**UNITEDSTATES**

** SECURITIES AND 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**  |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                              |
| **For  the quarterly period ended March 31, 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.) |
|                                                       |       |                 |
| **100  Overlook Center, Princeton, New Jersey 08540**      |
| (Address of  principal executive offices) (Zip Code)       |
| ** **                                                 | ** ** | ** **           |
| **(609)  514-0300**                                        |
| (Registrant’s  telephone number, including area code) |

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed 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.     x  Yes     o   No

 

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” in Rule 12b-2of the Exchange Act.

 
| Large accelerated  filer  o                                                     |   | Accelerated  filer  o |
|-------------------------------------------------------------------------------------------|--------|---------------------------------|
| Non-accelerated  filer  x

 (Do not check if a smaller reporting  company) |   | Smaller reporting  companyo     |

 

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

 

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

 

The Registrant’s commonstock, par value $0.01 per share, is not publicly traded. As of May 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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**TABLEOF CONTENTS**

 

**FORM 10-Q**

 
|    |   | PART I- FINANCIAL  INFORMATION                                                                       |
|---------|--------|-----------------------------------------------------------------------------------------------------------|
| Item 1  |   | Financial  Statements (Unaudited)                                                                         |
|    |   | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2008 and 2007 |
|    |   | Condensed  Consolidated Balance Sheets as of March 31, 2008 and December 31,  2007              |
|    |   | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 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                                                                                                |

 

 

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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** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| ** **                                                            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net sales                                                             |       | $                                | 854.0      |   | $ | 747.7 |   |
| Cost of products  sold                                                |       | 579.1                            |       | 503.6 |   |
| Gross profit                                                          |       | 274.9                            |       | 244.1 |   |
| Selling, general  and administrative expenses                         |       | 170.1                            |       | 147.2 |   |
| Restructuring  charges, net                                           |       | 0.8                              |       | 4.0 |   |
| Loss (gain) on  sale of assets                                        |       | 0.1                              |       | (4.8 | ) |
| Operating income                                                      |       | 103.9                            |       | 97.7 |   |
| Other income  (expenses):                                             |       |                             |       |   |   |
| Interest expense                                                      |       | (73.7                            | )          | (54.7 | ) |
| Interest income                                                       |       | 2.2                              |       | 4.8 |   |
| Refinancing  expenses                                                 |       | —                           |       | (0.9 | ) |
| Foreign exchange  gain, net                                           |       | 15.1                             |       | 0.1 |   |
| Other, net                                                            |       | 0.4                              |       | (0.1 | ) |
| Other income  (expenses), net                                         |       | (56.0                            | )          | (50.8 | ) |
| Income from  continuing operations before taxes and minority interest |       | 47.9                             |       | 46.9 |   |
| Income tax  provision                                                 |       | 19.6                             |       | 20.8 |   |
| Income from  continuing operations before minority interest           |       | 28.3                             |       | 26.1 |   |
| Minority  interest in continuing operations                           |       | (0.6                             | )          | (1.1 | ) |
| Net income from  continuing operations                                |       | 27.7                             |       | 25.0 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | 4.7 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | 115.7 |   |
| Minority  interest in discontinued operations                         |       | —                           |       | (0.1 | ) |
| Net income                                                            |       | $                                | 27.7       |   | $ | 145.3 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                           |       |               |       |                  |       |
| Current assets:                                                                                      |       |               |       |                  |       |
| Cash and cash  equivalents                                                                           |       | $                  | 294.8      |                  | $          | 346.9 |   |
| Accounts  receivable, net                                                                            |       | 554.3              |       | 483.7                 |       |
| Inventories                                                                                          |       | 573.8              |       | 535.4                 |       |
| Deferred income  taxes                                                                               |       | 21.2               |       | 22.7                  |       |
| Prepaid expenses  and other current assets                                                           |       | 61.7               |       | 70.7                  |       |
| Total current  assets                                                                                |       | 1,505.8            |       | 1,459.4               |       |
| Property, plant  and equipment, net                                                                  |       | 1,588.1            |       | 1,512.8               |       |
| Goodwill                                                                                             |       | 1,827.4            |       | 1,767.0               |       |
| Other intangible  assets, net                                                                        |       | 714.7              |       | 676.8                 |       |
| Deferred debt  issuance costs, net of accumulated amortization of $35.8 and $31.2,  respectively     |       | 41.6               |       | 41.1                  |       |
| Deferred income  taxes                                                                               |       | 15.3               |       | 15.5                  |       |
| Other assets                                                                                         |       | 42.0               |       | 39.2                  |       |
| Total assets                                                                                         |       | $                  | 5,734.9    |                  | $          | 5,511.8 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                                       |       |               |       |                  |       |
| Current  liabilities:                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                     |       | $                  | 248.8      |                  | $          | 293.2 |   |
| Income taxes  payable                                                                                |       | 13.4               |       | 12.7                  |       |
| Accrued  compensation                                                                                |       | 77.0               |       | 83.1                  |       |
| Restructuring  liability                                                                             |       | 9.9                |       | 14.0                  |       |
| Accrued expenses  and other current liabilities                                                      |       | 191.8              |       | 172.8                 |       |
| Deferred income  taxes                                                                               |       | 8.6                |       | 7.2                   |       |
| Long-term debt,  current portion                                                                     |       | 111.3              |       | 107.4                 |       |
| Total current  liabilities                                                                           |       | 660.8              |       | 690.4                 |       |
| Long-term debt                                                                                       |       | 2,532.9            |       | 2,474.0               |       |
| Pension and  related liabilities                                                                     |       | 354.5              |       | 327.5                 |       |
| Deferred income  taxes                                                                               |       | 121.6              |       | 112.6                 |       |
| Other  liabilities                                                                                   |       | 215.1              |       | 166.7                 |       |
| Total  liabilities                                                                                   |       | 3,884.9            |       | 3,771.2               |       |
| Minority  interest                                                                                   |       | 173.7              |       | 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                                                                                      |       | 1,035.2            |       | 1,035.2               |       |
| Accumulated  other comprehensive income                                                              |       | 457.0              |       | 373.7                 |       |
| Retained  earnings                                                                                   |       | 184.1              |       | 156.4                 |       |
| Total  stockholder’s equity                                                                     |       | 1,676.3            |       | 1,565.3               |       |
| Total  liabilities and stockholder’s equity                                                     |       | $                  | 5,734.9    |                  | $          | 5,511.8 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                                                                                         | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                         |       |                             |       |   |   |
| Net income                                                                                                                                                         |       | $                                | 27.7       |   | $ | 145.3 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                                                                 |       |                             |       |   |   |
| Income from  discontinued operations, net of tax                                                                                                                   |       | —                           |       | (4.7 | ) |
| Gain on sale of  discontinued operations, net of tax                                                                                                               |       | —                           |       | (115.7 | ) |
| Minority  interest in discontinued operations                                                                                                                      |       | —                           |       | 0.1 |   |
| Depreciation and  amortization                                                                                                                                     |       | 61.8                             |       | 49.3 |   |
| Deferred  financing costs amortization                                                                                                                             |       | 2.3                              |       | 2.4 |   |
| Foreign exchange  gain                                                                                                                                             |       | (15.1                            | )          | (0.1 | ) |
| Fair value  adjustment of derivatives                                                                                                                              |       | 30.8                             |       | 2.8 |   |
| Bad debt  provision                                                                                                                                                |       | 0.3                              |       | 0.4 |   |
| Stock-based  compensation                                                                                                                                          |       | 1.8                              |       | — |   |
| Deferred income  taxes                                                                                                                                             |       | 7.3                              |       | 9.8 |   |
| Gain on sale of  assets                                                                                                                                            |       | (0.4                             | )          | (4.8 | ) |
| Minority  interest in continuing operations                                                                                                                        |       | 0.6                              |       | 1.1 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                           |       |                             |       |   |   |
| Accounts  receivable                                                                                                                                               |       | (47.3                            | )          | (52.2 | ) |
| Inventories,  including inventory write-up reversal                                                                                                                |       | (12.7                            | )          | (3.0 | ) |
| Prepaid expenses  and other assets                                                                                                                                 |       | 3.3                              |       | (1.7 | ) |
| Accounts payable                                                                                                                                                   |       | (39.0                            | )          | (25.4 | ) |
| Income taxes  payable                                                                                                                                              |       | 1.3                              |       | 5.8 |   |
| Accrued expenses  and other liabilities                                                                                                                            |       | 4.5                              |       | 55.0 |   |
| Net cash  provided by operating activities of continuing operations                                                                                                |       | 27.2                             |       | 64.4 |   |
| Net cash  provided by operating activities of discontinued operations                                                                                              |       | —                           |       | 6.3 |   |
| **Net  cash provided by operating activities**                                                                                                                     |       | 27.2                             |       | 70.7 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                         |       |                             |       |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                                                               |       | (10.9                            | )          | (2.1 | ) |
| Post closing  purchase price consideration                                                                                                                         |       | 29.1                             |       | — |   |
| Capital  expenditures, excluding capital leases                                                                                                                    |       | (56.1                            | )          | (45.6 | ) |
| Proceeds from  formation of Viance joint venture, net                                                                                                              |       | —                           |       | 76.6 |   |
| Proceeds on sale  of assets                                                                                                                                        |       | 2.4                              |       | 9.9 |   |
| Net cash (used  in) provided by investing activities of continuing operations                                                                                      |       | (35.5                            | )          | 38.8 |   |
| Net cash (used  in) provided by investing activities of discontinued operations, including  sale proceeds of $426.2 for the three months ended March 31, 2007 |       | (4.6                             | )          | 424.5 |   |
| **Net  cash (used in) provided by investing activities**                                                                                                           |       | (40.1                            | )          | 463.3 |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                         |       |                             |       |   |   |
| Repayment of  senior secured credit facilities                                                                                                                     |       | (33.5                            | )          | (28.0 | ) |
| Repayment of  senior secured credit facilities revolver                                                                                                            |       | —                           |       | (37.0 | ) |
| Payments on  other long-term debt                                                                                                                                  |       | (3.0                             | )          | (1.6 | ) |
| Distribution to  minority shareholder                                                                                                                              |       | (2.2                             | )          | — |   |
| Net cash used in  financing activities of continuing operations                                                                                                    |       | (38.7                            | )          | (66.6 | ) |
| Net cash used in  financing activities of discontinued operations                                                                                                  |       | —                           |       | — |   |
| **Net  cash used in financing activities**                                                                                                                         |       | (38.7                            | )          | (66.6 | ) |
| Effect of  exchange rate changes on cash                                                                                                                           |       | (0.5                             | )          | (2.1 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                                                                              |       | (52.1                            | )          | 465.3 |   |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                                                                                  |       | —                           |       | (1.6 | ) |
| (Decrease)  increase in cash and cash equivalents from continuing operations                                                                                       |       | (52.1                            | )          | 463.7 |   |
| Cash and cash  equivalents of continuing operations, beginning of period                                                                                           |       | 346.9                            |       | 25.9 |   |
| Cash and cash  equivalents of continuing operations, end of period                                                                                                 |       | $                                | 294.8      |   | $ | 489.6 |   |

 

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(a) - Excludes $4.6 of sale-related cash outflows, net for thethree months ended March 31, 2008. Excludes sale proceeds of $426.2         andintercompany transfers of $3.0 for the three months ended March 31, 2007.

 
| Supplemental  disclosures of cash flow information: |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Interest paid,  net                                 |   | $      | 25.9   |   | $      | 25.4 |   |
| Income taxes  paid, net of refunds                  |   | $      | 10.9   |   | $      | 5.0 |   |
| Non-cash  investing activities:                     |   |   |   |   |   |
| Acquisition of  capital equipment                   |   | $      | 7.5    |   | $      | 10.8 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

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

 

**1.****                                      DESCRIPTIONOF BUSINESS AND SUMMARY OF 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 to Rockwood SpecialtiesGroup, 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 spachemicals. The Company is an indirect wholly-owned subsidiary of RockwoodHoldings, 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.

 

***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 the interim periods are not necessarilyindicative of the results of operations for the full year. The condensedconsolidated financial statements are presented based upon accountingprinciples generally accepted in the United States of America (“U.S. GAAP”),except that certain information and footnote disclosures, normally included infinancial statements prepared in accordance with U.S. GAAP, have been condensedor omitted. The accompanying condensed consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and the notesthereto contained in the Company’s 2007 Form 10-K. In the opinion ofmanagement, this information contains all adjustments necessary, consisting ofnormal and recurring accruals, for a fair presentation of the results for theperiods presented.

 

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 Haas Companycompleted the formation of Viance, LLC, a joint venture company that providesan extensive range of advanced wood treatment technologies and services to theglobal wood treatment industry.  Inaccordance with the consolidation 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.

 

***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, the Company sold its Electronics business, excludingits European wafer reclaim business, 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 

 

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liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and revenue and expenses during the periods reported. Theseestimates include, among other things, assessing the collectibility of accountsreceivable, the use and recoverability of inventory, the valuation of deferredtax 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 fair value of assetsacquired and liabilities assumed allocated to the purchase price of businesscombinations consummated.

 

***Risks Associated with International Operations and CurrencyRisk***—The Company’s international operations are subjectto risks normally associated with foreign operations, including, but not limitedto, the disruption of markets, changes in export or import laws, restrictionson currency exchanges and the modification or introduction of othergovernmental 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 and DLJMerchant Banking Partners III, L.P. (“DLJMB”) and affiliates ofeach. Information concerning certain transactions is included in Holdings’2007 Form 10-K in Item 13, “Certain Relationships and RelatedTransactions, and Director Independence.” There have not been additionalrelated party transactions for the period ended March 31, 2008.

 

As of March 31,2008, the Company had $8.8 million of payables due to its parent company,primarily related 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 lessthan 1% of consolidated net sales as of March 31, 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 March 31, 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 ($820.0 million using the March 31, 2008 exchange rate of€1.00 = $1.5788) 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 recognized as either assets or liabilities at fair value.Changes in the fair value of derivatives not designated as hedging instrumentsare recognized currently in earnings while changes in the fair value ofderivatives that are designated as hedging instruments are recognized as acomponent of comprehensive income. The Company uses derivative instruments tomanage its exposure to market risks associated with fluctuations in interestrates and foreign currency exchange rates. See “Comprehensive Income” sectionof Note 1 for the impact of the Company’s net investment hedges. The Companydoes not enter into derivative contracts for trading purposes nor does it useleveraged or complex instruments.

 

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87,*Employers’ Accounting for Pensions* and SFAS 158,*Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans, an amendment ofFASB Statements No. 87, 88, 106 and 132 (R)*. Otherpostretirement benefit costs and liabilities have been determined in accordancewith SFAS 106,*Employers’ Accounting forPostretirement Benefits Other 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 FASB Statement No. 109*.  The Company’s U.S. operations are included ina consolidated federal income tax return. The amount of current and deferredtax expense is computed on a separate entity basis for each member of the groupbased on applying the principles of 

 

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

 

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 ismore-likely-than-not to not be sustained upon audit by the relevant authority.An uncertain income tax position will not be recognized if it has less than a50% likelihood of being sustained. Additionally, FIN 48 provides guidance onderecognizing, classification, interest and penalties, accounting in interimperiods, 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.  Foreign currency translation amounts are notadjusted for income taxes since they relate to indefinite length investments innon-U.S. subsidiaries and certain intercompany debt.

 

Comprehensive income issummarized as follows:

 
| ** **                               | ** ** | **Three months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 31,**               | ** ** |
| **($ in millions)**            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net income                               |       | $                                | 27.7       |   | $ | 145.3 |   |
| Pension related  adjustments, net of tax |       | 0.5                              |       | 0.5 |   |
| Foreign currency  translation            |       | 116.8                            |       | 36.8 |   |
| Intercompany  foreign currency loans     |       | 62.8                             |       | 2.1 |   |
| Net investment  hedge, net of tax        |       | (96.8                            | )          | (10.4 | ) |
| Total  comprehensive income              |       | $                                | 111.0      |   | $ | 174.3 |   |

 

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 March 31, 2008. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at March 31, 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 $1,054.1million based on the March 31, 2008 exchange rate of €1.00 =$1.5788). As a result, effective October 1, 2005, any foreigncurrency gains and losses resulting from the euro-denominated debt discussedabove are accounted for as a component of accumulated other comprehensiveincome. There was no ineffective portion of the net investment hedge as of March 31,2008. The Company does not expect any of the loss on the net investment hedgeresiding in comprehensive income at March 31, 2008 to be reclassified intoearnings 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 

 

8

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may share costs withother parties. Rockwood does not include anticipated recoveries from insurancecarriers or other 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 caused income from continuing operations beforetaxes and minority interest to decrease by $1.9 million and less than $0.1million for the three months ended March 31, 2008 and 2007, respectively.See Note 10, “Stock-Based Compensation,” for further details.

 

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 March 31, 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, *Applicationof FASB Statement No. 157 to FASB Statement No. 13 and Its RelatedInterpretive Accounting Pronouncements That Address Leasing Transactions*,and FSP FAS 157-2, *Effective Date of FASBStatement No. 157*. FSP FAS 157-1 removes leasing from the scopeof SFAS No. 157. FSP FAS 157-2 delays the effective date of SFAS No. 157from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities,except those that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually).  The Company will apply the provisions of FSP157-2 on January 1, 2009 and does not expect this FSP to have a materialimpact 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),*Business Combinations*(“FAS 141R”) was issued, which replaces FASB Statement No. 141,*Business Combinations.*  FAS 141R establishes principles andrequirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired. Thisstatement also establishes disclosure requirements to enable users of financialstatements to evaluate the nature and financial effects of the business combination.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 that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. This statement also applies to entities thatprepare 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.

 

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 

 

9

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options in accordancewith SFAS No. 123R,*Share-BasedPayment.*  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 Company does not expect a material impacton its financial statements as a result of this 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 the disclosure requirements for derivative instrumentsand hedging activities, including enhanced disclosures about (a) how andwhy an entity uses derivative instruments, (b) how derivative instrumentsand related hedged items are accounted for under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities* and its relatedinterpretations, and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  SFAS No. 161 iseffective for the Company as of January 1, 2009. The Company is currentlyevaluating the impact this statement will have on its financial statements.

 

**2.****                                      DISCONTINUEDOPERATIONS:**

 

On January 9, 2007,the Company completed the sale of its Groupe Novasep segment. The transactionwas valued at approximately €425 million, which included the repayment of thirdparty and intercompany indebtedness.  Inconnection with SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets,”*the Company’sfinancial statements have been reclassified to reflect the Groupe Novasepsegment 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 havebeen reclassified to reflect the Electronics business sold as a discontinuedoperation for all periods presented.

 

Operating results of thediscontinued operations of Groupe Novasep and the Electronics business sold forthe three months ended March 31, 2007 were as follows:

 
| ** **                                    | ** ** | **Groupe**  | ** ** | **Electronics** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------|------------|-----------------|------------|------------|------------|
| **($ in millions)**                 | ** ** | **Novasep** | ** ** | **Business**    | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $           | 8.9        |            | $          | 48.4       |       | $ | 57.3 |   |
| Cost of products  sold                        |       | 7.0         |       | 35.5            |       | 42.5       |       |
| Gross profit                                  |       | 1.9         |       | 12.9            |       | 14.8       |       |
| Selling, general  and administrative expenses |       | 1.0         |       | 7.6             |       | 8.6        |       |
| Restructuring  charges                        |       | —      |       | 0.5             |       | 0.5        |       |
| Gain on sale of  business/assets              |       | (117.7      | )          | —          |       | (117.7     | )          |
| Operating income                              |       | 118.6       |       | 4.8             |       | 123.4      |       |
| Other income  (expenses):                     |       |        |       |            |       |       |       |
| Interest expense                              |       | (0.3        | )          | —          |       | (0.3       | )          |
| Interest income                               |       | —      |       | 0.3             |       | 0.3        |       |
| Foreign exchange  gain, net                   |       | —      |       | 0.3             |       | 0.3        |       |
| Other income  (expenses), net                 |       | (0.3        | )          | 0.6             |       | 0.3        |       |
| Income before  taxes and minority interest    |       | 118.3       |       | 5.4             |       | 123.7      |       |
| Income tax  provision                         |       | 2.1         |       | 1.2             |       | 3.3        |       |
| Net income  before minority interest          |       | 116.2       |       | 4.2             |       | 120.4      |       |
| Minority  interest                            |       | (0.1        | )          | —          |       | (0.1       | )          |
| Net income                                    |       | $           | 116.1      |            | $          | 4.2        |       | $ | 120.3 |   |

 

10

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As of March 31,2007, the Company had received net cash proceeds of $426.2 million from thesale of Groupe Novasep. These proceeds were reported as net cash provided byinvesting activities of discontinued operations for the three months ended March 31,2007 in the Company’s Condensed Consolidated Statements of Cash Flows. Net cashproceeds for the year ended December 31, 2007 from the sale of GroupeNovasep were $420.7 million. The net gain on the Groupe Novasep sale recordedin the first quarter of 2007 was $115.7 million (net of $2.0 million ofGerman taxes).

 

**3.****                                      SEGMENTINFORMATION:**

 

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 additives and water treatment chemicals business lines; (3) TitaniumDioxide Pigments; (4) Advanced Ceramics; 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 assets primarilyrepresent deferred financing costs that have been capitalized in connectionwith corporate external debt financing, deferred income tax assets and cashbalances maintained in accordance with centralized cash management techniques.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 the sale ofits U.S. wafer reclaim business. These operations are substantially unrelatedby nature to businesses currently within the Company’s operating segments.

 

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

 
| ** **                                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**               | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three  months ended March 31, 2008** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                   |       | $             | 311.7      |            | $          | 211.6        |       | $            | 125.8      |          | $          | 133.2              |       | $                | 69.0       |   | $ | 2.7 |   | $ | 854.0 |   |
| Total Adjusted  EBITDA                      |       | 80.5          |       | 31.2            |       | 23.9         |       | 38.5         |       | 8.7           |       | (14.4              | )          | 168.4            |       |
| **Three  months ended March 31, 2007** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                   |       | $             | 267.9      |            | $          | 184.8        |       | $            | 116.1      |          | $          | 105.5              |       | $                | 69.6       |   | $ | 3.8 |   | $ | 747.7 |   |
| Total Adjusted  EBITDA (a)                  |       | 68.3          |       | 32.6            |       | 22.4         |       | 28.8         |       | 8.1           |       | (13.2              | )          | 147.0            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **           | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-------------------|------------|----------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**     | ** ** | ** **           | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |              |       |                 |       |             |       |
| March 31,  2008        |       | $             | 2,038.0    |            | $          | 1,406.5      |       | $            | 856.3      |          | $          | 921.0             |       | $                    | 283.9      |             | $          | 404.3 |   | $ | (175.1 | ) | $ | 5,734.9 |   |
| 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 $9.2 million of Adjusted EBITDA for the three months ended March 31,2007 from the Electronics business sold on December 31, 2007 and $1.8million of Adjusted EBITDA for the three months ended March 31, 2007 fromthe former Groupe Novasep segment sold on January 9, 2007.

 

(b)               This amountincludes $52.7 million and $47.4 million of assets from the legacy businessesformerly belonging to Dynamit Nobel at March 31, 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.

 

11

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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 consolidatedbasis pursuant to the senior secured credit agreement, which reflectsmanagement’s interpretations thereof. The indenture governing the 2014 Notesexcludes certain adjustments permitted under the senior credit agreement.Senior management uses Adjusted EBITDA on a segment basis as the primarymeasure to evaluate the ongoing performance of the Company’s business segmentsand reporting units.

 

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:

 
| ** **                                                                   | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**                                                | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three  months ended March 31, 2008**                                  |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 52.7       |            | $          | 5.2          |       | $            | 2.1        |          | $          | 18.1               |       | $                | 3.6        |   | $ | (33.8 | ) | $ | 47.9 |   |
| Interest expense  (a)                                                        |       | 12.8          |       | 8.1             |       | 8.9          |       | 8.7          |       | 2.3           |       | 32.9               |       | 73.7             |       |
| Interest income                                                              |       | (0.7          | )          | —          |       | —       |       | (0.1         | )          | (0.2          | )          | (1.2               | )          | (2.2             | )          |
| Depreciation and  amortization                                               |       | 16.1          |       | 16.5            |       | 12.9         |       | 11.9         |       | 2.9           |       | 1.5                |       | 61.8             |       |
| Restructuring  charges, net                                                  |       | —        |       | 0.6             |       | —       |       | 0.2          |       | —        |       | —             |       | 0.8              |       |
| Systems/organization  establishment expenses                                 |       | 0.3           |       | 0.7             |       | —       |       | 0.1          |       | 0.1           |       | —             |       | 1.2              |       |
| Inventory  write-up reversal                                                 |       | 0.4           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.4              |       |
| Loss on sale of  assets                                                      |       | —        |       | —          |       | —       |       | 0.1          |       | —        |       | —             |       | 0.1              |       |
| Foreign exchange  gain, net                                                  |       | (0.6          | )          | —          |       | —       |       | (0.5         | )          | —        |       | (14.0              | )          | (15.1            | )          |
| Other                                                                        |       | (0.5          | )          | 0.1             |       | —       |       | —       |       | —        |       | 0.2                |       | (0.2             | )          |
| Total Adjusted  EBITDA                                                       |       | $             | 80.5       |            | $          | 31.2         |       | $            | 23.9       |          | $          | 38.5               |       | $                | 8.7        |   | $ | (14.4 | ) | $ | 168.4 |   |
| **Three  months ended March 31, 2007**                                  |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before                             |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| taxes and  minority interest                                                 |       | $             | 46.8       |            | $          | 16.0         |       | $            | 4.2        |          | $          | 10.8               |       | $                | 3.0        |   | $ | (33.9 | ) | $ | 46.9 |   |
| Interest expense  (a)                                                        |       | 9.4           |       | 3.3             |       | 7.9          |       | 7.9          |       | 2.4           |       | 23.8               |       | 54.7             |       |
| Interest income                                                              |       | (0.8          | )          | (0.2            | )          | —       |       | 0.2          |       | (0.2          | )          | (3.8               | )          | (4.8             | )          |
| Depreciation and  amortization                                               |       | 12.8          |       | 12.6            |       | 10.3         |       | 9.6          |       | 2.7           |       | 1.3                |       | 49.3             |       |
| Restructuring  charges, net                                                  |       | 0.2           |       | —          |       | —       |       | 0.1          |       | —        |       | 3.7                |       | 4.0              |       |
| Systems/organization  establishment expenses                                 |       | —        |       | 0.5             |       | —       |       | 0.2          |       | 0.2           |       | —             |       | 0.9              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.1                |       | 0.1              |       |
| Refinancing  expenses                                                        |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.9                |       | 0.9              |       |
| Loss (gain) on  sale of assets                                               |       | —        |       | 0.1             |       | —       |       | —       |       | —        |       | (4.9               | )          | (4.8             | )          |
| Foreign exchange  loss (gain), net                                           |       | 0.2           |       | 0.1             |       | —       |       | —       |       | —        |       | (0.4               | )          | (0.1             | )          |
| Other                                                                        |       | (0.3          | )          | 0.2             |       | —       |       | —       |       | —        |       | —             |       | (0.1             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 68.3       |            | $          | 32.6         |       | $            | 22.4       |          | $          | 28.8               |       | $                | 8.1        |   | $ | (13.2 | ) | $ | 147.0 |   |

 

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(a)                Includes losses of$30.8 million and $2.8 million for the three months ended March 31, 2008and 2007, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

(b)               This amount doesnot include $9.2 million of Adjusted EBITDA for the three months ended March 31,2007 from the Electronics business sold on December 31, 2007 and $1.8million of Adjusted EBITDA for the three months ended March 31, 2007 fromthe former Groupe Novasep segment sold 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*

 

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe Dynamit Nobel Acquisition and Holdings’ initial public offering, resultedin a number of charges that have affected Rockwood’s historical results. Thesecharges, along with certain other items, are added to or subtracted from income(loss) from continuing operations before taxes and minority interest to deriveAdjusted EBITDA, as defined below. 

 

12

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These items include thefollowing:

 

·            *Restructuring and related charges*: Restructuring charges of $0.8 million and $4.0 million were recorded in thethree months ended March 31, 2008 and 2007, respectively, formiscellaneous restructuring activities, including headcount reductions andfacility closures (see Note 12, “Restructuring Liability,” for furtherdetails).

 

·            *Systems/organization establishment expenses*: For the three months ended March 31, 2008, expenses of $1.2 million wererecorded related to the integration of businesses acquired, primarily relatedto the acquisition of the Elementis plc business in the Performance Additivessegment in August 2007.  For thethree months ended March 31, 2007, expenses of $0.9 million were recordedprimarily in connection with the integration of the Viance, LLC joint ventureand the integration of businesses acquired in 2006 in the Advanced Ceramics andSpecialty Compounds segments.

 

·            *Cancelled acquisition and disposal costs*: Costs of $0.1 million were recorded for the three months ended March 31,2007 in connection with non-consummated acquisitions and dispositions.

 

·            *Inventory write-up reversal*:  UnderSFAS 141,*Business Combinations*,all inventories acquired in an acquisition must be revalued to “fair value.” Inconnection with 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$0.4 million for the three months ended March 31, 2008 in the SpecialtyChemicals segment as the inventory was sold in the normal course of business.

 

·            *Refinancingexpenses: *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.

 

·            *Loss (gain) on sale of assets*:  TheCompany recorded a loss, net of $0.1 million for the three months ended March 31,2008 respectively, related to asset sales in the Advanced Ceramics segment. Inthe three months ended March 31, 2007, the Company recorded gains of $4.8million primarily related to the sale of the U.S. wafer reclaim business.

 

·            *Foreign exchange gain (loss), net*: During the periods presented, the Company recorded foreign exchange gains and(losses) from intercompany financing related-receivables, long-term debt andother non-operating transactions. For the three months ended March 31,2008 and 2007, gains of $15.1 million and $0.1 million, respectively, wererecorded. The increase in foreign exchange gains is due to the impact ofthe stronger euro as of March 31, 2008 versus December 31, 2007,related to non-operating euro-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 fromacquisitions is tested for impairment at least annually.

 

**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 March 31,2008. The results of operations and cash flows of the business acquired for theperiods after August 31, 2007 are included for the quarter ended March 31,2008. The excess of the total purchase price over the estimated fair value ofthe net assets acquired at closing has been allocated to goodwill and isestimated to be $23.1 million as of March 31, 2008. Certain environmentalmatters were assumed in the acquisition. The Company estimates that thepotential exposure range for these items is from $4.5 million to $16.7 million.At March 31, 2008, $4.5 million of related reserves are recorded. Theallocation of the purchase price to the identifiable assets acquired and theenvironmental liabilities assumed are preliminary and are subject to changeupon the finalization of purchase accounting which is expected to be completedduring 2008.

 

In addition to theacquisition described above, the Company has completed other smalleracquisitions in 2007 and in the first quarter of 2008. Depending on the timingand complexity involved, the purchase price allocation to the net assetsacquired for certain acquisitions completed within the last year waspreliminary as of March 31, 2008.

 

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

 

13

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**5.****                                      INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Raw materials                 |       | $                  | 192.9      |                  | $          | 186.9 |   |
| Work-in-process               |       | 68.5               |       | 61.0                  |       |
| Finished goods                |       | 305.9              |       | 281.4                 |       |
| Packaging  materials          |       | 6.5                |       | 6.1                   |       |
| Total                         |       | $                  | 573.8      |                  | $          | 535.4 |   |

 

**6.****                                      GOODWILL:**

 

Below are goodwillbalances and activity by segment:

 
| ** **                                     | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|------------|------------|
| ** **                                     | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** ** | ** ** |
| **($ in millions)**                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **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                                   |       | 2.1           |       | —          |       | —       |       | —       |       | —        |       | 2.1        |       |
| Foreign exchange  and other (b)                |       | 41.9          |       | 7.5             |       | 15.3         |       | 21.9         |       | 0.8           |       | 87.4       |       |
| Balance,  March 31, 2008                  |       | $             | 709.9      |            | $          | 522.9        |       | $            | 197.1      |          | $          | 275.5      |       | $ | 122.0 |   | $ | 1,827.4 |   |

 

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(a)                Under the terms ofthe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition in April 2004, GEA Group and its subsidiary, GEA NorthAmerica Inc. (“GEA North America”), were obligated to indemnify the Company forcertain legal, tax and environmental liabilities and obligations that relate tothe period 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 its subsidiary.As a result, the Company has reported this as an adjustment to the purchaseprice with a credit to goodwill in the first quarter of 2008.  See Note 14, “Commitments and Contingencies,”for further details.

 

(b)               Consists primarilyof foreign currency changes.

 

**7.****                                      OTHERINTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of March 31, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                    | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                 | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount (a)**                          | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                            | 427.8      |                                            | $          | (133.6 | ) | $ | 294.2 |   | $ | 395.6 |   | $ | (116.7 | ) | $ | 278.9 |   |
| Trade names and  trademarks              |       | 149.0                                        |       | (25.9                                           | )          | 123.1 |   | 147.2 |   | (23.0 | ) | 124.2 |   |
| Customer  relationships                  |       | 309.2                                        |       | (67.1                                           | )          | 242.1 |   | 273.3 |   | (57.3 | ) | 216.0 |   |
| Supply  agreements                       |       | 31.3                                         |       | (3.7                                            | )          | 27.6 |   | 29.6 |   | (2.9 | ) | 26.7 |   |
| Other                                    |       | 57.8                                         |       | (30.1                                           | )          | 27.7 |   | 57.7 |   | (26.7 | ) | 31.0 |   |
| Total                                    |       | $                                            | 975.1      |                                            | $          | (260.4 | ) | $ | 714.7 |   | $ | 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 $18.7 million and $15.1 million for the three monthsended March 31, 2008 and 2007, respectively.

 

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

 

14

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| **($ in millions)** | ** ** | **Amortization** | ** ** |
|-------------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2008                          |       | $                | 73.4       |   |
| 2009                          |       | 66.4             |       |
| 2010                          |       | 64.7             |       |
| 2011                          |       | 59.5             |       |
| 2012                          |       | 55.6             |       |
|                               |            |                  |            |  |

 

**8.****                                      LONG-TERMDEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ , € and £ in millions)**                            | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Senior secured  credit facilities:                                                               |       |               |       |                  |       |
| Tranche A-1 term  loans (€26.1 and €29.3, respectively)                                |       | $                  | 41.2       |                  | $          | 42.8 |   |
| Tranche A-2 term  loans (€113.6 and €127.8, respectively)                              |       | 179.4              |       | 186.5                 |       |
| Tranche E term  loans                                                                            |       | 1,110.7            |       | 1,116.4               |       |
| Tranche G term  loans (€266.6 and €267.9, respectively)                                |       | 420.9              |       | 390.9                 |       |
| 2014 Notes  (€375.0 and $200.0 as of March 31, 2008 and December 31, 2007)        |       | 792.0              |       | 747.1                 |       |
| Other term loan  facilities                                                                      |       | 23.5               |       | 24.2                  |       |
| Capitalized  lease obligations (€33.4 and €34.1, respectively)                         |       | 52.7               |       | 49.7                  |       |
| Preferred stock  of subsidiary (£12.0 as of March 31, 2008 and December 31, 2007) |       | 23.8               |       | 23.8                  |       |
|                                                                                             |       | 2,644.2            |       | 2,581.4               |       |
| Less current  maturities                                                                         |       | (111.3             | )          | (107.4                | )          |
|                                                                                             |       | $                  | 2,532.9    |                  | $          | 2,474.0 |   |

 

**9.****                                      INCOMETAXES:**

 

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the three months ended March 31, 2008 and 2007 was40.9% and 44.3%, respectively. The effective tax rate is lower in 2008 comparedto 2007 primarily as a result of lower statutory rates in various Europeancountries and geographic mix. The difference between the effective tax rate andthe U.S. federal statutory rate of 35.0% is primarily a function of foreignrate differentials and the impact of the valuation allowance on domesticearnings.

 

In the three months endedMarch 31, 2008, the Company increased its worldwide valuation allowancesby $44.5 million. The increase in the valuation allowance was the result of anincrease in the U.S. net deferred tax assets. The change in the valuationallowance for the first quarter of 2008 increased the tax provision by $6.1million. The following table reflects the activity in the valuation allowancefor worldwide net operating losses and other deferred income tax assets:

 
| ** **                                           | ** ** | **Valuation** | ** ** |
|------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                        | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2007                |       | $             | 92.5       |   |
| Increase as  reflected in income tax expense         |       | 6.1           |       |
| Increase as  reflected in other comprehensive income |       | 38.4          |       |
| Balance as of  March 31, 2008                   |       | $             | 137.0      |   |

 

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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 first quarter of2008, 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 first threemonths of 2008, the Company’s net deferred tax assets and liabilities weremaintained at a zero level, other than a noncurrent deferred tax liabilityrelating to goodwill with an indefinite reversal period and the Federal AMTCredit. It is the Company’s policy that the valuation allowance is reversed inthe year management determines it is more likely than not that the deferred taxassets will be realized.

 

Unrecognized tax benefitsat March 31, 2008 were $26.1 million, including $23.4 million of taxbenefits that, if recognized, would 

 

15

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affect the effective taxrate. Also included in the balance of unrecognized tax benefits at March 31,2008, are $2.2 million of tax benefits that if recognized, would result in adecrease to goodwill recorded in purchase business combinations, and $0.5million of tax benefits that, if recognized, would result in an adjustment toother 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 three months ended March 31, 2008, the accrual forinterest and penalties was increased by $0.5 million. As of March 31,2008, the Company had accrued a total of $4.8 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-BASEDCOMPENSATION:**

 

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 $1.9 million and less than$0.1 million for the three months ended March 31, 2008 and 2007,respectively. The total tax benefit recognized related to stock options was$0.2 million and less than $0.1 million for the three months ended March 31,2008 and 2007, respectively.

 

**11.****                               EMPLOYEEBENEFIT 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** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Service cost                          |       | $                                | 1.8        |   | $ | 1.9 |   |
| Interest cost                         |       | 7.0                              |       | 5.7 |   |
| Expected return  on assets            |       | (2.7                             | )          | (2.1 | ) |
| Net amortization  of actuarial losses |       | —                           |       | 0.1 |   |
| Total pension  cost                   |       | $                                | 6.1        |   | $ | 5.6 |   |

 

**12.****                               RESTRUCTURINGLIABILITY:**

 

The Company recordedrestructuring charges of $0.8 million and $4.0 million for the three monthsended March 31, 2008 and 2007, respectively.  The Company records restructuring liabilitiesthat represent charges incurred in connection with consolidations andcessations of certain of its operations, including operations fromacquisitions, as well as headcount reduction programs. These charges consistprimarily of write-offs of assets and severance costs. Severance charges arebased on various factors including the employee’s length of service, contractprovisions, salary levels and local governmental legislation. At the time arelated charge is recorded, the Company calculates its best estimate based upondetailed analysis. Although significant changes are not expected, actual costsmay differ from these estimates.

 

16

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During the three monthsended March 31, 2008, the Company expensed $0.8 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 willinclude the reorganization and relocation of its North American Finance and ITservices and the closure of three manufacturing facilities by the end of 2008.For the three months ended March 31, 2008, the Company recorded $0.6million of severance costs related to this restructuring plan and expects torecord approximately $1.5 million of additional costs during the remainder of2008. In the Advanced Ceramics segment, $0.2 million was recorded in the firstquarter of 2008 for miscellaneous headcount reductions.

 

During the three monthsended March 31, 2007, the Company expensed $4.0 million of restructuringcharges.  In the Corporate and othersegment, facility closure and severance costs of $3.7 million were recordedprimarily related to the restructuring of the wafer reclaim business.  In addition, $0.2 million was recorded in theSpecialty Chemicals segment and $0.1 million was recorded in the AdvancedCeramics segment for miscellaneous headcount reductions.

 

In 2006, the Companyrecorded restructuring charges for miscellaneous restructuring items, includingmiscellaneous headcount reductions and the closure of an administrative officein the Specialty Chemicals segment.  Inthe Corporate and other segment, charges were recorded primarily related to therestructuring of the wafer reclaim business. This included severance andrelated costs for employees in connection with the closure of two wafer reclaimfacilities. The Company closed a wafer reclaim facility in the U.K. in January 2006and one of the facilities in the U.S. in March 2006. In addition, chargeswere recorded in the Performance Additives and Advanced Ceramics segmentsprimarily for miscellaneous 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.

 

Selected information forthe 2008 restructuring actions follows:

 
| ** **                                 | ** ** | **Severance** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------|------------|
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Total**  | ** ** |
| **2008**                                   | ** ** | ** **    | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007 |       | $             | —     |       | $          | — |   |
| Restructuring  charge in 2008              |       | 0.9           |       | 0.9        |       |
| Utilized in 2008                           |       | (0.7          | )          | (0.7       | )          |
| Liability  balance, March 31, 2008    |       | $             | 0.2        |       | $          | 0.2 |   |

 

These actions areexpected to be completed during 2008.

 

Selected information forthe 2007 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2007**                                   |       |          |       |         |       |           |       |       |       |
| Liability  balance, December 31, 2007 |       | $             | 6.1        |         | $          | 0.3            |       | $          | 0.3        |   | $ | 6.7 |   |
| Utilized in 2008                           |       | (1.3          | )          | (0.1         | )          | —         |       | (1.4       | )          |
| Foreign exchange  and other                |       | (1.9          | )          | 1.4          |       | —         |       | (0.5       | )          |
| Liability  balance, March 31, 2008    |       | $             | 2.9        |         | $          | 1.6            |       | $          | 0.3        |   | $ | 4.8 |   |

 

These actions areexpected to be completed during 2008 and 2009.

 

17

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Selected information forthe 2006 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2006**                                   |       |          |       |         |       |           |       |       |       |
| Liability  balance, December 31, 2007 |       | $             | 1.3        |         | $          | 4.1            |       | $          | 0.1        |   | $ | 5.5 |   |
| Utilized in 2008                           |       | (0.7          | )          | (0.9         | )          | —         |       | (1.6       | )          |
| Liability  balance, March 31, 2008    |       | $             | 0.6        |         | $          | 3.2            |       | $          | 0.1        |   | $ | 3.9 |   |

 

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:

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

 

These actions areexpected to be completed in 2008.

 

Selected information forthe 2004 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2004**                                   |       |          |       |         |       |           |       |       |       |
| 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                |       | 0.1           |       | —       |       | (0.4           | )          | (0.3       | )          |
| Liability  balance, March 31, 2008    |       | $             | 0.7        |         | $          | 0.1            |       | $          | —     |   | $ | 0.8 |   |

 

These actions areexpected to be substantially completed by the end of 2008.

 

Restructuring reserves bysegment are as follows:

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Specialty  Chemicals          |       | $                  | 2.3        |                  | $          | 3.4 |   |
| Performance  Additives        |       | 3.2                |       | 4.6                   |       |
| Advanced  Ceramics            |       | 0.7                |       | 0.8                   |       |
| Specialty  Compounds          |       | 1.0                |       | 2.4                   |       |
| Corporate and  other          |       | 2.7                |       | 2.8                   |       |
|                          |       | $                  | 9.9        |                  | $          | 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

 

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related disclosures. Thisstatement does not require any new fair value measurements, but requiresdisclosure of how the fair values of any assets and liabilities that aremeasured at fair value on a recurring basis are determined. Certain provisionsof this standard were effective for the Company as of January 1, 2008 andare disclosed below.  However, the FASBhas deferred the implementation of SFAS No. 157 by one year fornon-financial assets and liabilities. Under SFAS No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities*—*Includingan Amendment of FASB Statement No. 115,”*entities are permitted to choose whether to measuremany financial instruments and certain other items at fair value.  The Company has elected not to measure anyinstruments at fair value under SFAS No. 159.

 

As of March 31,2008, the only assets and liabilities that the Company currently measures atfair value 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 any financial assets or liabilities that areclassified as Level 3 inputs as of March 31, 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 March 31, 2008:

 
| ** **                                                     | ** ** | **As of**               | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **March 31, 2008** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable  securities (a)                                     |       | $                            | 170.3      |                                  | $          | 170.3 |   | $ | — |   | $ | — |   |
| Total assets at  fair value                                    |       | $                            | 170.3      |                                  | $          | 170.3 |   | $ | — |   | $ | — |   |
|                                                           |       |                         |       |                                  |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate  swaps (b)                                       |       | $                            | 40.8       |                                  | $          | — |   | $ | 40.8 |   | $ | — |   |
| Cross-currency  interest rate swaps (c)                        |       | 8.4                          |       | —                                |       | 8.4 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (d) |       | 42.8                         |       | —                                |       | 42.8 |   | — |   |
| Raw material  purchase hedge (e)                               |       | 0.2                          |       | —                                |       | 0.2 |   | — |   |
| Total  liabilities at fair value                               |       | $                            | 92.2       |                                  | $          | — |   | $ | 92.2 |   | $ | — |   |

 

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(a)                These representmoney market funds with an original maturity of three months or less. These arereported in cash and cash equivalents in the Condensed Consolidated BalanceSheets.

 

(b)               The Company hashistorically entered into interest rate swaps to manage its exposure to changesin interest rates related to variable rate debt.  As of March 31, 2008, these contractscover notional amounts of $725.0 million (at a rate of 4.499%) and €405.8million (at rates ranging from 2.498% to 4.529%). These derivative contractseffectively convert the senior secured credit obligations to fixed rateobligations.  The maturity date of thesehedges is July 2008.  In the thirdquarter of 2007, the Company entered into interest rate swaps that becomeeffective in July 2008 and will effectively replace the swaps that willexpire in 2008. These swaps mature between November 2009 and July 2012.The Company has elected not to apply hedge accounting for these interest rateswaps and has recorded the mark-to-market of these derivatives as a componentof interest expense in the Condensed Consolidated Statements of 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 withthe offering of the 2014 Notes, the Company entered into a cross-currencyinterest rate swap in November 2004

 

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                              witha notional amount of €155.6 million that effectively converts the U.S. dollarfixed rate debt in respect of the 2014 dollar-denominated notes sold into eurofixed rate debt.  This swap has a finalmaturity date of November 2009.  TheCompany designated this contract as a hedge of the foreign currency exposure ofits net investment in its euro-denominated operations.  As a result, any foreign currency gains andlosses resulting from the translation of this euro-denominated debt isaccounted for as a component of accumulated other comprehensive income for aslong 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 materialprices.  The Company has elected not toapply hedge accounting for this derivative contract and has recorded themark-to-market of this derivative in cost of products sold in the CondensedConsolidated Statements of Operations.

 

The fair values of marketablesecurities are based on unadjusted quoted market prices from various financialinformation service providers and securities exchanges. The fair values ofderivatives are based on quoted market prices from various banks for similarinstruments.

 

**14.       COMMITMENTS AND CONTINGENCIES:**

 

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters in accordance with SFAS 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 this matter 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 Companyexpects to continue to pay legal fees in connection with the above matters andother legal actions related to chromated copper arsenate and other productliability matters, based on currently available facts, the Company does not believethat these actions will have a material effect on the financial 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 March 31, 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

 

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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 NorthAmerica Inc. (“GEA North America”)) were obligated to indemnify the Company forcertain legal, tax and environmental liabilities and obligations that relate tothe period prior to the closing, subject to certain limits and exclusions.Pursuant to these agreements, the Company has various claims forindemnification with Evonik Degussa and GEA Group. However, in March 2008,the Company entered into an agreement with GEA Group and GEA North America tosettle all existing and future non tax-related indemnities under the sale andpurchase agreement relating to the Dynamit Nobel Acquisition in considerationof payment to the Company of €18.8 million ($29.1 million), which was receivedon March 28, 2008. These indemnities primarily relate to environmentalmatters.

 

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. The Company believes that 12of its facilities in the United States may be required to provide informationnecessary to complete the first step known as the Top Screen. After gatheringinformation during the Top Screen process, Homeland Security will develop fourtiers of risk with Tier 1 being the highest risk sites and Tier 4 representingthe lowest. For national security reasons, the Department will not publishthe ranking criteria. The Company

 

believes that followingTop Screen, six of the Company’s locations may receive a ranking and be askedto undertake the second step of the regulation, which is to prepare a SiteVulnerability Analysis (which includes identification of critical assets,threat assessments, identification of potential security vulnerabilities andanalysis of countermeasures to a terrorist attack) and a Site Security Plan(which describes 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.

 

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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, which itbelieves to be approximately $5.0 million per year until 2010 and approximately$3.0 million per year from 2011 through 2018, although we may incur additionalcosts depending on the safety assessments required. In addition, it is possiblethat REACH may affect raw material supply, customer demand for certain productsand the Company’s decision to continue to manufacture and sell certainproducts.

 

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, aswell as 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 Company continuesto evaluate options in order to comply with the Protocol. However, the Companydoes not expect this to have a material impact on its cash flow or results ofoperations.

 

***Remediation Liabilities***

 

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

 

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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 March 31,2008:

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

 

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(a)                TheCompany is currently operating groundwater monitoring and/or remediationsystems at these locations.

 

(b)               TheCompany is currently operating groundwater monitoring and/or remediationsystems at these locations for which prior owners or insurers have assumedresponsibility.

 

(c)                TheCompany is currently conducting investigations into additional possible soiland/or groundwater contamination at these locations.

 

(d)               TheCompany has land restoration obligations relating to landfill activities orsurface mining at these locations.

 

(e)                TheCompany is responsible for liabilities related to environmental matters atthese closed facilities.

 

The Company is alsoresponsible for environmental matters at some of its former off-site disposallocations owned by third parties. These sites are considered Superfund sites asdefined by 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 March 31, 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.

 

***Environmental Indemnity Obligations***

 

Pursuant to the sharepurchase agreement entered into in connection with the sale of the GroupeNovasep segment, the Company 

 

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agreed to indemnify thebuyers for certain known and unknown environmental actions which may arise inthe future related to periods prior to closing of the sale. These obligationsexpire three years after the closing; however, the Company’s liability for suchobligations was reduced from 90% of any qualifying environmental liabilityclaim to 70% of such claims 15 months after the closing. In addition, theCompany is required to indemnify the purchaser of the Company’s U.S. waferreclaim business for six years for any unknown environmental actions attributableto the conduct of such business prior to the closing of the transaction in February 2007.The business purchase agreement provides that the Company must indemnify thebuyer for 100% of claims related to contamination of the business’ site or the migrationof any hazardous substances from such site if notice of any such claim is givenwithin four years of the closing of the transaction and 50% of such claims ifnotice is given after the fourth but before the sixth anniversary of theclosing.

 

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 environmentaldeed provides that Evonik Degussa will indemnify the Company and itssubsidiaries for claims relating to properties that were formerly owned,occupied or used as of November 20, 2000, as well as properties owned bythird parties (inclusive of disposal of waste and certain other identifiedissues prior to November 20, 2000). The environmental deed provides thatin this instance, Evonik Degussa will be responsible for reasonable costs and expensesincurred.

 

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition 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 $43.4 million for knownenvironmental liabilities as of March 31, 2008, of which $43.3 million wasclassified as other non-current liabilities in the Consolidated Balance Sheets.As of December 31, 2007, the Company has accrued $40.7 million for knownenvironmental liabilities, all of which was classified as other non-currentliabilities in 

 

24

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the Consolidated BalanceSheets. The environmental liabilities assumed are subject to change upon thefinalization of purchase accounting. Included in the $43.4 million as of March 31,2008 is $16.7 million that is discounted using discount rates ranging from 5.0%to 7.0%, with the undiscounted amount of these reserves equaling $25.2 million.Included in the $40.7 million as of December 31, 2007 is $15.8 millionthat is discounted 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 environmental mattersis from $43.4 million to $69.0 million. In the three months ended March 31,2008, excluding the acquisition of the global color pigments business ofElementis plc, the Company recorded charges of $1.0 million to increase itsenvironmental liabilities and made payments of $0.6 million for clean-up andremediation costs, which reduced its environmental liabilities. For the threemonths ended March 31, 2008, the recurring cost of managing hazardoussubstances for ongoing operations is $13.3 million. At a number of the sitesdescribed 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.       CONSOLIDATING FINANCIAL INFORMATION:**

 

As described in Note 8, “Long-termDebt,” the Company issued the 2014 Notes in November 2004. The followingconsolidating financial statements present the results of operations, financialcondition and cash flows, in separate columns, of the parent company (RockwoodSpecialties Group, Inc.), which is the issuer of the 2014 Notes, guarantorsubsidiaries, non-guarantor subsidiaries, elimination adjustments andconsolidated totals.

 

25

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED MARCH 31, 2008**

**(Dollarsin millions)**

 
| ** **                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                         |       | $           | —     |             | $          | 195.7             |       | $                | 658.3      |   | $ | 854.0 |   |
| Cost of products  sold                            |       | —      |       | 142.9            |       | 436.2             |       | 579.1            |       |
| Gross profit                                      |       | —      |       | 52.8             |       | 222.1             |       | 274.9            |       |
| Selling, general  and administrative expenses     |       | —      |       | 44.7             |       | 125.4             |       | 170.1            |       |
| Restructuring  charges, net                       |       | —      |       | 0.4              |       | 0.4               |       | 0.8              |       |
| Loss on sale of  assets                           |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Operating (loss)  income                          |       | —      |       | 7.7              |       | 96.2              |       | 103.9            |       |
| Other income  (expenses):                         |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                         |       | 27.7        |       | (9.5             | )          | (18.2             | )          | —           |       |
| Interest expense                                  |       | (64.5       | )          | (0.5             | )          | (8.7              | )          | (73.7            | )          |
| Interest income                                   |       | 2.7         |       | (0.1             | )          | (0.4              | )          | 2.2              |       |
| Intergroup  other, net                            |       | —      |       | 1.4              |       | (1.4              | )          | —           |       |
| Foreign exchange  gain (loss), net                |       | 21.2        |       | (0.2             | )          | (5.9              | )          | 15.1             |       |
| Other, net                                        |       | (0.4        | )          | 0.4              |       | 0.4               |       | 0.4              |       |
| Other income  (expenses), net                     |       | (13.3       | )          | (8.5             | )          | (34.2             | )          | (56.0            | )          |
| (Loss) income  before taxes and minority interest |       | (13.3       | )          | (0.8             | )          | 62.0              |       | 47.9             |       |
| Income tax  provision                             |       | 0.3         |       | 1.5              |       | 17.8              |       | 19.6             |       |
| (Loss) income  before minority interest           |       | (13.6       | )          | (2.3             | )          | 44.2              |       | 28.3             |       |
| Minority  interest                                |       | —      |       | —           |       | (0.6              | )          | (0.6             | )          |
| Net (loss)  income                                |       | $           | (13.6      | )                | $          | (2.3              | )          | $                | 43.6       |   | $ | 27.7 |   |

 

26

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED MARCH 31, 2007**

**(Dollarsin millions)**

 
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 175.6             |       | $                | 572.1      |   | $ | 747.7 |   |
| Cost of products  sold                                                       |       | —      |       | 126.4            |       | 377.2             |       | 503.6            |       |
| Gross profit                                                                 |       | —      |       | 49.2             |       | 194.9             |       | 244.1            |       |
| Selling, general  and administrative expenses                                |       | 0.1         |       | 39.4             |       | 107.7             |       | 147.2            |       |
| Restructuring  charges, net                                                  |       | —      |       | 0.5              |       | 3.5               |       | 4.0              |       |
| Loss (gain) on  sale of assets                                               |       | 0.1         |       | (4.3             | )          | (0.6              | )          | (4.8             | )          |
| Operating (loss)  income                                                     |       | (0.2        | )          | 13.6             |       | 84.3              |       | 97.7             |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                    |       | 18.3        |       | (5.5             | )          | (12.8             | )          | —           |       |
| Interest expense                                                             |       | (47.6       | )          | (0.7             | )          | (6.4              | )          | (54.7            | )          |
| Interest income                                                              |       | 7.6         |       | —           |       | (2.8              | )          | 4.8              |       |
| Intergroup  other, net                                                       |       | 0.3         |       | 4.0              |       | (4.3              | )          | —           |       |
| Refinancing  expenses                                                        |       | (0.9        | )          | —           |       | —            |       | (0.9             | )          |
| Foreign exchange  gain (loss), net                                           |       | 1.3         |       | (0.1             | )          | (1.1              | )          | 0.1              |       |
| Other, net                                                                   |       | —      |       | —           |       | (0.1              | )          | (0.1             | )          |
| Other income  (expenses), net                                                |       | (21.0       | )          | (2.3             | )          | (27.5             | )          | (50.8            | )          |
| (Loss) income  from continuing operations before taxes and minority interest |       | (21.2       | )          | 11.3             |       | 56.8              |       | 46.9             |       |
| Income tax  provision                                                        |       | 0.4         |       | 3.5              |       | 16.9              |       | 20.8             |       |
| (Loss) income  from continuing operations before minority interest           |       | (21.6       | )          | 7.8              |       | 39.9              |       | 26.1             |       |
| Minority  interest in continuing operations                                  |       | —      |       | —           |       | (1.1              | )          | (1.1             | )          |
| Net (loss)  income from continuing operations                                |       | (21.6       | )          | 7.8              |       | 38.8              |       | 25.0             |       |
| Income from  discontinued operations, net of tax                             |       | —      |       | 1.7              |       | 3.0               |       | 4.7              |       |
| Gain on sale of  discontinued operations, net of tax                         |       | —      |       | —           |       | 115.7             |       | 115.7            |       |
| Minority  interest in discontinued operations                                |       | —      |       | —           |       | (0.1              | )          | (0.1             | )          |
| Net (loss)  income                                                           |       | $           | (21.6      | )                | $          | 9.5               |       | $                | 157.4      |   | $ | 145.3 |   |

 

27

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**MARCH 31, 2008**

**(Dollarsin millions)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 428.3      |             | $          | (188.7            | )          | $                | 55.2       |             | $          | — |   | $ | 294.8 |   |
| Accounts  receivable, net                        |       | —      |       | 132.7            |       | 421.6             |       | —           |       | 554.3            |       |
| Inventories                                      |       | —      |       | 150.7            |       | 423.1             |       | —           |       | 573.8            |       |
| Deferred income  taxes                           |       | 2.5         |       | 13.9             |       | 4.8               |       | —           |       | 21.2             |       |
| Prepaid expenses  and other current assets       |       | 0.1         |       | 12.1             |       | 49.5              |       | —           |       | 61.7             |       |
| Total current  assets                            |       | 430.9       |       | 120.7            |       | 954.2             |       | —           |       | 1,505.8          |       |
| Property, plant  and equipment, net              |       | —      |       | 239.9            |       | 1,348.2           |       | —           |       | 1,588.1          |       |
| Investment in  subsidiary                        |       | 1,423.4     |       | 92.4             |       | —            |       | (1,515.8         | )          | —           |       |
| Goodwill                                         |       | —      |       | 359.1            |       | 1,468.3           |       | —           |       | 1,827.4          |       |
| Intergroup  receivable                           |       | 1,740.1     |       | 719.6            |       | 4,561.4           |       | (7,021.1         | )          | —           |       |
| Other intangible  assets, net                    |       | —      |       | 71.8             |       | 642.9             |       | —           |       | 714.7            |       |
| Deferred debt  issuance costs, net               |       | 2.0         |       | 3.9              |       | 35.7              |       | —           |       | 41.6             |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 15.3              |       | —           |       | 15.3             |       |
| Other assets                                     |       | —      |       | 3.2              |       | 38.8              |       | —           |       | 42.0             |       |
| Total assets                                     |       | $           | 3,596.4    |             | $          | 1,610.6           |       | $                | 9,064.8    |             | $          | (8,536.9 | ) | $ | 5,734.9 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 65.5              |       | $                | 183.3      |             | $          | — |   | $ | 248.8 |   |
| Income taxes  payable                            |       | 0.5         |       | 2.7              |       | 10.2              |       | —           |       | 13.4             |       |
| Accrued  compensation                            |       | —      |       | 8.3              |       | 68.7              |       | —           |       | 77.0             |       |
| Restructuring  liability                         |       | —      |       | 3.1              |       | 6.8               |       | —           |       | 9.9              |       |
| Accrued expenses  and other current liabilities  |       | 36.6        |       | 43.5             |       | 111.7             |       | —           |       | 191.8            |       |
| Deferred income  taxes                           |       | —      |       | —           |       | 8.6               |       | —           |       | 8.6              |       |
| Long-term debt,  current portion                 |       | 26.1        |       | —           |       | 85.2              |       | —           |       | 111.3            |       |
| Total current  liabilities                       |       | 63.2        |       | 123.1            |       | 474.5             |       | —           |       | 660.8            |       |
| Long-term debt                                   |       | 2,338.6     |       | —           |       | 194.3             |       | —           |       | 2,532.9          |       |
| Pension and  related liabilities                 |       | —      |       | 5.5              |       | 349.0             |       | —           |       | 354.5            |       |
| Intergroup  payable                              |       | 4.0         |       | 1,383.8          |       | 5,633.3           |       | (7,021.1         | )          | —           |       |
| Deferred income  taxes                           |       | 13.2        |       | (1.3             | )          | 109.7             |       | —           |       | 121.6            |       |
| Other  liabilities                               |       | 96.1        |       | 34.9             |       | 84.1              |       | —           |       | 215.1            |       |
| Total liabilities                                |       | 2,515.1     |       | 1,546.0          |       | 6,844.9           |       | (7,021.1         | )          | 3,884.9          |       |
| Minority  interest                               |       | —      |       | —           |       | 173.7             |       | —           |       | 173.7            |       |
| Stockholder’s  equity:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,035.2     |       | 101.9            |       | 1,058.6           |       | (1,160.5         | )          | 1,035.2          |       |
| Accumulated  other comprehensive income          |       | (17.3       | )          | 0.3              |       | 474.0             |       | —           |       | 457.0            |       |
| Retained  earnings (deficit)                     |       | 63.4        |       | (228.2           | )          | 348.9             |       | —           |       | 184.1            |       |
| Total  stockholder’s equity                 |       | 1,081.3     |       | 64.6             |       | 2,046.2           |       | (1,515.8         | )          | 1,676.3          |       |
| Total  liabilities and stockholder’s equity |       | $           | 3,596.4    |             | $          | 1,610.6           |       | $                | 9,064.8    |             | $          | (8,536.9 | ) | $ | 5,734.9 |   |

 

28

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**DECEMBER 31, 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 |   |

 

29

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2008**

**(Dollarsin millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net (loss)  income                                                                                       |       | $           | (13.6      | )                | $          | (2.3              | )          | $                | 43.6       |   | $ | 27.7 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Depreciation and  amortization                                                                           |       | —      |       | 11.6             |       | 50.2              |       | 61.8             |       |
| Deferred  financing costs amortization                                                                   |       | 0.1         |       | 0.2              |       | 2.0               |       | 2.3              |       |
| Foreign exchange  (gain) loss                                                                            |       | (21.2       | )          | 0.2              |       | 5.9               |       | (15.1            | )          |
| Fair value  adjustment of derivatives                                                                    |       | 28.2        |       | —           |       | 2.6               |       | 30.8             |       |
| Bad debt  provision                                                                                      |       | —      |       | 0.2              |       | 0.1               |       | 0.3              |       |
| Stock-based  compensation                                                                                |       | —      |       | 1.1              |       | 0.7               |       | 1.8              |       |
| Deferred income  taxes                                                                                   |       | (0.9        | )          | 1.5              |       | 6.7               |       | 7.3              |       |
| Gain on sale of  assets                                                                                  |       | —      |       | —           |       | (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                                                                                     |       | —      |       | (20.0            | )          | (27.3             | )          | (47.3            | )          |
| Inventories,  including inventory write-up reversal                                                      |       | —      |       | (12.5            | )          | (0.2              | )          | (12.7            | )          |
| Prepaid expenses  and other assets                                                                       |       | 1.0         |       | 18.2             |       | (15.9             | )          | 3.3              |       |
| Accounts payable                                                                                         |       | —      |       | (7.0             | )          | (32.0             | )          | (39.0            | )          |
| Income taxes  payable                                                                                    |       | 0.3         |       | (0.6             | )          | 1.6               |       | 1.3              |       |
| Accrued expenses  and other liabilities                                                                  |       | 12.7        |       | (11.5            | )          | 3.3               |       | 4.5              |       |
| Intercompany  operating activities, net                                                                  |       | 2.5         |       | (2.2             | )          | (0.3              | )          | —           |       |
| Net cash  provided by (used in) operating activities of continuing operations                            |       | 9.1         |       | (23.1            | )          | 41.2              |       | 27.2             |       |
| Net cash  provided by operating activities of discontinued operations                                    |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) operating activities**                                                 |       | 9.1         |       | (23.1            | )          | 41.2              |       | 27.2             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | (1.5             | )          | (9.4              | )          | (10.9            | )          |
| Post closing  purchase price consideration                                                               |       | —      |       | —           |       | 29.1              |       | 29.1             |       |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (7.5             | )          | (48.6             | )          | (56.1            | )          |
| Proceeds on sale  of assets                                                                              |       | —      |       | 1.8              |       | 0.6               |       | 2.4              |       |
| Net cash used in  investing activities of continuing operations                                          |       | —      |       | (7.2             | )          | (28.3             | )          | (35.5            | )          |
| Net cash used in  investing activities of discontinued operations                                        |       | —      |       | (4.6             | )          | —            |       | (4.6             | )          |
| **Net  cash used in investing activities**                                                               |       | —      |       | (11.8            | )          | (28.3             | )          | (40.1            | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Repayment of  senior secured credit facilities                                                           |       | (12.6       | )          | —           |       | (20.9             | )          | (33.5            | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (3.0              | )          | (3.0             | )          |
| Distribution to  minority shareholder                                                                    |       | —      |       | —           |       | (2.2              | )          | (2.2             | )          |
| Intercompany  financing related activity                                                                 |       | 60.8        |       | (71.7            | )          | 10.9              |       | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                            |       | 48.2        |       | (71.7            | )          | (15.2             | )          | (38.7            | )          |
| Net cash used in  financing activities of discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) financing activities**                                                 |       | 48.2        |       | (71.7            | )          | (15.2             | )          | (38.7            | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                            |       | 0.3         |       | 0.1              |       | (0.9              | )          | (0.5             | )          |
| Net increase  (decrease) in cash and cash equivalents                                                    |       | 57.6        |       | (106.5           | )          | (3.2              | )          | (52.1            | )          |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                        |       | —      |       | —           |       | —            |       | —           |       |
| Increase  (decrease) in cash and cash equivalents from continuing operations                             |       | 57.6        |       | (106.5           | )          | (3.2              | )          | (52.1            | )          |
| 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                                       |       | $           | 428.3      |             | $          | (188.7            | )          | $                | 55.2       |   | $ | 294.8 |   |

 

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(a) - Excludes$4.6 of sale-related cash outflows, net.

 

30

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2007**

**(Dollarsin millions)**

 
| ** **                                                                                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                          | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                          |       |        |       |             |       |              |       |             |       |
| Net (loss)  income                                                                                                  |       | $           | (21.6      | )                | $          | 9.5               |       | $                | 157.4      |   | $ | 145.3 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:                |       |        |       |             |       |              |       |             |       |
| Income from  discontinued operations, net of tax                                                                    |       | —      |       | (1.7             | )          | (3.0              | )          | (4.7             | )          |
| Gain on sale of  discontinued operations                                                                            |       | —      |       | —           |       | (115.7            | )          | (115.7           | )          |
| Minority  interest in discontinued operations                                                                       |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Depreciation and  amortization                                                                                      |       | —      |       | 8.3              |       | 41.0              |       | 49.3             |       |
| Deferred  financing costs amortization                                                                              |       | 0.2         |       | 0.5              |       | 1.7               |       | 2.4              |       |
| Foreign exchange  (gain) loss                                                                                       |       | (1.3        | )          | 0.1              |       | 1.1               |       | (0.1             | )          |
| Fair value  adjustment of derivatives                                                                               |       | 2.6         |       | —           |       | 0.2               |       | 2.8              |       |
| Bad debt  provision                                                                                                 |       | —      |       | 0.2              |       | 0.2               |       | 0.4              |       |
| Deferred income  taxes                                                                                              |       | 0.3         |       | 0.7              |       | 8.8               |       | 9.8              |       |
| Loss (gain) on  sale of assets                                                                                      |       | 0.1         |       | (4.3             | )          | (0.6              | )          | (4.8             | )          |
| Minority  interest in continuing operations                                                                         |       | —      |       | —           |       | 1.1               |       | 1.1              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:            |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                                |       | —      |       | (7.2             | )          | (45.0             | )          | (52.2            | )          |
| Inventories,  including inventory write-up reversal                                                                 |       | —      |       | (5.9             | )          | 2.9               |       | (3.0             | )          |
| Prepaid expenses  and other assets                                                                                  |       | (0.4        | )          | (2.1             | )          | 0.8               |       | (1.7             | )          |
| Accounts payable                                                                                                    |       | —      |       | 3.9              |       | (29.3             | )          | (25.4            | )          |
| Income taxes  payable                                                                                               |       | 0.1         |       | 3.4              |       | 2.3               |       | 5.8              |       |
| Accrued expenses  and other liabilities                                                                             |       | 19.6        |       | 6.1              |       | 29.3              |       | 55.0             |       |
| Intercompany  operating activities, net                                                                             |       | 19.9        |       | (27.3            | )          | 7.4               |       | —           |       |
| Net cash  provided by (used in) operating activities of continuing operations                                       |       | 19.5        |       | (15.8            | )          | 60.7              |       | 64.4             |       |
| Net cash  provided by operating activities of discontinued operations                                               |       | 0.3         |       | 0.9              |       | 5.1               |       | 6.3              |       |
| **Net  cash provided by (used in) operating activities**                                                            |       | 19.8        |       | (14.9            | )          | 65.8              |       | 70.7             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                          |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                |       | —      |       | —           |       | (2.1              | )          | (2.1             | )          |
| Capital  expenditures, excluding capital leases                                                                     |       | —      |       | (7.3             | )          | (38.3             | )          | (45.6            | )          |
| Proceeds from  formation of Viance joint venture, net                                                               |       | —      |       | 46.1             |       | 30.5              |       | 76.6             |       |
| Proceeds on sale  of assets                                                                                         |       | (0.1        | )          | 7.2              |       | 2.8               |       | 9.9              |       |
| Net cash (used  in) provided by investing activities of continuing operations                                       |       | (0.1        | )          | 46.0             |       | (7.1              | )          | 38.8             |       |
| Net cash (used  in) provided by investing activities of discontinued operations, including  sale proceeds of $426.2 |       | —      |       | (0.2             | )          | 424.7             |       | 424.5            |       |
| **Net  cash (used in) provided by investing activities**                                                            |       | (0.1        | )          | 45.8             |       | 417.6             |       | 463.3            |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                          |       |        |       |             |       |              |       |             |       |
| Repayment of  senior secured credit facilities                                                                      |       | (11.3       | )          | —           |       | (16.7             | )          | (28.0            | )          |
| Repayment of  senior secured credit facilities revolver                                                             |       | (37.0       | )          | —           |       | —            |       | (37.0            | )          |
| Payments on  other long-term debt                                                                                   |       | —      |       | —           |       | (1.6              | )          | (1.6             | )          |
| Intercompany  financing related activity                                                                            |       | 398.8       |       | (6.0             | )          | (392.8            | )          | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                                       |       | 350.5       |       | (6.0             | )          | (411.1            | )          | (66.6            | )          |
| Net cash used in  financing activities of discontinued operations                                                   |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) financing activities**                                                            |       | 350.5       |       | (6.0             | )          | (411.1            | )          | (66.6            | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                                       |       | 1.0         |       | (0.1             | )          | (3.0              | )          | (2.1             | )          |
| Net increase in  cash and cash equivalents                                                                          |       | 371.2       |       | 24.8             |       | 69.3              |       | 465.3            |       |
| 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                                                   |       | 371.2       |       | 24.8             |       | 67.7              |       | 463.7            |       |
| 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                                                  |       | $           | 834.9      |             | $          | (143.6            | )          | $                | (201.7     | ) | $ | 489.6 |   |

 

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(a) -Excludes sale proceeds of $426.2 and intercompany transfers of $3.0.

 

31

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**Item2.     Management’s Discussion and Analysis of FinancialCondition 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 condensed consolidatedfinancial statements have been reclassified to reflect these segments asdiscontinued operations for all periods presented. See Note 2, “DiscontinuedOperations,” for further details.  The European wafer reclaim businessretained has been reported in the “Corporate and other” category for segmentreporting purposes for all periods 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.*

 

**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 andallowances.  In addition, net sales include shipping and handling costsbilled 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:

 

·            We have cut costs, reduced overhead and eliminatedduplicative positions in both acquired and existing businesses. In 2007, weclosed two U.K. facilities acquired in an October 2006 acquisition by ourSpecialty Compounds segment.   We also implemented otherrestructuring measures in our other segments, including the closure of ourBaulking, U.K. facility in our Clay-based Additives business;

 

·            We acquired the global color pigments business ofElementis plc in August 2007 which is being integrated into our ColorPigments and Service business within our Performance Additives segment;

 

·            We completed the sale of our Groupe Novasep segment inJanuary 2007 and our United States wafer reclaim business in February 2007.  In December 2007, we completed the saleof our Electronics business, excluding our European wafer reclaim business; and

 

·            In March 2008, we implemented a restructuringplan in our Color Pigments and Services business in connection with thebusiness acquired from Elementis plc which will include the reorganization andrelocation of its North American Finance and IT services and the closure ofthree manufacturing facilities by the end of 2008.

 

**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:

 

32

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***Specialty Chemicals***

 

·            Demand for Surface Treatment products in our SpecialtyChemicals segment generally follows the activity levels of metal processingmanufacturers, including the automotive supply, steel and aerospace industries.Sales growth in the Surface Treatment business occurred in 2007 and hascontinued in the first quarter of 2008 in most markets and regions served,especially in the European automotive, general industrial and aerospaceindustries, as price and volume increases and the impact of a bolt-onacquisition made in December 2007 more than offset raw material costincreases. We expect the Surface Treatment business to continue to grow in2008.

 

·            Demand for our lithium products in the Fine Chemicalsbusiness line of our Specialty Chemicals segment is generally driven by demandfor lithium carbonate in industrial applications, the aluminum business, glassceramics, cement and the general demand in China. Sales of lithium productsspecifically used in life science applications depend on the trends in drugdevelopment and growth in pharmaceuticals markets as well as genericcompetition. Growth in the Fine Chemicals business occurred in 2007 andhas continued in the first quarter of 2008 in most market segments, driven byprice increases in lithium salt applications, and higher demand for lithium applications.Growth in the Fine Chemicals business is expected to continue in most lithiumapplications in 2008.

 

***Performance Additives***

 

·            Generally, a trend towards the increased use ofcolored concrete products in the North American construction market has historicallyhad a positive effect on our Color Pigments and Services business line.  However, a general slowdown in theconstruction market negatively impacted North American construction sales in2007.  As a result of this slowdown, North American volumes were lower inthe first quarter of 2008 and are expected to continue to decline throughoutthe year.  However, sales in our Color Pigments and Services business inNorth America are expected to be favorably impacted in 2008 by higher sellingprices implemented to help recover raw material and energy cost increases andthe acquisition of the global color pigments business of Elementis plc made in August 2007.  Unlike North America, construction volumes inEurope in our Color Pigments and Services business increased slightly in2007.  However, European constructionvolumes were lower in the first quarter of 2008 and are expected to continue todecline throughout the year.

 

·            The change in the market to environmentally advancedwood treatment chemical products, such as alkaline copper quaternary, or ACQ,and the phase out of chromated copper arsenate, or CCA, for residential usepreviously had a positive impact on the Timber Treatment Chemicals business,which is a leading supplier of these higher margin products. However, themarket position of ACQ was negatively impacted in 2007 and the first quarter of2008 by customer losses, a general slowdown in the construction market and theincreasing use of wood substitutes. The expiration of the ACQ patent in May 2007could also have a negative impact on our results of operations, as at least onenew competitor has entered the market and others may follow.  Although wecommercialized the next generation timber treatment preservatives system (*Ecolife*) in the third quarter of 2007through our joint venture with Rohm and Haas, we do not expect this to have asignificant impact in 2008.

 

·            In the Clay-based Additives business, sales were upslightly in 2007 and continued to increase in the first quarter of 2008 ashigher oilfield volumes and increased selling prices for coatings and inks werepartially offset by lower carbonless applications.  We expect sales growthto continue in 2008 in oilfield applications.

 

·            Raw material costs have increased in general in thePerformance Additives segment and continue to trend upward. In the ColorPigments and Services and Clay-based Additives business, selling priceincreases helped offset the increases in raw material and energy costs,specifically iron oxide for Color Pigments and Services and quaternary amine (“quat”)for Clay-based Additives.  Continuing unfavorable foreign exchange ratesare expected to result in substantial cost increases in Chinese manufacturedraw materials used in our Color Pigments and Services business.  TheTimber Treatment Chemicals business continues to experience high costs forcopper, a primary component in ACQ. Selling price increases were implemented in 2007 and were maintained inthe first quarter of 2008 to offset higher copper costs. Our ability to pass onadditional selling price increases throughout 2008 is uncertain in thesebusinesses.

 

***Titanium Dioxide Pigments***

 

·             Demand for our titanium dioxide products in anatasegrade is driven mainly by demand in the synthetic fiber industry, while demandfor titanium dioxide products in rutile grade and our functional additives isdriven by demand in the coatings, paper and plastics industries.  Volumes and selling prices in the fiberanatase business decreased in 2007 and continued to be down in the firstquarter of 2008.  We expect sales in thefiber anatase business in 2008 to be comparable to 2007 levels.  While sales of titanium dioxide products inrutile grade were up slightly in 2007 on increased volumes, sales of theseproducts were down in the first quarter of 2008 due to lower volumes andselling prices.  However, we expectvolumes of these rutile grade products to be up in 2008. Our functionaladditives business increased in 2007 on higher selling prices and volumes, butwas down slightly 

 

33

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in the first quarter of2008 as lower volumes were partially offset by higher selling prices.  However, we expect sales in the functionaladditives business to also be up in 2008 as compared to 2007.

 

***Advanced Ceramics***

 

·             Demand for our ceramic medical devices is mainly tiedto the aging population in Europe and the United States.  Although thevolume of our products used in medical device applications sold experienceddouble-digit growth each year from 2001 through 2005, in 2006 some customers inthe U.S. reduced their demand due to high inventory levels and delayedapprovals resulting in lower volumes.  However, sales of our medicaldevice applications increased in 2007 on higher volumes and continued toincrease in the first quarter of 2008. We expect this trend to continuethroughout 2008.

 

·            Despite the negative impact of pricing pressure fromAsian competitors, sales of ceramic products for use in cutting tool productswere higher in 2007 and in the first quarter of 2008 due to volume increases.This growth is expected to continue in 2008. Sales of mechanical systems wereup in 2007, but were lower in the first quarter of 2008 and are expected tocontinue to be down throughout 2008. Sales in our electronic products business were lower in 2007 primarilyon decreased volumes and continued to decrease in the first quarter of 2008 onlower selling prices and volumes. We expect this trend to continue throughoutthis year.  Sales of our multi-functional applications were higher in 2007from increased volumes, but were down slightly in the first quarter of 2008from lower selling prices.  However,growth in this business is expected for the remainder of 2008 on highervolumes.

 

***Specialty Compounds***

 

·            Our largest product line in the Specialty Compoundssegment is wire and cable compounds. Sales within this product line aredependent upon the telecommunications market and related sectors, specificallydemand for high-end voice and data communication wire and cable, for which ourSpecialty Compounds segment is a significant provider of sheathing materials.Newly developed non-halogen products for wire and cable data communication,military and other applications have expanded business in North America forthose applications and created opportunities in Europe. Although sales of wireand cable products were up slightly in 2007, sales growth was due to theacquisition of the Megolon division of Scapa Group, plc, while the wire andcable business was negatively impacted by a general downturn in the wire andcable market.  Despite continued weaknessin the wire and cable market and lower sales in the first quarter of 2008,sales of wire and cable products are expected to be up slightly in 2008.

 

·            Most of the other end-use markets for which SpecialtyCompounds’ products are used generally track growth of gross domesticproduct, but many are also application specific, such as automotive.  We are focusing more of our efforts towardsincreasing 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 but were downslightly in the first quarter of 2008, although growth in these markets isstill expected this year.  Net sales of regulated packaging were lower in2007 and the first quarter of 2008 and are expected to continue to decrease in2008.

 

·            Raw material prices for ammonium octamolybdate (“AOM”)and polyvinyl chloride (“PVC”) resin and plasticizers, key raw materials usedin the production of wire and cable products, were slightly lower in 2007, butwere up in the first quarter of 2008 and are expected to be higher throughoutthe remainder of the year.

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2007 net sales, 52% were shipments toEurope, 31% to North America (predominantly the United States) and 17% to therest of the world. For a geographic description of the origin of our net salesand location of our long-lived assets, see Note 4, “Segment Information” in our2007 Form 10-K.

 

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 91 manufacturing facilities in 25countries. Consequently, we are exposed to global economic and politicalchanges, particularly currency fluctuations that could impact our profitabilityand 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 quarter ended March 31, 2008, the average exchange rate of the euroagainst the U.S. dollar was higher compared to the same period in 2007. As aresult, our net sales, gross profit and operating income were positivelyimpacted. 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.

 

34

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**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 significantprice fluctuations our raw materials have experienced in the past duringperiods of high demand have had an adverse impact on our results of operations.We cannot accurately predict the impact of any future price increases for rawmaterials or any raw material shortages on our business as a whole or inspecific geographic regions. In addition, we may not be able to pass on rawmaterial price increases to our customers.   See details of our ten most significant rawmaterials (in terms of dollars) in 2007 in Item 1, “Business – Raw Materials”in our 2007 Form 10-K.

 

**EnergyCosts**

 

In 2007, energy purchasesrepresented approximately 5% of our cost of products sold.  However,within certain business lines, such as our Titanium Dioxide Pigments segmentand the Color 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 were relatively stable in 2007 and during thefirst three months of 2008. In contrast, natural gas prices in Europe, whereour Titanium Dioxide Pigments segment is located, have historically beenrelatively stable, although prices were higher in 2007 and the first quarter of2008.

 

**IncomeTaxes**

 

The effective tax ratefor the first quarter of 2008 was 40.9%. This rate is negatively impacted by avaluation allowance related to domestic losses and foreign tax rates. In thefirst quarter of 2008, the worldwide valuation allowance increased by $44.5million. The increase in the valuation allowance was primarily due to anincrease of $6.1 million in deferred tax assets associated with the Company’sdomestic losses and $38.4 million in other comprehensive income. Of the $44.5million increase in the valuation allowance for the first quarter of 2008, $6.1million 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.

 

**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 reversals. See “Itemsexcluded from Adjusted EBITDA” section in Note 3, “Segment Information,” for adiscussion of special charges and credits recorded in the three months ended March 31,2008 and 2007.

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

A non-GAAP financialmeasure is generally defined by the SEC as one that purports to measure historicalor future financial performance, financial position or cash flows but excludesor includes amounts that would not be so adjusted in the most comparable U.S.GAAP measure. From time to time in this management’s discussion and analysis,we disclose non-GAAP financial measures, primarily Adjusted EBITDA, as definedbelow.

 

**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)before the deduction of income taxes of Rockwood Specialties Group, Inc.and the Restricted Subsidiaries (as such term is defined in the senior securedcredit agreement), excluding extraordinary items) plus:

 

·            interest expense;

·            depreciation expense;

·            amortization expense, including amortization ofdeferred financing fees;

·            extraordinary losses and non-recurring charges;

·            non-cash charges;

·            losses on asset sales;

 

35

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

·            expenses paid by us or any of our subsidiaries inconnection with the Dynamit Nobel Acquisition, the senior secured creditagreement, the granting of liens under the security documents (as such term isdefined in the senior secured credit agreement), the indenture governing the2014 Notes and the offering of the 2014 Notes and any other relatedtransactions;

·            any expenses or charges incurred in connection withany issuance of debt or equity securities;

·            any fees and expenses related to permittedacquisitions;

·            any deduction for minority interest expense; and

·            items arising in connection with CCA litigationrelated to our Timber Treatment Chemicals business of our Performance Additivessegment;

 

less:

 

·            extraordinary gains and non-recurring gains;

·            non-cash gains; and

·            gains on asset sales,

 

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 our liquiditybecause our senior secured credit agreement and indenture governing the 2014Notes contain financial covenants that are determined based on Adjusted EBITDA.These covenants are material terms of these agreements, because they governsubstantially all of our long-term debt, which in turn represents a substantialportion of our capitalization. Non-compliance with these financial covenantsunder our senior secured credit facilities—our maximum total leverage ratio andour minimum interest coverage ratio, in particular—could result in the lendersrequiring us to immediately repay all amounts borrowed. Any such accelerationcould also lead to the noteholders accelerating the maturity of the 2014 Notes.In addition, if we cannot satisfy these financial covenants in the indenturegoverning the 2014 Notes, we cannot engage in certain activities, such asincurring additional indebtedness or making certain payments. Consequently,Adjusted EBITDA is critical to our assessment 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 Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges determined by our senior management to be non-recurring gains andcharges and certain items deemed by our senior management to have little or nobearing on the day-to-day operating performance of our business segments andreporting units. The adjustments made to operating income directly correlatewith the adjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the senior secured credit agreement, which reflectsmanagement’s interpretations 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:

 

36

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·            the cash portion of interest expense, net, income taxprovision (benefit), and restructuring as well as non-recurring charges relatedto securities issuance, acquisition activities, and systems/organizationestablishment, generally represent charges (gains) which may significantlyaffect funds available to use in our operating, investing and financingactivities;

 

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

 

·            depreciation, amortization, non-cash (gains) chargesand impairment charges, though not directly affecting our current cashposition, represent the wear and tear and/or reduction in value of the plant,equipment and intangible assets which permit us to manufacture and/or marketour products; these items may be indicative of future needs for capitalexpenditures, for development or acquisition of intangible assets or relevanttrends causing asset value changes.

 

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

 

Adjusted EBITDA is not analternative to net income (loss) or income (loss) 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 of othercompanies.

 

**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 months ended March 31, 2008 and2007), including as a percentage of net sales, for the periods presented. SeeNote 3, “Segment Information,” for segment information and a reconciliation toincome from continuing operations before taxes and minority interest toAdjusted EBITDA on a segment basis.

 

37

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| ** **                                                                | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                             | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Statement  of operations data:**                                        |       |                             |       |   |   |
| **Net  sales:**                                                           |       |                             |       |   |   |
| Specialty  Chemicals                                                      |       | $                                | 311.7      |   | $ | 267.9 |   |
| Performance  Additives                                                    |       | 211.6                            |       | 184.8 |   |
| Titanium Dioxide  Pigments                                                |       | 125.8                            |       | 116.1 |   |
| Advanced  Ceramics                                                        |       | 133.2                            |       | 105.5 |   |
| Specialty  Compounds                                                      |       | 69.0                             |       | 69.6 |   |
| Corporate and  other                                                      |       | 2.7                              |       | 3.8 |   |
| Total net sales                                                           |       | 854.0                            |       | 747.7 |   |
|                                                                      |       |                             |       |   |   |
| Gross profit                                                              |       | 274.9                            |       | 244.1 |   |
|                                                                      |       | 32.2                             | %          | 32.6 | % |
| Selling, general  and administrative expenses                             |       | 170.1                            |       | 147.2 |   |
|                                                                      |       | 19.9                             | %          | 19.7 | % |
| Restructuring  charges, net                                               |       | 0.8                              |       | 4.0 |   |
| Loss (gain) on  sale of assets                                            |       | 0.1                              |       | (4.8 | ) |
| **Operating  income (loss):**                                             |       |                             |       |   |   |
| Specialty  Chemicals                                                      |       | 63.6                             |       | 55.6 |   |
|                                                                      |       | 20.4                             | %          | 20.8 | % |
| Performance  Additives                                                    |       | 13.3                             |       | 19.3 |   |
|                                                                      |       | 6.3                              | %          | 10.4 | % |
| Titanium Dioxide  Pigments                                                |       | 11.0                             |       | 12.1 |   |
|                                                                      |       | 8.7                              | %          | 10.4 | % |
| Advanced  Ceramics                                                        |       | 26.3                             |       | 18.9 |   |
|                                                                      |       | 19.7                             | %          | 17.9 | % |
| Specialty  Compounds                                                      |       | 5.7                              |       | 5.1 |   |
|                                                                      |       | 8.3                              | %          | 7.3 | % |
| Corporate and  other                                                      |       | (16.0                            | )          | (13.3 | ) |
| Total operating  income                                                   |       | 103.9                            |       | 97.7 |   |
| **Other  income (expenses):**                                             |       |                             |       |   |   |
| Interest expense                                                          |       | (73.7                            | )          | (54.7 | ) |
| Interest income                                                           |       | 2.2                              |       | 4.8 |   |
| Refinancing  expenses                                                     |       | —                           |       | (0.9 | ) |
| Foreign exchange  gain, net                                               |       | 15.1                             |       | 0.1 |   |
| Other, net                                                                |       | 0.4                              |       | (0.1 | ) |
| **Income  from continuing operations before taxes and minority interest** |       | 47.9                             |       | 46.9 |   |
| Income tax  provision                                                     |       | 19.6                             |       | 20.8 |   |
| Income from  continuing operations before minority interest               |       | 28.3                             |       | 26.1 |   |
| Minority  interest in continuing operations                               |       | (0.6                             | )          | (1.1 | ) |
| Net income from  continuing operations                                    |       | 27.7                             |       | 25.0 |   |
| Income from  discontinued operations, net of tax                          |       | —                           |       | 4.7 |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                           |       | 115.7 |   |
| Minority  interest in discontinued operations                             |       | —                           |       | (0.1 | ) |
| Net income                                                                |       | $                                | 27.7       |   | $ | 145.3 |   |
| **Adjusted  EBITDA:**                                                     |       |                             |       |   |   |
| Specialty  Chemicals                                                      |       | $                                | 80.5       |   | $ | 68.3 |   |
|                                                                      |       | 25.8                             | %          | 25.5 | % |
| Performance  Additives                                                    |       | 31.2                             |       | 32.6 |   |
|                                                                      |       | 14.7                             | %          | 17.6 | % |
| Titanium Dioxide  Pigments                                                |       | 23.9                             |       | 22.4 |   |
|                                                                      |       | 19.0                             | %          | 19.3 | % |
| Advanced Ceramics                                                         |       | 38.5                             |       | 28.8 |   |
|                                                                      |       | 28.9                             | %          | 27.3 | % |
| Specialty  Compounds                                                      |       | 8.7                              |       | 8.1 |   |
|                                                                      |       | 12.6                             | %          | 11.6 | % |
| Corporate and  other                                                      |       | (14.4                            | )          | (13.2 | ) |
| Total Adjusted  EBITDA (a)                                                |       | $                                | 168.4      |   | $ | 147.0 |   |

 

----

(a)                This amount does not include $9.2 million of AdjustedEBITDA for the three months ended March 31, 2007 from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe three months ended March 31, 2007 from the former Groupe Novasepsegment sold on January 9, 2007.

 

38

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

 
| ** **                                                                | ** ** | **Change: Three months ended March 31, 2008 versus 2007** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                                | ** ** | ** **                                                                                        | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                             | ** ** | **Total**                                                                                         | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement  of operations data:**                                        |       |                                                                                              |       |   |   |   |   |   |   |
| **Net  sales:**                                                           |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 43.8       |   | 16.3 | % | $ | 27.7 |   | $ | 16.1 |   |
| Performance  Additives                                                    |       | 26.8                                                                                              |       | 14.5 |   | 4.7 |   | 22.1 |   |
| Titanium Dioxide  Pigments                                                |       | 9.7                                                                                               |       | 8.4 |   | 15.8 |   | (6.1 | ) |
| Advanced  Ceramics                                                        |       | 27.7                                                                                              |       | 26.3 |   | 15.6 |   | 12.1 |   |
| Specialty  Compounds                                                      |       | (0.6                                                                                              | )          | (0.9 | ) | 1.4 |   | (2.0 | ) |
| Corporate and  other                                                      |       | (1.1                                                                                              | )          | (28.9 | ) | 0.3 |   | (1.4 | ) |
| Total net sales                                                           |       | 106.3                                                                                             |       | 14.2 |   | 65.5 |   | 40.8 |   |
|                                                                      |       |                                                                                              |       |   |   |   |   |   |   |
| Gross profit                                                              |       | 30.8                                                                                              |       | 12.6 |   | 22.7 |   | 8.1 |   |
| Selling, general  and administrative expenses                             |       | 22.9                                                                                              |       | 15.6 |   | 13.4 |   | 9.5 |   |
| Restructuring  charges                                                    |       | (3.2                                                                                              | )          |   |   |   |   | (3.2 | ) |
| Loss (gain) on  sale of assets                                            |       | 4.9                                                                                               |       |   |   |   |   | 4.9 |   |
| Total operating  expenses                                                 |       | 24.6                                                                                              |       | 16.3 |   | 13.4 |   | 11.2 |   |
| **Operating  income (loss):**                                             |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 8.0                                                                                               |       | 14.4 |   | 4.6 |   | 3.4 |   |
| Performance  Additives                                                    |       | (6.0                                                                                              | )          | (31.1 | ) | — |   | (6.0 | ) |
| Titanium Dioxide  Pigments                                                |       | (1.1                                                                                              | )          | (9.1 | ) | 1.4 |   | (2.5 | ) |
| Advanced  Ceramics                                                        |       | 7.4                                                                                               |       | 39.2 |   | 3.5 |   | 3.9 |   |
| Specialty  Compounds                                                      |       | 0.6                                                                                               |       | 11.8 |   | 0.1 |   | 0.5 |   |
| Corporate and  other                                                      |       | (2.7                                                                                              | )          | (20.3 | ) | (0.3 | ) | (2.4 | ) |
| Total                                                                     |       | 6.2                                                                                               |       | 6.3 |   | 9.3 |   | (3.1 | ) |
| **Other  income (expenses):**                                             |       |                                                                                              |       |   |   |   |   |   |   |
| Interest expense                                                          |       | (19.0                                                                                             | )          | 34.7 |   | (0.4 | ) | (18.6 | ) |
| Interest income                                                           |       | (2.6                                                                                              | )          | (54.2 | ) | — |   | (2.6 | ) |
| Refinancing  expenses                                                     |       | 0.9                                                                                               |       |   |   |   |   |   |   |
| Foreign exchange  gain, net                                               |       | 15.0                                                                                              |       |   |   |   |   |   |   |
| Other, net                                                                |       | 0.5                                                                                               |       |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 5.9                                                                                               |       |   |   |   |   |   |   |
| Performance  Additives                                                    |       | (10.8                                                                                             | )          |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (2.1                                                                                              | )          |   |   |   |   |   |   |
| Advanced  Ceramics                                                        |       | 7.3                                                                                               |       |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | 0.6                                                                                               |       |   |   |   |   |   |   |
| Corporate and  other                                                      |       | 0.1                                                                                               |       |   |   |   |   |   |   |
| Total                                                                     |       | 1.0                                                                                               |       |   |   |   |   |   |   |
| Income tax  provision                                                     |       | (1.2                                                                                              | )          |   |   |   |   |   |   |
| Income from  continuing operations before minority interest               |       | 2.2                                                                                               |       |   |   |   |   |   |   |
| Minority  interest in continuing operations                               |       | 0.5                                                                                               |       |   |   |   |   |   |   |
| Net income from  continuing operations                                    |       | 2.7                                                                                               |       |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                          |       | (4.7                                                                                              | )          |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | (115.7                                                                                            | )          |   |   |   |   |   |   |
| Minority  interest in discontinued operations                             |       | 0.1                                                                                               |       |   |   |   |   |   |   |
| Net income                                                                |       | $                                                                                                 | (117.6     | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 12.2       |   | 17.9 | % | $ | 6.0 |   | $ | 6.2 |   |
| Performance  Additives                                                    |       | (1.4                                                                                              | )          | (4.3 | ) | 0.8 |   | (2.2 | ) |
| Titanium Dioxide  Pigments                                                |       | 1.5                                                                                               |       | 6.7 |   | 3.0 |   | (1.5 | ) |
| Advanced  Ceramics                                                        |       | 9.7                                                                                               |       | 33.7 |   | 4.9 |   | 4.8 |   |
| Specialty  Compounds                                                      |       | 0.6                                                                                               |       | 7.4 |   | 0.2 |   | 0.4 |   |
| Corporate and  other                                                      |       | (1.2                                                                                              | )          | (9.1 | ) | (0.3 | ) | (0.9 | ) |
| Total Adjusted  EBITDA                                                    |       | $                                                                                                 | 21.4       |   | 14.6 | % | $ | 14.6 |   | $ | 6.8 |   |

 

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(a)                The constant currency effect is the translation impactcalculated based on the change in the applicable rate, primarily the euro, tothe U.S. dollar exchange rate for the applicable period.

 

39

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***Three months ended March 31, 2008 compared to threemonths ended March 31, 2007***

 

**Overview**

 

Net sales increased$106.3 million in the first quarter of 2008 compared with the same period inthe prior year primarily due to increased selling prices of $18.5 million andthe positive impact of currency changes of $65.5 million.  Higher volumes,particularly in our Specialty Chemicals and Advanced Ceramics segments, alsohad a favorable impact on net sales.  Seefurther discussion by segment below.

 

Operating income andAdjusted EBITDA also increased in the first quarter of 2008 compared with thesame period in the prior year due to the positive impact of currency changesand the sales increases noted above. Operating income and Adjusted EBITDA werenegatively impacted by higher raw material costs in most businesses.

 

Net income fromcontinuing operations of $27.7 million in the first quarter of 2008 increased$2.7 million compared with the same period in the prior year primarily due tothe reasons noted above. This was partially offset by higher interest expenserecorded in the first quarter of 2008 compared to the same period in the prioryear due to higher mark-to-market losses on our interest rate hedginginstruments.

 

Income from discontinuedoperations, net of tax was $4.7 million in the first quarter of 2007 and wasprimarily comprised of income from operating the Electronics business,excluding the European wafer reclaim business, in the first quarter of 2007.

 

The gain on sale ofdiscontinued operations, net of tax, of $115.7 million recorded in the firstquarter of 2007 is related to the sale of Groupe Novasep in January 2007.

 

Net income decreased$117.6 million in the first quarter of 2008 compared with the same period inthe prior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.   Net sales increased $43.8 million overthe prior year on higher selling prices, as well as increased volumes and thepositive impact of currency changes of $27.7 million. In the Fine Chemicalsbusiness, higher selling prices of lithium products, as well as increasedvolumes, had a favorable impact on net sales. Net sales in the SurfaceTreatment business were favorably impacted by higher selling prices, increasedvolumes in most markets, particularly in European automotive applications, andthe impact of a bolt-on acquisition made in December 2007.

 

*PerformanceAdditives*.   Net sales increased $26.8 million overthe prior year due to the acquisition of the global color pigments business ofElementis plc completed on August 31, 2007, as well as increased sellingprices in our Color Pigments and Services and Clay-based Additives businessesand the positive impact of currency changes of $4.7 million. This was partiallyoffset by lower volumes of construction-related products in our Color Pigmentsand Services and Timber Treatment Chemicals businesses.

 

*TitaniumDioxide Pigments*.   Net sales increased $9.7million over the prior year due to the positive impact of currency changes of$15.8 million, partially offset by lower volumes and selling prices oftitanium dioxide products.  Lower volumesof functional additives also had an unfavorable impact on net sales.

 

*AdvancedCeramics*.   Net sales increased $27.7 million overthe prior year primarily due to the positive impact of currency changes of$15.6 million, increased volumes of medical and cutting tool applications andthe impact of a bolt-on acquisition made in April 2007.  This was partially offset by lower sellingprices and volume declines in mechanical systems and mechanical applications.

 

*SpecialtyCompounds*.   Net sales decreased $0.6 million overthe prior year due to lower volumes in wire and cable and medical applications,partially offset by increased selling prices and the positive impact ofcurrency changes of $1.4 million.

 

*Corporateand other*.   Net sales decreased $1.1 million overthe prior year primarily due to the sale of our U.S. wafer reclaim business inthe first quarter of 2007.

 

**Grossprofit**

 

Gross profit increased$30.8 million over the prior year primarily due to the positive impact ofcurrency changes of $22.7 million and the sales increases noted above, inparticular selling price increases. This was partially offset by raw materialcost increases, particularly from the impact of higher lithium chloride andother raw material costs in our Specialty Chemicals segment, higher iron-oxidecosts in our Color Pigments and Services business and higher PVC resin costs inour Specialty Compounds segment. Gross profit as a percentage of net sales was 32.2%in the first quarter of 2008 versus 32.6% in the first quarter of 2007.  Gross profit in the first quarter of 2008includes a reduction of $0.4 million due to the inventory write-up reversalrelated to a bolt-on acquisition made in

 

40

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our Specialty Chemicalssegment in December 2007.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $22.9 million over the prioryear primarily due to the impact of currency changes of $13.4 million. HigherSG&A costs were also recorded in a few segments, particularly in AdvancedCeramics, related to increased sales volumes. SG&A expenses as a percentageof net sales was 19.9% in the first quarter of 2008 versus 19.7% in the firstquarter of 2007.

 

**Restructuringcharges, net**

 

We recorded $0.8 millionof restructuring charges in the first quarter of 2008 for restructuring actionsin the Performance Additives and Advanced Ceramics segments for miscellaneousheadcount reductions.  We recorded $4.0million of restructuring charges in the first quarter of 2007 primarily relatedto facility closures in the Corporate and other segment related to therestructuring of the wafer reclaim business. See Note 12, “Restructuring Liability,” for further details.

 

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

 

We recorded a loss of$0.1 million in the first quarter of 2008 and a gain of $4.8 million in thefirst quarter of 2007 related to the sale of assets.  The gain recorded in the first quarter of2007 primarily relates to the sale of our U.S. wafer reclaim business.

 

**Operatingincome**

 

*SpecialtyChemicals*.   Operating income increased $8.0million over the prior year primarily due to the impact of higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $4.6 million. This increase was partially offset by higherraw material costs of $4.7 million, primarily for lithium chloride and otherraw material costs, and increased depreciation and amortization costs of $3.3million.

 

*PerformanceAdditives*.   Operating income decreased $6.0million over the prior year due to the lower sales volumes discussed above, andhigher raw material costs of $4.7 million, particularly iron-oxide costs in theColor Pigments and Services business and higher quat costs in our Clay-basedAdditives business.  Higher depreciationand amortization costs of $3.9 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 sellingprice increases noted above.

 

*TitaniumDioxide Pigments*.   Operating income decreased $1.1million over the prior year primarily due to the lower sales volumes andselling prices noted above, increased depreciation and amortization costs of$2.6 million and higher energy costs of $0.9 million.  This decrease was partially offset by thepositive impact of currency changes of $1.4 million.

 

*AdvancedCeramics*.   Operating income increased $7.4 millionover the prior year primarily due to the impact of the increased sales volumesnoted above, productivity improvements and the positive impact of currencychanges of $3.5 million. The impact of a bolt-on acquisition made in April 2007also had a favorable impact on operating income. This increase was partiallyoffset by lower selling prices and increased depreciation and amortizationcosts of $2.3 million related to the acquisition discussed above.

 

*SpecialtyCompounds*.   Operating income increased $0.6million over the prior year due to lower operating costs relating to theclosure of a U.K. facility in December 2007.  This was partially offset by higher rawmaterial costs of $2.6 million, particularly PVC resin costs, and lower salesvolumes.

 

*Corporateand other.*   Operating loss increased $2.7 millionover the prior year primarily due to additional stock compensation expenserelated to stock-based awards made in 2007 and 2008.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interest expense increased $19.0 millionin the first quarter of 2008 compared to the same period in the prior year. Thefirst quarters of 2008 and 2007 included losses of $30.8 million and $2.8million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate hedging instruments. The remaining interestexpense decrease of $9.0 million is primarily due to lower debt levels,including the redemption in 2007 of the 2011 Notes in the aggregate amount of$273.4 million.

 

*Interestincome*.  Interest income decreased $2.6 million inthe first quarter of 2008 compared to the same period in the prior yearprimarily related to lower average cash balances in the first quarter of 2008compared to the first quarter of 2007 and lower short-term interest rates.

 

*Refinancing expenses. *In March 2007, weexpensed $0.9 million related to the fourth amendment of the senior securedcredit agreement resulting in a 50 basis point reduction on our new tranche Gterm loans.

 

41

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*Foreignexchange gain, net*.   In the first quarter of 2008,we had foreign exchange gains of $15.1 million compared to foreign exchangegains of $0.1 million recorded in the same period in the prior year. Theincrease from the prior year is primarily due to the impact of the strongereuro as of March 31, 2008 versus December 31, 2007 related tointercompany financing arrangements.

 

*Other, net. *In the first quarter of2008, we recorded $0.4 million of income primarily related to the sale of aninvestment in the Surface Treatment business of our Specialty Chemicalssegment.

 

**Provisionfor income taxes**

 

The effective income taxrate for the first quarter of 2008 was 40.9% and an income tax provision of$19.6 million was recorded for the first quarter of 2008. The effective incometax rate compared to the federal statutory rate was negatively impacted by anincrease in the valuation allowance related to domestic losses offset by lowerforeign tax rates.  The effective incometax rate was 44.3% for the first quarter of 2007 and was negatively impacted byan increase in the valuation allowance related to U.S. operations.  The decrease in the effective income tax ratein the first quarter of 2008 was due to lower average statutory rates relatedto favorable European rate changes during 2007, as well as geographic earningsmix.

 

**Minorityinterest in continuing operations**

 

Minority interestrepresents the minority interest portion of the Viance, LLC joint venturecompleted in January 2007 between our Timber Treatment Chemicals businessand Rohm and Haas Company.

 

**Netincome from continuing operations**

 

Net income fromcontinuing operations for the first quarter of 2008 was $27.7 million ascompared to net income from continuing operations of $25.0 million for thefirst quarter of 2007 for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $4.7 million in the first quarter of 2007 and wasprimarily due to income from operating the Electronics business in the firstquarter of 2007.

 

**Gain on sale of discontinuedoperations, net of tax**

 

The gain on sale ofdiscontinued operations, net of tax, of $115.7 million recorded in the firstquarter of 2007 is related to the sale of Groupe Novasep in January 2007.

 

**Minorityinterest in discontinued operations**

 

Minority interest indiscontinued operations represents the minority interest portion of GroupeNovasep’s net income for the first quarter of 2007.

 

**Netincome**

 

Net income for the firstquarter of 2008 was $27.7 million as compared to net income of $145.3 millionfor the first quarter of 2007 for the reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.   Adjusted EBITDA increased $12.2million over the prior year primarily due to the impact of higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $6.0 million. This increase was partially offset by higherraw material costs of $4.7 million as discussed above.

 

*PerformanceAdditives*.   Adjusted EBITDA decreased $1.4 millionover the prior year due to the lower sales volumes discussed above and higherraw material costs of $4.7 million, particularly iron-oxide costs in the ColorPigments and Services business and higher quat costs in our Clay-basedAdditives business.  These decreases werepartially offset by the selling price increases noted above.

 

*TitaniumDioxide Pigments*.   Adjusted EBITDA increased $1.5million over the prior year due to the positive impact of currency changes of$3.0 million.  This was partially offsetby higher energy costs of $0.9 million and lower volumes and selling prices.

 

*AdvancedCeramics*.   Adjusted EBITDA increased $9.7 millionover the prior year primarily due to the impact of the increased sales volumesnoted above, productivity improvements and the positive impact of currencychanges of $4.9 million. The impact of a bolt-on acquisition made in April 2007also had a favorable impact on Adjusted EBITDA. This increase was partiallyoffset by lower selling prices.

 

42

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*SpecialtyCompounds*.   Adjusted EBITDA increased $0.6 millionprimarily due to lower operating costs relating to the closure of a U.K.facility in December 2007.  This waspartially offset by higher raw material costs of $2.6 million, particularly PVCresin costs, and lower sales volumes.

 

*Corporateand other*.   Adjusted EBITDA loss at Corporateincreased $1.2 million over the prior year due to the recording of additionalstock compensation expense related to stock-based awards made in 2007 and 2008.

 

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

 

Because we view AdjustedEBITDA on both a consolidated basis and segment basis as an operatingperformance measure, we use net income as the most comparable U.S. GAAP measureon a consolidated basis. The following table, which sets forth the applicablecomponents of Adjusted EBITDA, presents a reconciliation of net income toAdjusted EBITDA on a consolidated basis:

 
| ** **                                                            | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net income                                                            |       | $                                | 27.7       |   | $ | 145.3 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | (4.7 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | (115.7 | ) |
| Minority  interest in discontinued operations                         |       | —                           |       | 0.1 |   |
| Net income from  continuing operations                                |       | 27.7                             |       | 25.0 |   |
| Income tax  provision                                                 |       | 19.6                             |       | 20.8 |   |
| Minority  interest in continuing operations                           |       | 0.6                              |       | 1.1 |   |
| Income from  continuing operations before taxes and minority interest |       | 47.9                             |       | 46.9 |   |
| Interest expense  (a)                                                 |       | 73.7                             |       | 54.7 |   |
| Interest income                                                       |       | (2.2                             | )          | (4.8 | ) |
| Depreciation and  amortization                                        |       | 61.8                             |       | 49.3 |   |
| Restructuring  and related charges                                    |       | 0.8                              |       | 4.0 |   |
| Systems/organization  establishment expenses                          |       | 1.2                              |       | 0.9 |   |
| Inventory  write-up reversal                                          |       | 0.4                              |       | — |   |
| Cancelled  acquisition and disposal costs                             |       | —                           |       | 0.1 |   |
| Refinancing  expenses                                                 |       | —                           |       | 0.9 |   |
| Loss (gain) on  sale of assets                                        |       | 0.1                              |       | (4.8 | ) |
| Foreign exchange  gain                                                |       | (15.1                            | )          | (0.1 | ) |
| Other                                                                 |       | (0.2                             | )          | (0.1 | ) |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 168.4      |   | $ | 147.0 |   |

 

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(a)                Includes losses of$30.8 million and $2.8 million for the three months ended March 31, 2008and 2007, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

(b)               This amount doesnot include $9.2 million of Adjusted EBITDA for the three months ended March 31,2007 from the Electronics business sold on December 31, 2007 and $1.8million of Adjusted EBITDA for the three months ended March 31, 2007 fromthe former Groupe Novasep segment sold on January 9, 2007.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at the March 31, 2008 exchange rate of€1.00 = $1.5788.*

 

*OperatingActivities*.   Net cash provided by operatingactivities was $27.2 million and $70.7 million for the three months ended March 31,2008 and 2007, respectively. Net cash from operating activities decreasedprimarily from higher use of operating cash from working capital changes andthe lack of operating cash flows due to the divestiture of the Electronicsbusiness, partially offset by higher operating income and lower cash interestexpense.

 

*InvestingActivities*.  Net cash (used in) provided byinvesting activities was $(40.1) million and $463.3 million for the threemonths 

 

43

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ended March 31, 2008and 2007, respectively. Net cash used in investing activities decreasedprimarily due to the proceeds received in the first quarter of 2007 from thesale of the Groupe Novasep segment and from the formation of the Viance, LLCjoint venture. This was partially offset by funds received related to the claimsettlement between the Company and GEA Group in the first quarter of 2008. SeeNote 6, “Goodwill,” for further details.

 

*FinancingActivities*.   Net cash used in financing activitieswas $38.7 million and $66.6 million for the three months ended March 31,2008 and 2007, respectively, and was comprised of scheduled payments forlong-term debt and revolver payments.

 

**Liquidity**

 

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. Events that have had an impact on our liquidity include:

 
| · | On January 2,  2007, CSI, our wholly-owned subsidiary and Rohm and Haas Company formed  Viance, LLC, a joint venture company. We received net cash proceeds of $73.0  million. We also paid approximately $1.0 million in fees and expenses  associated with this transaction and the remainder was used for general  corporate purposes. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                           |
| · | On January 9,  2007, we sold our Groupe Novasep segment and received net cash proceeds of  $420.7 million. The proceeds were used to redeem our outstanding 2011  Notes (see below) and for general corporate purposes.                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                           |
| · | On February 12,  2007, we completed the sale of our U.S. wafer reclaim business for  approximately $11.0 million in cash and a long-term notes receivable. The  proceeds were used for general corporate purposes.                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                           |
| · | On May 15, 2007,  we redeemed our outstanding 10 5/8% Senior Subordinated Notes that were due  in 2011 in the aggregate principal amount of $273.4 million. In connection  with this repayment, we paid redemption premiums of $14.5 million.                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                           |
| · | On August 31, 2007,  we completed the acquisition of the global color pigments business of  Elementis plc for a purchase price of $140.0 million.                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                           |
| · | On December 31,  2007, we completed the sale of our Electronics business, excluding our  European wafer reclaim business, and received net cash proceeds of $311.0  million. The proceeds will be used for general corporate purposes.                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                           |
| · | On March 28, 2008,  we received €18.8 million  ($29.1 million) from GEA Group and GEA North America for the settlement of  all existing and future non-tax related claims resulting from the sale and  purchase agreement entered into in connection with the Dynamit Nobel  Acquisition in April 2004.                         |

 

Our primary liquidityrequirements are working capital, debt service, capital expenditures andacquisitions. Our debt service requirements and other contractual obligationsand commitments over the next several years are significant and aresubstantially higher than historical amounts. We believe that our currentlyavailable sources of liquidity will be sufficient for these needs. Furthermore,any future major acquisitions, business combinations or similar transactionswill likely require additional capital resources. If our present operatingperformance and current market conditions continue, we believe that suchresources will be available to us for certain transactions. We would needaccess to alternative sources of liquidity for larger acquisitions such asthrough additional borrowings, equity issuances or other sources, and we maynot have access to these sources for a variety of reasons. See Item 1, “Business,”and Item 1A, “Risk Factors” in our 2007 Form 10-K.

 

We believe that based oncurrent and anticipated levels of operations and conditions in our industry andmarkets, cash flows from operations and borrowings available under ourrevolving credit facility will be adequate for 2008 and the foreseeable futureto make required payments of principal and interest on our debt and fund ourworking capital and capital expenditure requirements. We continue to takeactions to reduce costs and exit unprofitable businesses, in part to improveour long-term liquidity. We expect this to further improve our short andlong-term liquidity. If our cash flow from operations and borrowings under ourrevolving credit facility are insufficient to fund our currently existingliquidity requirements, we may be forced to use other means available to us,such as to reduce or delay capital expenditures and seek additional capital. Wemay not have adequate capital for future acquisitions, business combinations orsimilar transactions.

 

As of March 31,2008, we had actual total indebtedness of $2,644.2 million. As of March 31,2008, the revolving credit facility under the senior secured credit facilitiesprovided for additional borrowings of up to $250.0 million. As of March 31,2008, there were no outstanding borrowings under the revolving credit facility.

 

As of March 31,2008, we had cash and cash equivalents of $294.8 million primarily from cashfrom operations and the net cash proceeds received from the sale of theElectronics business in December 2007, less cash used for certainselective acquisitions.

 

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

 

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·            tranche A-1 term loansin an aggregate principal amount of €26.1 million (or $41.2 million at March 31,2008) and tranche A-2 term loans in an aggregate principal amount of €113.6million (or $179.4 million at March 31, 2008), each maturing on July 30,2011 and bearing interest at Adjusted EURIBOR plus 1.75%;

 

·            tranche E term loansin an aggregate principal amount of $1,110.7 million at March 31, 2008,maturing on July 30, 2012 and bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 1.50% or (ii) ABR plus 0.75%. For thethree months ended March 31, 2008, we have elected to use option (i) AdjustedLIBOR plus 1.50%;

 

·            tranche G term loansin an aggregate principal amount of €266.6 million (or $420.9 million at March 31,2008) maturing on July 30, 2012 and bearing interest of Adjusted LIBORplus 1.75%; and

 

·            a revolving creditfacility in an aggregate principal amount of $250.0 million maturing on July 30,2010, bearing interest at the Company’s option of either (i) AdjustedLIBOR plus 1.75% or (ii) ABR plus 1.00%. As of March 31, 2008, we hadno borrowings outstanding under this facility and had outstanding letters ofcredit of $25.7 million that reduced our availability under the creditfacility.

 

The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on March 31, 2008 of €1.00 = $1.5788. In each case, the interestrates are subject to step-downs determined by reference to a performance test.Adjusted LIBOR is the London inter-bank offered rate adjusted for statutoryreserves. ABR is the alternate base rate, which is the highest of Credit Suisse’sprime rate and the federal funds effective rate plus 0.5%. Tranche A-1 andA-2 term loans are payable in January and July of each year atescalating percentages of the original principal amount. Tranche E andtranche G term loans are payable in January and July of eachyear at amounts equal to 0.5% of the principal amount of the formertranche D term loans and tranche F term loans, respectively, with theremainder due at the final maturity date.

 

The Company’s borrowingsand the borrowings of Rockwood Specialties Limited under the senior securedcredit facilities are guaranteed and secured by assets and pledges of capitalstock.

 

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

 

*2014Notes.*   The 2014 Notes have an aggregate principalamount of €375.0 million ($592.0 million at March 31, 2008) in the case ofthe Euro notes and $200.0 million in the case of the U.S. Dollar notes, andmature on November 15, 2014. Interest on the 2014 Notes is payablesemi-annually on May 15 and November 15. Interest on the 2014 Notesaccrues at the rate of 7.625% in the case of the Euro notes and 7.500% in thecase of the U.S. Dollar notes. Certain of our domestic subsidiaries guaranteethe 2014 Notes on a senior subordinated unsecured basis (see Note 15, “ConsolidatingFinancial Information,” for further details).

 

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

 

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

 

·            a leverage ratio: forthe twelve-month period ended March 31, 2008, net debt (total debt pluscapital lease obligations, minus cash up to a maximum of $100.0 million) toAdjusted EBITDA must be less than 5.00 to 1; for such period, our ratio equaled3.81 to 1; and

 

·            an interest coverageratio: for the twelve-month period ended March 31, 2008, Adjusted EBITDAto cash interest expense (interest expense, net excluding deferred debtissuance cost amortization and the movements in the mark-to market value of ourinterest rate and cross-currency interest rate derivatives) must be at least1.85 to 1; for such period, our ratio equaled 3.97 to 1.

 

Please see Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations—“Definitions of Adjusted EBITDA,” for a discussion of the definitionof Adjusted EBITDA used in calculating our financial covenants.

 

45

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These covenants arematerial terms of the senior secured credit agreement. Non-compliance withthese covenants or other covenants could result in a default under the senior securedcredit agreement and the lenders could elect to declare all amounts borrowedimmediately due and payable. Any such acceleration would also result in adefault under the indenture governing the 2014 Notes, which could lead to thenote holders electing to declare the principal, premium, if any, and intereston the then outstanding notes immediately due and payable. Because theindenture governing the 2014 Notes defines an event of default to include,among other things, a default under any other debt obligation in excess of$35.0 million that could cause the acceleration of such obligation, anyacceleration under the senior secured credit agreement would also result in adefault under the indenture governing these notes, which could lead to the noteholders electing to declare the principal, premium, if any, and interest on thethen outstanding 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 governingthe 2014 Notes prohibits us from incurring additional debt, subject to certainpermitted incurrences, unless the fixed charge coverage ratio, which is theratio of Adjusted EBITDA (as defined therein excluding certain adjustmentspermitted under the senior secured credit agreement) to fixed charges (asdefined therein), for the most recently ended four fiscal quarters is at least2.00 to 1. In addition, the indenture prohibits us from making restrictedpayments (such as dividends or other equity distributions, repurchases ofcapital stock or restricted investments), subject to certain permittedpayments, unless, among other things, the fixed charge coverage ratio for themost recently ended four fiscal quarters is at least 2.00 to 1. For the four-fiscalquarter period ended March 31, 2008, the fixed charge coverage ratioequaled 3.97 to 1. This covenant is a material term of the indenture governingthe 2014 Notes.

 

We were in compliancewith all of the above covenants as of March 31, 2008 and December 31,2007.

 

Given our use of AdjustedEBITDA (see “Special Note Regarding Non-GAAP Financial Measures” for thedefinition of Adjusted EBITDA and management’s uses of Adjusted EBITDA) as aliquidity measure, the following table presents a reconciliation of net cashprovided by operating activities to Adjusted EBITDA:

 
| ** **                                                                                                             | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                                                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                                | 27.2       |   | $ | 64.4 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 88.5                             |       | 21.6 |   |
| Current portion  of income tax provision                                                                               |       | 12.3                             |       | 11.0 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 38.4                             |       | 44.7 |   |
| Restructuring  and related charges                                                                                     |       | 0.8                              |       | 4.0 |   |
| Systems/organization  establishment expenses                                                                           |       | 1.2                              |       | 0.9 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | —                           |       | 0.1 |   |
| Cost incurred  related to debt modifications                                                                           |       | —                           |       | 0.9 |   |
| Inventory  write-up reversal                                                                                           |       | 0.4                              |       | — |   |
| Bad debt  provision                                                                                                    |       | (0.3                             | )          | (0.4 | ) |
| Loss (gain) on  sale of assets                                                                                         |       | 0.1                              |       | (0.1 | ) |
| Other                                                                                                                  |       | (0.2                             | )          | (0.1 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                                | 168.4      |   | $ | 147.0 |   |

 

***Contractual Obligations***

 

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, andunconditional purchase obligations. A discussion of these contractualobligations is included in the Company’s 2007 Form 10-K. Liabilities forunrecognized tax benefits in the amount of $26.7 million as of December 31,2007 related to Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”)No. 48,*Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109,*were excluded from the Contractual Obligations table as we were unable to makea reasonably reliable estimate of the period of cash settlement with therespective taxing authorities. Liabilities for these unrecognized tax benefitsare classified as non-current income tax liabilities (other liabilities) unlessexpected to be paid in one year.  Therehave not been significant changes to these contractual obligations as of March 31,2008.

 

46

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***Capital Expenditures***

 

Rockwood’s capitalexpenditures in the first quarter of 2008 consisted primarily of replacementsof worn, obsolete or damaged equipment as well as investments in new equipment.

 

For the three monthsended March 31, 2008 and 2007, our capital expenditures, excluding capitalleases, were $56.1 million and $45.6 million, respectively. Capitalexpenditures for each of our reporting segments are provided in the followingtable:

 
| ** **                    | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|-------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                    | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)** | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| Three months  ended           |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| March 31,  2008          |       | $             | 17.1       |            | $          | 8.8          |       | $            | 11.5       |          | $          | 13.0               |       | $                | 3.5        |   | $ | 2.2 |   | $ | 56.1 |   |
| Three months  ended           |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| March 31,  2007          |       | 15.4          |       | 7.1             |       | 12.3         |       | 8.7          |       | 1.4           |       | 0.7                |       | 45.6             |       |
|                               |            |               |            |                 |            |              |            |              |            |               |            |                    |            |                  |            |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2007, ourcapital expenditures for SHE matters totaled $29.6 million, excluding costs tomaintain and repair pollution control equipment. For 2008, we estimate capitalexpenditures for compliance with SHE laws to be at similar levels; however,because capital expenditures for these matters are subject to changes in andnew SHE laws, we cannot provide assurance that our recent expenditures will beindicative of future amounts required to comply with these laws, including theEU’s Registration, Evaluation and Authorization of Chemicals (“REACH”)legislation.  See Note 14, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

As of March 31,2008, based on the March 31, 2008 exchange rate of €1.00 = $1.5788,$1,296.7 million of the debt outstanding is denominated in euros.

 

**RecentAccounting Pronouncements**

 

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

 

**Off-BalanceSheet Arrangements**

 

In the normal course ofbusiness, the Company incurs obligations which include guarantees related tocontract completion, regulatory compliance and product performance. Undercertain circumstances, these obligations are supported through the issuance ofletters of credit and other bank guarantees. As of March 31, 2008, theCompany had approximately $30.8 million of letters of credit and other bankguarantees, of which $25.9 million will expire in 2008 through 2012. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $25.7 million that reduced our availabilityunder the senior secured credit facility. In the opinion of management, such obligationswill not significantly affect the Company’s financial position, results ofoperations or cash flows as the Company anticipates fulfilling its performanceobligations.

 

**Commitmentsand Contingencies**

 

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

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with U.S. GAAP. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure of contingentassets and liabilities. These estimates include assessing, among other things:

 

·            the fair values ofassets acquired and liabilities assumed in business combinations;

 

·            the use andrecoverability of inventory;

 

·            the valuation ofdeferred tax assets;

 

·            the amount ofunrecognized tax benefits in accordance with FIN 48;

 

47

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·            impairment ofgoodwill, property, plant and equipment and other intangible assets; and

 

·            the useful lives oftangible and intangible assets.

 

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

 

The significantaccounting policies of the Company are described in Note 1,”Description ofBusiness and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in theCompany’s 2007 Form 10-K. There have been no significant changes to thesecritical accounting policies and estimates as of March 31, 2008.

 

**Forward-LookingStatements**

 

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

 

·            our business strategy;

 

·            competitive pricing orproduct development activities affecting demand for our products;

 

·            fluctuations ininterest rates, exchange rates and currency values;

 

·            availability andpricing of raw materials;

 

·            fluctuations in energyprices;

 

·            changes in the end-usemarkets in which our products are sold;

 

·            changes in the generaleconomic conditions in North America and Europe and in other locations in whichwe currently do business;

 

·            technological changesaffecting production of our materials;

 

·            governmental andenvironmental regulations and changes in those regulations;

 

·            hazards associatedwith chemicals manufacturing;

 

·            our high level ofindebtedness;

 

·            risks associated withnegotiating, consummating and integrating acquisitions;

 

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

 

·            risks associated withinternational sales and operations.

 

You should keep in mindthat any forward-looking statements made by us in this document or elsewherespeak only as of the date on which we make them. New risks and uncertaintiescome up from time to time, and it is impossible for us to predict these eventsor how they may affect us. We disclaim any obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

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

 

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes. A discussion and analysis of the Company’s market risk isincluded in the Company’s 2007 Form 10-K. There have been no significantchanges to these market risks as of March 31, 2008.

 

**Item4T.  Controls and Procedures**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of March 31, 2008 and concluded that ourdisclosure controls and procedures are effective. In connection with thisevaluation, our management did not identify any change in our internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting during thefirst quarter of 2008.

 

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**PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

We are involved in legalproceedings from time to time in the ordinary course of our business, includingwith respect to product liability, intellectual property and environmentalmatters. In addition, we may be required to make indemnity payments inconnection with certain product liability and environmental claims. See Item 1,“Business,” and Item 1A, “Risk Factors,” “Environmental Indemnities—We maybe subject to environmental indemnity claims relating to properties we havedivested”; “Product Liability— Due to the nature of our business and products,we may be liable for damages arising out of product liability claims”; and “ProductLiability—Due to the nature of our business and products, we may be liable fordamages arising out of certain indemnity claims” in our 2007 Form 10-K.  However, we do not believe that there is anyother individual, governmental, legal proceeding or arbitration that is likelyto have a material adverse effect on our business, results of operations, cashflows or financial condition.  We cannot predict the outcome of anylitigation or the potential for future litigation.

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of our wholly-owned subsidiaries in our Specialty Compoundssegment alleging claims for negligence, negligent misrepresentation, estoppel,fraud, third party beneficiary breach of contract and unfair trade practices asa result of our subsidiary providing PVC compound to its customer. Hospira isseeking damages of approximately $16.0 million for costs allegedly related toits recall and destruction of intravenous administration kits that incorporatedcomponents made with this compound, and further seeks treble damages ofapproximately $48.0 million, plus attorneys’ fees and interest, under the NorthCarolina unfair trade practice statute. The Court dismissed Hospira’snegligence and estoppel claims, but initially denied our subsidiary’s motion todismiss the other claims. Following discovery, our subsidiary filed a motionfor summary judgment to dismiss the remaining claims and, on November 9,2007, the trial court granted our motion for summary judgment and dismissed allof the plaintiff’s claims. The plaintiff has appealed this decision and wecannot predict how this decision will impact the ultimate resolution of thecase; however, we will continue to vigorously defend this matter. While webelieve our subsidiary has meritorious defenses against Hospira’s claims and donot believe that resolution of this matter will have a material adverse effecton our business or financial condition, we cannot predict the ultimate outcomeof this litigation and resolution of this claim may have a material adverseeffect on our results of operations or cash flows in any quarterly or annualreporting period.

 

In addition, a subsidiaryin our Specialty Chemicals segment that formerly manufactured sealants forinsulating glass and resins for laminated glass has been named as a defendantin several lawsuits relating to alleged negligent manufacturing of thoseproducts. Pursuant to the sale and purchase agreement with respect to thedivested “glass” business, this subsidiary may be required to pay indemnityclaims related to these lawsuits. Although we expect our subsidiary to havecoverage under its product liability insurance policies should damagesultimately be awarded or agreed to, in such an event, its insurance may notcover such claims and, if not, our subsidiary may not have sufficient cash flowto pay these claims. Although we do not believe that resolution of this matterwill have a material adverse effect on our business or financial condition, wecannot predict the ultimate outcome of this litigation, and the resolution ofone or more of these claims may have a material adverse effect on our resultsof operations or cash flows in any quarterly or annual reporting period.

 

Further, a customer ofour Advanced Ceramics business has been named in a class action lawsuit in NewJersey relating to a prosthesis hip replacement system using ceramiccomponents. The lawsuit alleges a violation of the Consumer Fraud Act, design defect,breach of warranty and negligence based on the customer’s design andmanufacture of hip implant systems. While our subsidiary has not been named inthis litigation, we cannot predict whether this action will affect our cashflows or results of operations.

 

**Item1A. Risk Factors.**

 

A discussion of theCompany’s risk factors is included in the Company’s Form 10-K for the yearended December 31, 2007. There have been no significant changes to theserisk factors.

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

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

 

None.

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits.**

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

 

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**SIGNATURES**

 

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

 

 
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |   |
|   | By:                                    | /s/ SEIFI GHASEMI |
|   |                                   | Seifi Ghasemi |
|   |                                   | Chairman of the Board  and Chief Executive Officer |
|   |                                   | Date: May 9, 2008 |
|   |                                   |   |
|   |                                   |   |
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|   |                                   |   |
|   |                                   |   |
|   | By:                                    | /s/ ROBERT J. ZATTA |
|   |                                   | Robert J. Zatta |
|   |                                   | Senior Vice President  and Chief Financial Officer |
|   |                                   | Date: May 9, 2008 |

 

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