  |  |  |

 

We may incur future costs for capital improvements and generalcompliance under Safety, Health and Environmental (“SHE”) laws. For the yearended December 31, 2007, our capital expenditures for SHE matters totaled$29.6 million, excluding costs to maintain and repair pollution controlequipment. For 2008, we estimate capital expenditures for compliance with SHElaws to be at similar levels; however, because capital expenditures for thesematters are subject to changes in and new SHE laws, we cannot provide assurancethat our recent expenditures will be indicative of future amounts required tocomply with these laws, including the EU’s Registration, Evaluation andAuthorization of Chemicals (“REACH”) legislation. See Note 14, “Commitments andContingencies,” “Regulatory Developments” for a discussion of REACH.

 

***Foreign currencyrelated transactions***

 

As of June 30, 2008, $1,292.4 million of the debt outstanding isdenominated in euros.

 

**Recent Accounting Pronouncements**

 

See Note 1, “Description of Business and Summary of SignificantAccounting Policies,” for a discussion of recent accounting pronouncements.

 

**Off-Balance Sheet Arrangements**

 

In the normal course of business, the Company incurs obligations whichinclude guarantees related to contract completion, regulatory compliance andproduct performance. Under certain circumstances, these obligations aresupported through the issuance of letters of credit and other bank guarantees.As of June 30, 2008, the Company had approximately $29.8 million of letters ofcredit and other bank guarantees, of which $24.9 million will expire in 2008through 2012. The remaining guarantees have no specified expiration date. Thisamount includes outstanding letters of credit of $24.7 million that reduced ouravailability under the senior secured credit facility. In the opinion ofmanagement, such obligations will not significantly affect the Company’sfinancial position, results of operations or cash flows as the Companyanticipates fulfilling its performance obligations.

 

**Commitments and Contingencies**

 

See Note 14, “Commitments and Contingencies,” for a discussion of theCompany’s Commitments and Contingencies.

 

**Critical Accounting Policies andEstimates**

 

Our discussion and analysis of our financial condition and results ofoperations are based upon our condensed consolidated financial statements,which have been prepared in accordance with U.S. GAAP. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and therelated disclosure of contingent assets and liabilities. These estimatesinclude assessing, among other things:

 

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

 

·                  theuse and recoverability of inventory;

 

·                  thevaluation of deferred tax assets;

 

·                  theamount of unrecognized tax benefits in accordance with FIN 48;

 

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

 

·                  theuseful lives of tangible and intangible assets.

 

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

 

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The significant accounting policies of the Company are described inNote 1,”Description of Business and Summary of Significant AccountingPolicies,” to the unaudited condensed consolidated financial statements and thecritical accounting policies and estimates are described in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section in the Company’s 2007 Form 10-K. There have been no significantchanges to these critical accounting policies and estimates as of June 30,2008.

 

**Forward-Looking Statements**

 

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

 
| · |   | our business strategy;                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
| · |   | competitive pricing or product development  activities affecting demand for our products;                                         |
| · |   | fluctuations in interest rates, exchange rates and  currency values;                                                              |
| · |   | availability and pricing of raw materials;                                                                                        |
| · |   | fluctuations in energy prices;                                                                                                    |
| · |   | changes in the end-use markets in which our products  are sold;                                                                   |
| · |   | changes in the general economic conditions in North  America and Europe and in other locations in which we currently do business; |
| · |   | technological changes affecting production of our  materials;                                                                     |
| · |   | governmental and environmental regulations and  changes in those regulations;                                                     |
| · |   | hazards associated with chemicals manufacturing;                                                                                  |
| · |   | our high level of indebtedness;                                                                                                   |
| · |   | risks associated with negotiating, consummating and  integrating acquisitions;                                                    |
| · |   | risks associated with competition and the  introduction of new competing products, especially in the Asia-Pacific  region; and    |
| · |   | risks associated with international sales and  operations.                                                                        |

 

You should keep in mind that any forward-looking statements made by usin this document or elsewhere speak only as of the date on which we make them.New risks and uncertainties come up from time to time, and it is impossible forus to predict these events or how they may affect us. We disclaim anyobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

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

 

We are exposed to market risk from changes in interest rates, foreigncurrency exchange rates and commodity prices. We manage our exposure to thesemarket risks through regular operating and financing activities and through theuse of derivatives. When used, derivatives are employed as risk managementtools and not for trading purposes. A discussion and analysis of theCompany’s market risk is included in the Company’s 2007 Form 10-K. Therehave been no significant changes to these market risks as of June 30, 2008.

 

**Item4T.  Controls and Procedures**

 

Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of June 30, 2008 andconcluded that our disclosure controls and procedures are effective. Inconnection with this evaluation, our management did not identify any change inour internal control over financial reporting that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting during the second quarter of 2008.

 

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**PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

We are involved in legal proceedings from time to time in the ordinarycourse of our business, including with respect to product liability,intellectual property and environmental matters. In addition, we may berequired 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 thenature of our business and products, we may be liable for damages arising outof certain indemnity claims” in our 2007 Form 10-K. However, we do notbelieve that there is any other individual, governmental, legal proceeding orarbitration that is likely to have a material adverse effect on our business,results of operations, cash flows or financial condition. We cannot predict theoutcome of any litigation or the potential for future litigation. See Note 15, “Commitmentsand Contingencies,” and Item 3, Legal Proceedings in our 2007 Form 10-K fordescriptions of other legal matters.

 

**Item 1A.Risk Factors.**

 

A discussion of the Company’s risk factors is included in the Company’sForm 10-K for the year ended December 31, 2007. There have been nomaterial changes to these risk factors.

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

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

 

None.

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits.**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1 (A)              |       | Underwriting Agreement,  dated June 11, 2008, between Rockwood Holdings, Inc., the selling  stockholders named therein and Credit Suisse Securities (USA) LLC.                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1 *               |       | Master Agreement, dated  May 21, 2008, by and among, Rockwood Holdings, Inc., Rockwood Specialties  Group, Inc. and certain of their affiliates and Kemira Oyj and certain of its  affiliates.                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2 *               |       | Shareholders’ and Joint  Venture Agreement, dated May 21, 2008, by and among, Rockwood Holdings, Inc.,  Rockwood Specialties Group, Inc. and certain of their affiliates and Kemira  Oyj and certain of its affiliates.                                                                                                                                                     |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3 *               |       | Share and Asset Purchase  and Transfer Agreement, dated May 21, 2008, by and among, Rockwood Holdings,  Inc., Rockwood Specialties Group, Inc. and certain of their affiliates and  Kemira Oyj and certain of its affiliates.                                                                                                                                                    |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4 *               |       | Facility  Agreement, made between Deukalion Einhundertvierundzwanzigste Vermögensverwaltungs GmbH, Sachtleben  Chemie GmbH, White Pigments Holding Oy, and Kemira Pigments Oy, Merchant  Banking, Skandinaviska Enskilda Banken AB as Agent, Security Agent and  Issuing Bank; and Nordea Bank Finland Plc as Arranger and Original Lender;  and the lenders party thereto. |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                       |
| 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.                                                |

 

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| 32.2 |   | Section 1350 Certification of Chief Financial  Officer. This certification accompanies this report pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  filed by the Company for purposes of Section 18 or any other provision  of the Securities Exchange Act of 1934, as amended. |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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* Filed herewith.

 

(A) Incorporated by reference to the Current Report on Form 8-K filedon June 17, 2008.

 

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**SIGNATURES**

 

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

 

 
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|--------|---------------------------------------|
|   |                                  |
|   |                                  |   |
|   | By:                                   | /s/ SEIFI GHASEMI |
|   |                                  | Seifi Ghasemi |
|   |                                  | Chairman of the Board and Chief Executive Officer |
|   |                                  | Date: August 11, 2008 |
|   |                                  |   |
|   |                                  |   |
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|   |                                  |
|   |                                  |   |
|   | By:                                   | /s/ ROBERT J. ZATTA |
|   |                                  | Robert J. Zatta |
|   |                                  | Senior Vice President and Chief Financial Officer |
|   |                                  | Date: August 11, 2008 |

 

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