**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-K**

** **
| **x**                                                 | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES********EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|
| ** **                                            | ** ** | ** **                                                                                                     |
| **For  the fiscal year ended December 31, 2008** |
| ** **                                            | ** ** | ** **                                                                                                     |
| **Or**                                                |
| ** **                                            | ** ** | ** **                                                                                                     |
| **o**                                                 | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES********EXCHANGE ACT OF 1934** |

 

**Commissionfile number   001-32609**

 

**RockwoodHoldings, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **52-2277366**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

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

(Address ofprincipal executive offices) (Zip Code)

 

**(609)514-0300**

(Registrant’stelephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

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

 

Securitiesregistered pursuant to section 12(g) of the Act:

 

**None**

(Title of class)

 

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. oYes  x  No

 

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

 

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

 

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

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

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

 

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

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold asof June 30, 2008 was $1,798,862,251.

 

As of February 27, 2009,there were 74,060,917 outstanding shares of common stock, par value $0.01 pershare, of the Registrant.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

The definitive proxystatement relating to the registrant’s Annual Meeting of Stockholders, to beheld on April 23, 2009, is incorporated by reference in Part III tothe extent described therein.

 

 

 

----

 

**TABLEOF CONTENTS**

 

**FORM 10-K**

 
| ** **    | ** ** | ** **                                                                                                          | **Page No.** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------|-------------------|
| PART I   |       |                                                                                                                |              |
| Item 1        |       | Business                                                                                                            | 3                 |
| Item 1A       |       | Risk Factors                                                                                                        | 21                |
| Item 1B       |       | Unresolved  Staff Comments                                                                                          | 30                |
| Item 2        |       | Properties                                                                                                          | 30                |
| Item 3        |       | Legal Proceedings                                                                                                   | 33                |
| Item 4        |       | Submission  of Matters to a Vote of Security Holders                                                                | 34                |
| PART II  |       |                                                                                                                |              |
| Item 5        |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 34                |
| Item 6        |       | Selected  Financial Data                                                                                            | 35                |
| Item 7        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 40                |
| Item 7A       |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 69                |
| Item 8        |       | Financial  Statements and Supplementary Data                                                                        | 71                |
| Item 9        |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 118               |
| Item 9A       |       | Controls and  Procedures                                                                                            | 118               |
| Item 9B       |       | Other Information                                                                                                   | 121               |
| PART III |       |                                                                                                                |              |
| Item 10       |       | Directors, Executive Officers and Corporate  Governance                                                             | 121               |
| Item 11       |       | Executive  Compensation                                                                                             | 121               |
| Item 12       |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 121               |
| Item 13       |       | Certain  Relationships and Related Transactions, and Director Independence                                          | 121               |
| Item 14       |       | Principal  Accounting Fees and Services                                                                             | 121               |
| PART IV  |       |                                                                                                                |              |
| Item 15       |       | Exhibits,  Financial Statement Schedules                                                                            | 122               |

 

2

----

 

**PART I**

 

**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 to assumptions,in this report to identify forward-looking statements. These forward-lookingstatements are made based on expectations and beliefs concerning future eventsaffecting us and are subject to uncertainties and factors relating to ouroperations and business environment, all of which are difficult to predict andmany of which are beyond our control, that could cause our actual results todiffer materially from those expressed in or implied by these forward-lookingstatements. In particular, these factors include, among other things:

 

·              our businessstrategy;

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

·              competitive pricingor product development activities affecting demand for our products;

·              fluctuations ininterest rates, exchange rates and currency values;

·              availability andpricing of raw materials;

·              fluctuations inenergy prices;

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

·              our ability to accesscapital markets;

·              technologicalchanges affecting production of our materials;

·              governmental andenvironmental regulations and changes in those regulations;

·              hazards associatedwith chemicals manufacturing;

·              our high level ofindebtedness;

·              risks associatedwith negotiating, consummating and integrating acquisitions;

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

·              risks associatedwith international sales and operations.

 

You should keep in 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.

 

**Item1. Business.**

 

Unless we indicateotherwise or the context otherwise requires, any references to “we,” “our,” “us,”the “Company” or “Rockwood” refer to Rockwood Holdings, Inc. and itsconsolidated subsidiaries.

 

*Unless otherwise noted, allbalances which are denominated in euros are converted at the December 31,2008 exchange rate of €1.00 = $1.3971.*

 

**General**

 

Rockwood is a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials used for industrial and commercial purposes. Rockwoodwas incorporated in Delaware in September 2000 in connection with anacquisition of certain assets, stock and businesses from Laporte plc (“Laporte”)on November 20, 2000 (the “KKR Acquisition”) by affiliates of KohlbergKravis Roberts & Co. L.P. (“KKR”). The businesses acquired focused onspecialty compounds, iron-oxide pigments, timber-treatment chemicals,clay-based additives, pool and spa chemicals and electronic chemicals insemiconductors and printed circuit boards.

 

On July 31, 2004, weacquired the specialty chemicals and advanced materials businesses of DynamitNobel (the “Dynamit Nobel Acquisition”), which focused on highly specializedmarkets and consisted of surface treatment and lithium chemicals, advancedceramics and titanium dioxide pigments. Through this acquisition, we created a further diversified portfolio ofdistinct specialty chemicals and advanced materials businesses, combining twocompanies with similar service-driven cultures focused on high margins;expertise in inorganic chemistry; stable profitability; growth platforms; andproven management teams. In addition, we believe the Dynamit Nobel Acquisitionbolstered our leading competitive positions by enhancing our ability to developinnovative products and solutions for our customers, expanding ourtechnological knowledge and further reducing our exposure to any particular rawmaterial or end-use market.

 

3

----

 

On January 9, 2007,we completed the sale of our Groupe Novasep subsidiary, which focused on thecustom synthesis and production of active ingredients for pharmaceuticals andthe development of purifications solutions; on December 31, 2007, wecompleted the sale of our Electronics business, excluding our European waferreclaim business; and on October 10, 2008, we completed the sale of ourpool and spa chemicals business.  In the financial statements containedherein, the Groupe Novasep subsidiary, the Electronics business, excluding thewafer reclaim business, and the pool and spa chemicals business are presentedas discontinued operations.    Prior period financial statements havebeen reclassified to reflect discontinued operations for all periodspresented.  The Groupe Novasep subsidiary and the Electronics business,including the wafer reclaim business, represented two of our reportablesegments.  See Note 2, “Discontinued Operations,” for further details.

 

On September 1,2008, we completed the formation of a venture with Kemira Oyj (“Kemira”) thatfocuses on specialty titanium dioxide pigments. This venture combines the Company’s titanium dioxide pigments and functionaladditives business and Kemira’s titanium dioxide business. The Company hasconsolidated this venture and has reported Kemira’s interest as minorityinterest in the consolidated financial statements. See Note 4, “Acquisitions,”for further details of this venture and other bolt-on acquisitions made in2008.

 

Our products consistprimarily of inorganic chemicals and solutions and engineered materials. Theyare often customized to meet the complex needs of our customers and to enhancethe value of their end products by improving performance, providing essentialproduct attributes, lowering costs and/or making them more environmentallyfriendly. We generally compete in niche markets in a wide range of end-use markets,including metal treatment and general industry, automotive, construction,chemicals and plastics, electronics and telecommunications, and life sciences(including pharmaceutical and medical markets). No single end-use marketaccounted for more than 17% of our 2008 net sales.

 

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

 

We operate globally,manufacturing our products in 96 facilities in 26 countries and selling ourproducts and providing our services to more than 60,000 customers, includingsome of the world’s preeminent companies. We believe our products are generallycritical to our customers’ products’ performance, but account for a smallpercentage of the total cost of their products. No single customer accountedfor more than 2% of our 2008 net sales. For a geographic description of theorigin of our net sales and location of our long-lived assets, see Note 3, “SegmentInformation,” in the accompanying consolidated financial statements.

 

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

 

On November 16,2007, funds affiliated with KKR and DLJ Merchant Banking Partners III, L.P. (“DLJMB”)and certain management stockholders sold an aggregate of 10 million shares ofour common stock.  On December 7, 2007, these stockholders sold anadditional aggregate of 125,915 shares of common stock as a result of theunderwriters’ partial exercise of the over-allotment option.  Prior tothis offering, affiliates of KKR owned approximately 50.9% of our common stockon an undiluted basis.  As a result of this offering, effective November 16,2007, affiliates of KKR control less than a majority of the voting power of ouroutstanding common stock and as a result, we are no longer considered a “controlledcompany” under New York Stock Exchange (“NYSE”) rules. Also, on June 17,2008, funds affiliated with KKR, DLJMB and certain management stockholders soldan aggregate of 10 million shares of the Company’s common stock.

 

We operate our businessthrough the following five business segments: (1) Specialty Chemicals; (2) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics and (5) SpecialtyCompounds. The following table sets forth net sales of each segment, and thepercentage of our net sales for the year ended December 31, 2008, as wellas our principal products and our principal end-use markets. For financialinformation about each segment, see Note 3, “Segment Information.”

 
| ** **           | ** ** | **2008 Net Sales** | ** ** | ** **    | ** ** | ** **                  |
|----------------------|------------|------------------------------|------------|---------------|------------|-----------------------------|
| ** **           | ** ** | **$ in**                | ** ** | **% of** | ** ** | ** **                  | ** ** | ** ** |
| **Segment**          | ** ** | **Millions**                 | ** ** | **Total**     | ** ** | **Principal Products** | ** ** | **Principal End-Use Markets** |
| Specialty  Chemicals |       | $                            | 1,232.6    |          | 36         | %                           | ·     Lithium  compounds and chemicals

·     Metal surface treatment chemicals  including corrosion protection/ prevention oils

·     Synthetic  metal sulfides

·     Maintenance  chemicals

  |   | ·     Automotive  pre-coating metal treatment and car body pre-treatment

·     Steel and  metal working

·     Life  sciences (pharmaceutical synthesis and polymers)

·     Polymerization  initiators for elastomers |
|                      |            |                              |            |               |            |                             |  |  |  |

 

4

----

 
|                      |   |   |    |   |   |   |                                                                                                                                                                                                                                                                                                                       | ·     Steel and  metal working

·     Batteries

·     Disc brakes

·     Aircraft  industry |
|---------------------------|--------|--------|---------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |   |   |    |   |   |   |                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                             |
| Performance  Additives    |   | $      | 835.6   |   | 25     | %      | ·     Iron-oxide  pigments

·     Wood  protection products

·     Inorganic  chemicals

·     Synthetic  and organic thickeners

·     Flocculants

                                    |                                                                                                                                                                                             | ·     Residential  and commercial construction, coatings and plastics

·     Coatings

·     Personal  care, paper manufacturing, foundries

·     Water  treatment |
|                      |   |   |    |   |   |   |                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                             |
| Titanium Dioxide Pigments |   | $      | 534.8   |   | 16     | %      | ·     Titanium  dioxide pigments

·     Barium  compounds

·     Zinc  compounds

 

                                                                                                                                                 |                                                                                                                                                                                             | ·     Synthetic  fibers for clothing

·     Plastics

·     Paper

·     Paints and  coatings

·     Pharmaceutical  contrast media |
|                      |   |   |    |   |   |   |                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                             |
| Advanced  Ceramics        |   | $      | 505.9   |   | 15     | %      | ·     Ceramic-on-ceramic  ball head and liner components used in hip joint prostheses systems

·     Ceramic  tapes

·     Cutting  tools

·     Wear and  corrosion

·     Armor  components |                                                                                                                                                                                             | ·     Medical (hip  replacement surgery)

·     Industrial

·     Electronics

·     Automotive

·     Defense  (vehicle protection) |
|                      |   |   |    |   |   |   |                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                             |
| Specialty  Compounds      |   | $      | 261.5   |   | 8      | %      | ·     High  specification compounds such as polyvinyl chloride (PVC) and thermoplastic  elastomer (TPE)                                                                                                                                                                                           |                                                                                                                                                                                             | ·     Voice and  data transmission

·     Cables

·     Food and  beverage

·     Packaging

·     Medical  applications

·     Footwear

·     Automotive |
|                      |   |   |    |   |   |   |                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                             |
| Corporate and  other (a)  |   | $      | 9.7     |   | — | %      | ·     Wafer  recycling and repair                                                                                                                                                                                                                                                                 |                                                                                                                                                                                             | ·     Semiconductors  manufacturing |
|                      |   |   |    |   |   |   |                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                             |
|                      |   | $      | 3,380.1 |   | 100    | %      |                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                             |   |
|                           |        |        |         |        |        |        |                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                  |  |  |

 

----

(a)          Represents our Europeanwafer reclaim business that was not included as part of the sale of ourElectronics business in December 2007. Our wafer reclaim businessprovides semiconductor wafer reclaim services, wafer thinning/grinding servicesand wafer supply services. This business works on silicon and sapphiresubstrates with semiconductor and solar cells manufacturers.

 

***Diverse Customer and End-Use Market Base.***We operate a diverse portfolio of distinct specialty chemicals and advancedmaterials businesses. We have more than 60,000 customers worldwide that cover awide variety of industries and geographic areas. Of our 2008 net sales, 54%were shipments to Europe, 29% to North America (predominantly the UnitedStates) and 17% to the rest of the world. No customer accounted for more than2% of such net sales, and our top ten customers represented only approximately8% of such net sales. Our largest end-use market represented approximately 17%of such net sales.

 

5

----

 

The following chartprovides a breakdown of our 2008 net sales by end-use markets:

 

 

Within these end-usemarkets, there is further diversification by sector, product and region. Forexample, within the construction end-use market, our Performance Additivessegment companies provide materials for new construction as well as companiesthat focus on remodeling and renovation. In addition, we serve constructionmaterials clients in both the residential and commercial sectors located inNorth America, Europe and Asia. Within the life sciences end-use market, weserve a number of sectors, including the medical applications sector throughour Specialty Compounds and Advanced Ceramics segments and the pharmaceuticalsector through our Specialty Chemicals segment.

 

**OperatingSegments**

 

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

 

**SpecialtyChemicals (36*% of 2008 net sales*)**

 

Our Specialty Chemicalssegment operates under the*Chemetall*brand name and develops and manufactures metal surface treatment products andservices, lithium chemicals and fine chemicals for a wide range of industriesand end markets. This segment is comprised of two business lines: (1) SurfaceTreatment, which supplies surface treatment products and solutions for metalprocessing industries; and (2) Fine Chemicals, which supplies lithiumproducts across the entire value chain from raw materials to specialty lithiumcompounds and advanced metal-based specialty chemicals to niche markets. OurSpecialty Chemicals segment generated net sales of $1,232.6 million, $1,082.9million and $918.3 million for the years ended December 31, 2008, 2007 and2006, respectively. See Note 3, “Segment Information,” for additional financialinformation regarding our Specialty Chemicals segment.

 

***Surface Treatment***

 

We believe that ourSurface Treatment business line is a leading global supplier of surfacetreatment products and solutions. Surface Treatment’s products are used for avariety of applications and serve the automotive, aerospace and generalindustrial markets, including steel and metal-working industries. This businessline supplies more than 5,000 different products, many of which are based onproprietary formulations and extensive application know-how, to over 50,000customers and operates in different locations for 

 

6

----

 

either production orresearch and development in over 20 countries. Surface Treatment operates inthe following core end-markets: Automotive Technologies, Automotive Components,Cold Forming and Coil Coating, General Industry and Aerospace Technologies.

 

In Surface Treatment, wedevelop and supply products and solutions for the chemical pre-treatment ofmetals and other substrates, some of which are customized for individualcustomers and applications. Our products and solutions are critical to manyareas of the metal processing industry because they protect metals fromcorrosion, facilitate forming and machining, allow parts to be processed in aclean and grease-free environment and ensure good coating adhesion. Otherproducts are used in the cleaning and maintenance of aircraft. As an integratedpart of the business, we also offer a full range of customer services, includingprocess control and analysis of chemical baths at clients’ facilities.

 

Surface Treatmentcompetes in markets characterized by significant barriers to entry, proprietarymanufacturing technologies and know-how, demanding product-handlingrequirements, rigorous product quality and performance standards andspecifications and longstanding service-intensive customer relationships. Inorder to remain competitive, we are focused on developing new products,improving process technologies, expanding our customer base and broadening ourtechnology capabilities in existing and new markets through internal researchand development and bolt-on acquisitions.  For example, in 2008, weincreased our marketing efforts in Central/Eastern Europe and Asia (especiallyby our joint ventures in China and India), increased our market share inEuropean, Japanese and Korean automotive original equipment manufacturers (“OEM”),grew in General Industry segments and improved our position in the AerospaceOEM Industry.  In September 2008, weacquired Nalco’s Finishing Technologies business that provided chemicals andservices for pre-treating of metal for customers primarily in the GeneralIndustry market. This acquisition, as well as an acquisition in December 2007of a business focused on the pre-treatment of metal surfaces for customersprimarily in the coil market, have increased our technology and customer base,predominantly in North America.  In 2008,we also undertook a number of research and development projects with industrialpartners and scientific institutes that help us fulfill our needs for more costefficient and environmentally compatible technologies.  As a result, new products and improvedtechnologies were launched in 2008 and more are expected in the near future.

 

The core end-markets thatSurface Treatment operates in are as follows:

 

*AutomotiveTechnologies.* We provide surface treatment products andsolutions for automotive OEMs, including an entire range of products andservices for use in the “paint shop” step of car-body manufacture. The productsand services we provide typically represent a low percentage of total car bodyproduction costs, but have high value in terms of corrosion protection andsurface quality. Major applications include car-body treatment (zinc-phosphating)and paint coagulation. Our services typically include intensive process controland chemical management in the customer’s production processes.

 

*AutomotiveComponents.* We offer cleaning and pre-treatment products andservices to automotive parts manufacturers for use in the making of automotiveparts, such as axles, seats and other metal components. We believe thatproducts for the treatment of steel and aluminum wheels, including a newgeneration of products based on self-assembling molecules, represent anattractive growth area in this market.

 

*ColdForming and Coil Coating.* We provide products and servicesused to facilitate the cold forming of tubes, wire drawing and cold extrusionof metal. We provide products and services used in forming, cleaning andpre-treating metal sheets used in the production of steel and aluminum coil.

 

*GeneralIndustry.* General industry includes the largest number ofcustomers among the Surface Treatment businesses.  We offer a range ofproducts and services to a broad range of industrial end-markets that havemetal surface treatment applications, including cleaning, activation,conversion coating and final rinsing. Our products include cleaners, ironphosphates, coolants, paint strippers and flocculants.   Theacquisition of Nalco’s Finishing Technologies business in September 2008expanded our product range in North America and China, with products in thefield of metalworking fluids.  Over thelast two years, we have introduced a new generation of iron-phosphatingproducts in the U.S. market, which we expect will provide growth in the nextfew years, and began offering silane or oxsilan-based systems. The markets inGeneral Industry include household appliances manufacturing, can producers,heating, ventilation, aluminum finishing and other diverse end-markets.

 

*AerospaceTechnologies.* We provide products and services for AerospaceOEMs, airlines and maintenance companies. Aerospace Technologies focuses onfour major application areas: cleaning; corrosion protection; maintenancechemicals; and sealants. Cleaning products, including our Ardox products, areused for the interior and exterior cleaning of airplanes and range from dailycleaning to complete aircraft overhaul. Corrosion protection products include waxesused to protect airframes. Maintenance chemicals for aircraft engines andturbines include high performance cleaners and products for non-destructivetesting of engines, while aircraft sealants provide high technology sealingsolutions for airplanes and are expected to contribute significantly to growthin the next few years. In the last few years, we introduced further variancesof low-density sealants in the market place.  This strategy was expandedin 2007 and 2008, resulting in obtaining additional market share for thisproduct range at major aerospace manufacturers. A new production line for sealants was established in 2008 to fulfillincreasing demand.  Also, we acquired abusiness in March 2008 that focuses on the non-destructive testing ofengines, primarily in the Aerospace business. In addition, we produce specialty products, which are similar to metalsurface treatment products, but are used on the glass substrates for glassmanufacturers, including specialty cleaners, 

 

7

----

 

polishing products,cutting oils and cooling lubricants.

 

*Competition*

 

We believe that the topfive competitors in the global metal surface treatment market held an estimatedmarket share of more than 50% in 2008. We believe that Henkel SurfaceTechnologies is the global market leader, followed by us. The remaining topcompetitors include Nihon Parkerizing, PPG and Nippon Paint Co., Ltd.Competition in this market is based primarily on customer service, productquality and technological capabilities.

 

*Customers*

 

Surface Treatment servesa large customer base that is dependent on the industry served and its specificcustomer needs. Surface Treatment’s largest customers include Daimler AG,ArcelorMittal, Volkswagen AG and European Aeronautic Defense and Space (EADS).The composition of the customer base varies widely among product groups andindustries served. The Automotive Technologies business division servesapproximately 20 customers, primarily global OEMs, and the Automotive Componentsbusiness division serves approximately 500 small to large customers. The ColdForming and Coil Coating business division serves approximately 800 mid-size tolarge customers and the General Industry business division serves approximately45,000 small to large customers in a broad range of industries worldwide. The AerospaceTechnologies business division serves approximately 4,500 small to largecustomers worldwide.

 

***Fine Chemicals***

 

Our Fine Chemicalsbusiness line consists of our lithium, special metals and metal sulfidesproduct lines. We believe that our Fine Chemicals business line is the leadingglobal producer of basic and specialty lithium compounds and chemicals andadvanced metal-based specialty chemicals.

 

Fine Chemicals developsand manufactures a broad range of basic lithium compounds, including lithiumcarbonate, lithium hydroxide, lithium nitrate, lithium chloride, and valueadded lithium specialties and reagents, including butyllithium and lithiumaluminum hydride. Lithium is a key component in products and processes used ina variety of applications and industries, which range from lithium batteries,high performance greases, thermoplastic elastomers for car tires, rubber solesand plastic bottles to intermediates in the pharmaceutical industry. In ourFine Chemicals business, we operate our lithium business along the followingfour business divisions reflecting its core end-markets: (1) Specialities;(2) Lithium Salts; (3) Butyllithium/Lithium Metal and (4) BatteryProducts.

 

In addition to developingand supplying lithium compounds, we provide technical service, includingtraining of customers’ employees, relating to the handling of reactive lithiumproducts. We also offer our customers recycling services for lithium containingby-products resulting from synthesis with organolithium products, lithium metaland other reagents. We plan to continue to focus on the development of newproducts and applications. Currently, we are in the process of developinglithium compounds for several near- to medium-term, new and potentially highgrowth products for various applications, such as pharmaceuticals and batteriesfor electric vehicles.

 

Fine Chemicals alsodevelops and manufactures advanced metal-based specialty chemicals along twobusiness divisions based on its principal product groups: (1) MetalSulfides, which develops and manufactures natural and synthetic metal sulfidesused in brake pads and clutch facings and cutting and grinding wheels and (2) SpecialMetals, which develops and manufactures cesium products for the chemical andpharmaceutical industries and zirconium, barium and titanium products forvarious pyrotechnical applications, including airbag igniters. Currently, weare a major supplier of natural and synthetic metal sulfides for use infriction materials. In addition, we hold several key patents, which, we believegives us a competitive advantage in the fast growing synthetic metal sulfidesmarket.  Fine Chemicals is also a major commercial producer of certaincesium compounds which are used for X-ray image intensifiers and displays fordigital X-ray technology.  In order to further strengthen our competitiveposition in the metal-based specialty chemicals market, we are focused on theproduction of new variations of synthetic metal sulfides and new cesiumproducts for organic synthesis. We also continuously monitor our customers’industries for potential new applications for our products. In addition, weplan to expand our business by penetrating growth areas such as India and China.

 

We believe that demandfor synthetic metal sulfides will increase further in the future as a result ofthe continuing substitution for asbestos-based friction linings, transitionfrom natural sulfides to synthetic sulfides spurred in part by environmentalconcerns and the transition from drum to disk brakes in Asia and the Americas.We also believe that the market for cesium compounds will grow as a result ofnew applications being developed in the chemicals industry, the pharmaceuticalindustry, the defense industry and for use in catalytic applications. As aresult of our competitive strengths as a supplier of cesium products forestablished markets, we believe we are well positioned to take advantage ofthis market trend.

 

8

----

 

*PrincipalBusiness Divisions*

 

*Lithium*

 

*Specialities.*We develop and manufacture lithium compounds and other products for lifescience applications, such as special reagents for the synthesis of drugintermediates as well as for the flavor and fragrances industry. The twoprincipal products in this business division are butyllithium and lithiumaluminum hydride, for which we believe we hold leading market positions. Wealso produce various other compounds which include lithium metal, grignardreagents and alkoxides. Our research and development team often works closelywith research and development departments of pharmaceutical companies,especially in the European market, in order to develop products and solutionstailored for their needs. In addition, broad variations of our specialities aredesigned to produce liquid crystals for flat screens.

 

*LithiumSalts.* We develop and manufacture basic lithium compounds,which serve a wide range of industries and applications. Our products include (1) lithiumcarbonate, for which the leading application is the production of thin, lightweight lithium-ion batteries.  It is alsoused as a fluxing agent for enamels, glass and ceramic production to lowerprocess temperature in aluminum electrolysis, and as a cement additive forconstruction applications; (2) lithium hydroxide, which is principallyused in high performance greases for automotive and industrial applications; (3) lithiumnitrate, which is principally used in the rubber industry and (4) lithiumchloride, which is principally used in gas and air treatment.

 

*Butyllithium/LithiumMetal.* Our main product, butyllithium, is used as apolymerization initiator for synthetic rubber and thermoplastic elastomers andas a reagent for the synthesis of active pharmaceutical ingredients (“API’s”)and Agrochemicals. Lithium metal is used in organic synthesis processes,primarily in the area of steroid chemistry and vitamins.  Generally, these products require a highdegree of handling, transport and application know-how and customer service dueto their high reactivity. We benefit from being a major supplier withbutyllithium manufacturing facilities in the United States, Germany and Taiwan.

 

*Batteryproducts.* We develop and manufacture lithium products forelectronic applications, mainly for the primary (disposable) and secondary(rechargeable) battery industries. Our major product is battery grade lithiummetal, which is used as anode material for primary batteries. Lithium ion-basedbatteries are used extensively in consumer electronics, such as mobile phones,camcorders and laptops. We are currently developing a new generation ofconductive lithium salts used for the battery market, which, we believe, hasthe potential to drive significant growth in the future.

 

*Metal-basedSpecialty Chemicals*

 

*MetalSulfides.* This business division has two major product lines:friction stabilizers and abrasive additives. Friction stabilizers enhance thepower and performance of brake pads and clutch facings and primarily serve theautomotive supplier industry while abrasive additives are additivecompounds.  The demand for metal sulfidesis driven primarily by the demand in the automotive supplier industry.

 

*SpecialMetals*. We develop and manufacture a unique range of productsbased on special metal compounds derived from cesium, zirconium, titanium,barium and rubidium. These products are used in highly specialized,technology-driven end-applications such as X-ray diagnostic systems, airbagsand vacuum lamps and serve various end-markets, such as chemical, pharmaceutical,metallurgical, automotive, electronics and pyrotechnical industries.

 

*Competition*

 

*Lithium*.We believe the global lithium market consists of three major producers and anumber of other small producers mainly from China. We believe that we are the globalmarket leader in the lithium market. While we offer a diverse range of productsfrom raw materials to specialty lithium compounds, FMC Corporation offersmainly specialty lithium compounds, and Sociedad Quimica y Minera de Chile S.A.(“SQM”) offers a more limited product line focused on basic lithium compounds.Competition in this market is based on product quality, reliability of productsand customer service.

 

*Metal-basedSpecialty Chemicals*. We believe that in the metal-basedspecialty chemicals business, Fine Chemicals holds a leading market position inits niche markets. We have a leading position in friction materials and are theonly supplier offering a full product range of friction stabilizers andabrasive additives based on metal sulfides. Key competitors include: Dow Corning Corporation, Catalise Brasil andAmerican Minerals, Inc. in the Metal Sulfides division and CabotCorporation and Sigma Aldrich-APL in the Special Metals division. Competitionin the metal-based specialty chemicals markets in which Fine Chemicals competesis based on product quality and product diversity.

 

*Customers*

 

Fine Chemicals servesapproximately 1,000 customers worldwide in its lithium business and 700customers worldwide in its metal-based specialty chemicals products business.Fine Chemicals’ customers of lithium products include Bayer CropScience, KratonPolymers U.S. LLC, Energizer Holdings, Inc. and DSM N.V.

 

9

----

 

**PerformanceAdditives*(25% of 2008 net sales)***

 

Our Performance Additivessegment consists of business lines which develop and manufacture a range ofspecialty chemicals used in industrial and consumer products and processes toenhance performance or create unique characteristics. This segment manufacturesand markets products that are based on a focused research and developmenteffort and a strong technology base. Our Performance Additives segmentgenerated net sales of $835.6 million, $798.5 million and $724.8 million forthe years ended December 31, 2008, 2007 and 2006, respectively. See Note3, “Segment Information,” for additional financial information regarding ourPerformance Additives segment.

 

***Color Pigments and Services***

 

Our Color Pigments andServices business line is a global producer of synthetic iron-oxide and otherinorganic pigments in a wide

range of yellow, red,orange, ultramarine blue, black, manganese violet or blended shades, and servesthe construction, paints and coatings, plastics, and specialty applicationmarkets with powder, granular and liquid grades. Color Pigments and Servicesfocuses on developing and manufacturing high value-added inorganic pigments.The business also offers a number of unique pigment dispensing systems. Color Pigmentsand Services generates sales from construction applications, which includecolorings for concrete products such as paving stones, bricks, concrete blocks,roofing tiles, ready mix, stucco and mortar, paints and coatings and plastics,paper and rubber and for specialty applications including security inks, tonersfor printers and copiers, catalysts and cosmetics.  Our Color Pigments andServices business line has been driven by product innovation, our brand namesand our customer and technical service, including customer-specific colorblending.

 

In 2007, we acquired theglobal color pigments business of Elementis plc, which included its colorpigments and specialty paint driers business in North America, Europe andChina.  In August 2008, we acquiredHolliday Pigments, a leading global manufacturer of technical grade ultramarineblue and manganese violet pigments which are used for a wide range ofapplications, including plastics, cosmetics, coatings and inks.  See Note 4, “Acquisitions,” for additionalinformation on these acquisitions.

 

*PrincipalProducts*

 

*ConstructionColor Pigments and Services.* We develop and manufactureprincipally iron-oxide pigments for manufacturers of construction products foruse in the coloring of concrete products, including paving stones, bricks,concrete blocks, roofing tiles, stucco and mortar. Color Pigments and Services’major U.S. brand is*Davis Colors*and its key products include*Granufin/Granumat, Hydrotint, Mix-Ready*and*Chameleon*.*Granufin* is a unique, dry, microgranulatedpigment that combines the flow characteristics of a liquid with the storage andhandling advantages of a powder. The*Granumat* dispensing system offers a variety of configurations andfeatures designed to accommodate the varying requirements and budgets ofconcrete product manufacturers.*Granufin*pigments and the*Granumat* systemimprove product handling and color consistency for our customers. However, the patent on the granulation technology used in*Granufin* expired in 2007. Our*Chameleon* system, which works incombination with our liquid pigments, automatically weighs, blends and conveyscolors into a ready-mix truck using a standard personal computer andcustom-developed Windows-based software. Color Pigments and Services hasan agreement pursuant to which an affiliate of W.R. Grace & Co. sellsadmixtures and fibers, distributes our liquid pigments and*Chameleon* dispensing systems toready-mix and pre-cast producers in the concrete industry. Our combined effortsprovide ready mix and pre-cast customers with added value in the form ofcolored, ready-mix concrete.

 

*Paints,Coatings and Colorants.* We also develop and manufacture colorpigments for the paints, coatings, plastics, paper and rubber end-use marketsincluding the brands*Ferroxide, Trans-oxide*and*Colourplex*. We produce a wide variety of pigments for thesemarkets that include synthetic iron-oxides, corrosion inhibitor pigments,complex inorganic color pigments and process natural pigments such as burntumbers and siennas. The largest application for these products is colorant usedin architectural, industrial and special purpose paints and coatings. Color,ease of dispersion and chemical stability are the primary characteristics ofour products, which can be used in a wide variety of both solvent andwater-borne systems. We believe that a number of Color Pigments and Services’products are considered industry standards in the markets in which we compete,such as our Mapico yellow and Copperas red pigments for architectural andindustrial applications and our heat stable tans, which can tolerateapplications requiring high temperature processing, such as plastic compoundingand roofing granules.

 

*Specialties*.Our iron-oxide pigments are also used in a wide variety of specialtyapplications such as toner for large printers and copiers, security inks usedto print bank notes, catalysts for styrene production and cosmetics. Each ofthese markets requires specialized pigments with unique properties which areoften as important as the coloring characteristics. For example, printer tonersrequire specific magnetic properties whereas pigments used in cosmetics requirecolor and purity.

 

*Competition*

 

We believe that there area significant number of producers of iron-oxide pigments across the globe at boththe pigment synthesis and finishing levels with whom we compete. We believethese producers include Lanxess Corporation, Cathay Pigments, Interstar, Yipin 

 

10

----

 

Pigments as well as otherproducers in Japan and China. Competition in this segment is based on customerservice, product attributes, such as product form and quality and price.Product quality is critical in the higher end of the business on which ColorPigments and Services focuses, as inconsistent product quality can have anadverse impact on the color consistency of the end-product.

 

*Customers*

 

Color Pigments andServices’ key customers include Akzo Nobel, Oldcastle (CRH plc), PavestoneCompany, The Sherwin-Williams Company, Evonik Degussa, and WR Grace &Co., each of which has been our customer for at least ten years. Color Pigmentsand Services’ customer base is highly fragmented.

 

***Timber Treatment Chemicals***

 

The Timber TreatmentChemicals business line is a manufacturer of wood protection products primarilyin North America and we market these products through our joint venture withRohm and Haas Company formed in 2007. Wood protection products enhance theperformance of wood by increasing its longevity through protection from decayand fungal or insect attack. Our specialty timber chemicals also add waterrepellency, fire retardancy, mold inhibition and other properties to woodproducts. Timber Treatment Chemicals’ products include wood protection productsbased on our alkaline copper quaternary, or ACQ technology, which was awardedthe Environmental Protection Agency (“EPA”) Presidential Green ChemistryChallenge Award in 2002, *Ecolife*,our new non-metallic wood preservative technology and chromated copperarsenate, or CCA.  In 2008, we commercializedour newest*Ecolife* system whichutilizes*Ecovance*, ahigh-performance non-metallic preservative with enhanced environmentalbenefits.*Ecovance* was approvedfor use for wood protection by the EPA in January 2008. We expect*Ecolife* to take advantage of marketdesire for non-metallic wood protection products and the growth potential inthe development and commercialization of the next generation of wood protectionproducts.  Other products includeClearwood, our wood protection product for wood windows and doors, as well as arange of specialty additives with fire retardant, water repellent or moldicideproperties. Applications for our products include wood protection products usedfor decking, fencing, playground equipment, garden furniture, houseconstruction materials, utility poles, and other wood constructions.

 

In addition, TimberTreatment Chemicals provides a broad range of technical expertise and servicesto its customers. In particular, Timber Treatment Chemicals works closely withits customers to assist them in reducing the total cost of their manufacturingprocess by supplying timber treatment chemicals as well as treatment equipmentalong with technical support.  We believe that Timber Treatment Chemicalsis a leading provider in North America of new generation alternative timbertreatment chemicals, such as ACQ and*Ecolife*,which provide enhanced environmental benefits as they do not contain chrome orarsenic.

 

Our Timber TreatmentChemicals business also manufactures inorganic chemicals such as nitrates andchlorides for various industrial applications including chemicals that areadded to concrete as curing accelerants and corrosion inhibitors, chemicalsthat are used for odor control in water treatment, galvanizing fluxes,micronutrients, pesticides and catalysts used in the manufacture of textileresins.

 

Many of our TimberTreatment products are registered pesticides and subject to extensiveregulation. In February 2002, the EPA announced a voluntary decision byCCA manufacturers, including our subsidiary, to amend their registrations forCCA to limit use of CCA-treated lumber in most residential settings. The EPAamended CCA registrations, effective December 31, 2003, to prohibitCCA-treated wood for use in most residential settings, including playstructures, decks, picnic tables, landscaping timbers, residential fencing,patios, walkways and boardwalks. Similar initiatives were enacted in Canada bythe Pest Management Regulatory Agency, which imposed similar limitations on theuse of CCA-treated wood. The EPA conducted a risk assessment of CCA-treatedwood in existing structures and issued a final report in 2008 that concludedthere are no unacceptable risks to the public for existing CCA-treated woodbeing used around homes. The use of ACQ and other formulations has increasedfollowing the industry-wide voluntary transition to non-arsenic chrome-basedwood protection products discussed above.

 

Likewise, in Japan, theuse of arsenic-based chemicals, such as those used in the manufacture of CCAwood protection products, is restricted through legislation limiting the levelsof arsenic allowed in rainwater runoff from outdoor wood product storage areas.This legislation created an opportunity for us to supply a significant portionof the Japanese timber treatment chemicals market through our ACQ product line.In European Union markets, restrictions were enacted in mid-2004.

 

*PrincipalProducts*

 

We develop andmanufacture a broad range of wood protection products, fire retardant andspecialty chemicals for use in residential and industrial wood applications. Inaddition, we provide treatment equipment, which facilitates the handling andtreatment of wood and chemicals and we provide comprehensive technical supportservices to our customers. Timber Treatment Chemicals’ key brands include*Ecolife, Preserve, Preserve Plus, Ultrawood,D-Blaze, Clearwood*and *SupaTimber.*

 

We also develop andmanufacture inorganic metallic chemicals for certain specialty markets. Theseinclude zinc chloride-based products, other chlorides, and a range of nitratesand other chemicals. Some of these products are manufactured using by-productsfrom other large chemical companies.

 

11

----

 

*Competition*

 

We believe that Timber TreatmentChemicals was one of the leading manufacturers of wood protection products inNorth America in 2008, along with Arch Chemicals, Inc., Osmose, Inc.and PhibroTech Inc.  BASF Group, Kurt Obermeier GmbH & Co. KG andRutgers AG are other competitors, particularly in Europe. Competition for woodprotection products is mainly based on price, customer support services,innovative technology and product range. In the inorganic chemicals market, weoperate in niche areas, and therefore have few competitors overall. Competitionin the inorganic chemicals market is mainly based on quality, customer supportservices and price.

 

*Customers*

 

Timber TreatmentChemicals sells its products primarily to wood processors who pressure-treatwood. Major customers include Coos Head Forest Products, Inc., CulpeperWood Preservers, Envirofor Preservers Ltd., Georgia Pacific Corporation,Jeld-Wen, Inc., Koshii Preserving Co. Ltd., Spartanburg Forest Products, Inc.and Sunbelt Forest Products Corporation. Customers of our inorganic chemicalsproduct line include Evonik Degussa AG, Rohm and Haas Company, Nalco Companyand W.R. Grace & Co. Most of these companies have been our customersfor at least ten years.

 

***Clay-based Additives***

 

Our Clay-based Additivesbusiness develops and manufactures a range of specialty rheology modifiers andadditives. These products are used in a wide variety of applications to modifyviscosity, thickness and flow characteristics, and keep solids in suspension.End products in which these additives are used include industrial andarchitectural coatings, oilfield drilling fluids, inks, household care productsand composites.

 

*PrincipalProducts*

 

*Coatingsand Inks*. We offer a comprehensive line of additives whichmodify the viscosity, flow and suspension properties of coatings and inks,including*Claytone* for themanufacture of industrial and special purpose coatings, such as bridge, marineand maintenance paints, architectural coatings and associative thickeners; *Optigel* clays for water-based coatings and*Laponite* for the manufacture ofautomotive coatings. Our*Garamite*additives are used in the manufacture of high solids, low volatile organiccontent epoxy coatings for industrial applications.

 

*Paper*.We serve the paper industry with a product line that includes bentoniteretention aids, which are used in the paper-making process to reduce fiberlosses and aid in water drainage from the sheet and an additive, which providesfade-resistant color for carbonless copy paper. We also produce a grade of*Laponite* which is used in the productionof clear, flexible and moisture-resistant films and coatings with conductive,anti-static and anti-sticking properties, that are used in the manufacture ofspecialty photographic and anti-static papers, ink jet papers and anti-staticpackaging.  Our*Fulacolor*clay product range is used in the color developing system for carbonless copypaper.

 

*Consumerand Household Care Products*. We develop and manufacture awide range of natural clay-based rheology modifiers, including*Gelwhite* and*Bentolite*, for the consumer and household care markets. Inaddition,*Laponite* also hasfunctional properties that improve the performance of a wide range of consumerproducts, such as personal care products, creams, lotions, cosmetics and hardsurface household cleaning products for the kitchen and bathroom.

 

*Oilfield*.We offer a line of*Claytone*organoclays, which are a type of specially treated clays, for use in diesel andsynthetic oilfield drilling fluids, which help to control viscosity and flowproperties. These additives also help to suspend the cuttings in the fluid, sothat they can be expelled from the well efficiently. We recently introduced a*Garamite* additive for use in deep welldrilling that requires higher performance.

 

*Composites*.We developed and introduced the*Cloisite*range of clays for the manufacture of nanocomposite plastics and composites.While the majority of our customers purchase*Cloisite* for developmental products and applications, a keycommercial development in 2007 was the introduction of a new, high-strength,lightweight plastic by Yamaha for personal watercraft hulls and deck lidsutilizing*Cloisite*nanoclay.  The acquisition of Süd-Chemie’s*Nanofil* business extended our range of product offerings fornanocomposites, and brings valuable know-how and intellectual property forflame retardant applications. Our*Garamite* range of clays is used in the manufacture of fiberglasscomposites.

 

*Water Chemistry.*Weare a leading manufacturer of polyaluminium chloride, or PAC, and polyaluminiumnitrate-based flocculants in Central Europe. Flocculants are added to water toimprove its purity before, during and after its use in industrial, commercialand municipal applications. PAC flocculants are widely used in public,industrial and swimming pool water treatment and as a process 

agent in the paperindustry.  As discussed, we completed theformation of the Titanium Dioxide Pigments venture in September 2008.  The water treatment business, formerly partof the Titanium Dioxide Pigments segment, is now being reported in Clay-based

 

12

----

 

Additives.

 

*Competition*

 

Clay-based Additivesoperates in specialty markets, and competes based on its research anddevelopment capabilities, its ability to produce innovative high-value productsolutions and its sales and technical support. Our direct competitors in thesemarkets include Elementis plc, Laviosa Chimica Mineraria S.p.A., R.T.Vanderbilt Company, Inc., Cytec, Amcol, Feralco AB, Arkema SA and IsraelChemical Ltd.  We also compete withmanufacturers who produce non-clay-based alternatives to our end-users.

 

*Customers*

 

We supply major coatingsmanufacturers such as International Paint Limited, BASF Group, E.I. duPont deNemours and Company, PPG Industries Inc., and The Sherwin-Williams Company;paper chemical and paper-making companies such as Mitsubishi Hi Tec Paper,Sappi Limited, Akzo Nobel, Brenntag AG, LEIPA Georg Leinfelder GmbH and StoraEnso Oyj; ink-makers such as Sun Chemical Corporation and oil drilling andservices companies such as M-I SWACO L.L.C.

 

**TitaniumDioxide Pigments*(16% of 2008 net sales)***

 

Our Titanium DioxidePigments segment operates under the*Sachtleben* brand name and is a leading producer of high qualitychemical products with a unique range of small inorganic particles that addsignificant value to customers’ products and reduce the cost of customers’production processes. Titanium Dioxide Pigments comprises two business lines: (1) TitaniumDioxide; and (2) Functional Additives. Our Titanium Dioxide Pigmentssegment generated net sales of $534.8 million, $442.9 million and $409.1million for the years ended December 31, 2008, 2007 and 2006,respectively. See Note 3, “Segment Information,” for additional financialinformation regarding our Titanium Dioxide Pigments segment.

 

In September 2008,we completed the formation of a venture with Kemira Oyj (“Kemira”) that focuseson producing and marketing specialty titanium dioxide pigments for thesynthetic fiber, packaging inks, cosmetics, pharmaceutical and foodindustries.  This venture combines ourexisting titanium dioxide pigments and functional additives business and Kemira’stitanium dioxide business.  See Note 4, “Acquisitions,”for further details.

 

***Titanium Dioxide***

 

Our Titanium Dioxidebusiness line through the venture is a leading producer of specialty gradetitanium dioxide (“TiO2”), serving a wide variety of customers in the syntheticfibers, plastics, paints, packaging inks, coatings, cosmetics, pharmaceuticalsand paper industries. TiO2 is a fine white powder that derives its value fromits unparalleled whitening strength and opacifying ability, which is commonlyreferred to as hiding power. Our Titanium Dioxide business line’s principalproducts include TiO2 in anatase grade, TiO2 in rutile grade and titaniumspecialties. This business line also provides recycling services for sulfuricwaste acid.

 

There are two ways ofproducing TiO2: the sulfate process and the chloride process. The chlorideprocess permits production of only rutile TiO2 and is primarily suited forlarge volume production of standard TiO2 grades.  We believe most of the globally installedTiO2 capacity uses the chloride process as opposed to the sulfate process.  Unlike the chloride process, the sulfateprocess is capable of producing both the rutile and anatase grade of TiO2.  We employ the sulfate process for TiO2production and thus, the output from most of the globally installed TiO2production capacity does not compete with our anatase products.

 

We believe that we have acompetitive advantage in fiber anatase production and special sophisticatedanatase applications based on our strong technological capabilities, long-termcustomer relationships and extensive test runs with regular monitoring of productand process parameters. Although it represents a negligible part of the fibermaterial cost, TiO2 application know-how and a longstanding application trackrecord of homogeneous anatase crystals, both of which avoid productioninterruptions and excessive wear or breakdown of our customers’ equipment, arecritical to our customers. We intend to focus our rutile business on selectedmarkets and applications and to further develop our titanium specialtiesbusiness. We expect this segment to benefit from sales of newly introducednano-particle titanium dioxide pigments that are used to provide ultravioletlight protection for cosmetics, plastics and coatings.  We also operate a waste sulfuric acidrecycling plant in our production facility in Duisburg, Germany.

 

*PrincipalProducts*

 

*TiO2 inAnatase Grade*. We develop and manufacture high qualityanatase TiO2 pigments. These pigments are sold primarily to the globalsynthetic fiber industry, as well as paper, food and pharmaceutical industries.We believe our anatase pigment, sold under the brand name*Hombitan*, is a leading global sellingTiO2 product for applications in the synthetic fiber industry.

 

*TiO2 inRutile Grade*. We develop and manufacture rutile TiO2pigments, which are mainly used in special applications such as selectedcoatings, paints, packaging inks, plastics and laminated paper productionprocesses. In this product area, we are geographically focused on the Europeanmarket. Rutile-based TiO2 pigments generally possess performance characteristicsdifferent from anatase-based pigments. Rutile-based pigments significantlyimprove the weatherability and durability of polymer products by 

 

13

----

 

providing protectionagainst yellowing and preventing embrittlement of the material. Our rutilegrades are state of the art products and are used in applications with hightechnical requirements.

 

*TitaniumSpecialties*. Our titanium specialties products primarilyinclude “nano-particles,” which are exceptionally fine-particled, transparentand easy-to-use pigment formulations that are used across a large and diverserange of applications in small volumes. For example, the specialty grade TiO2products are used as UV-absorbers in sun protection cosmetics. In addition, thenew nano-particles form the basis for innovative wood-protection products andinnovative color variations by the paints and coatings industry. Other usesinclude catalysts, gas cleansing, photocatalysts and intermediates for specialceramics.

 

*Competition*

 

Titanium Dioxide Pigments’key competitors include: (1) Fuji Titanium Industry Co., Ltd. and KronosWorldwide, Inc. for anatase-based TiO2; (2) DuPont TitaniumTechnologies, Millennium Chemicals, Inc., Tronox Corporation, and HuntsmanLLC for rutile-based TiO2; and (3) Tayca Corporation, Ishihara Corporationand Evonik Degussa for TiO2 specialties. Competition in the markets in whichTitanium Dioxide competes is generally based on technological capabilities,product quality, price in rutile grade and customer service.

 

*Customers*

 

Titanium Dioxide Pigments’customers include leading manufacturers of paints, such as BASF Group and E.I.duPont de Nemours and Company; fibers, such as Nan Ya Plastics Corporation andInvista Inc.; plastics, such as Ampacet Corporation and Ineos and paper, suchas Munksjo GmbH and Papierfabrik August Koehler AG.

 

***Functional Additives***

 

Our Functional Additivesbusiness line is a leading global manufacturer of barium-based and zinc-basedinorganic fine white pigments and additives. The main function of theseproducts is to improve brilliance of colors and shine of coatings, improve themechanical strength of plastic parts and prevent degradation due to exposure tolight. Our Functional Additives business line serves diverse end-markets,including the plastics industry, the coatings industry and the pharmaceuticalindustry.

 

*PrincipalProducts*

 

*Barium-basedAdditives*. We produce highly dispersed powders of bariumsulfate and are the largest global producer of precipitated synthetic bariumsulfates (Blanc Fixe). We provide a unique range of barium-based additivescustomized for applications in coatings, plastic, colorants, lubricants, PVCstabilizers and thermoplastics, fibers and paper to improve optical, chemicaland mechanical properties. We also produce an X-ray-grade barium sulfate usedas a contrast agent in medical applications, such as X-rays for the stomach andintestine area.

 

*Zinc-basedAdditives*. We believe we are also a leading producer of purezinc sulfide pigments, mainly used in glass fiber reinforced plastic parts andcoatings and a leading supplier of Lithopone, a white zinc sulfide pigmentwhich is used in plastics and coatings.

 

*Competition*

 

Key competitors forbarium-based additives include Solvay S.A., Gruppo Chimico Dalton S.p.A., SakaiChemical Industry Co., Ltd. and Chinese barium-producers. Key competitors forzinc-based additives include Chinese Lithopone producers. Competition in thefunctional additives market is primarily based on application know-how, brandrecognition, product quality and, to a certain extent, price.

 

*Customers*

 

Functional Additives’customers include E.I. duPont de Nemours and Company, Ampacet Corporation, BASFGroup, Akzo Nobel Coatings and A. Schulman Plastics.

 

**Advanced Ceramics*(15% of 2008 net sales)***

 

Our Advanced Ceramicssegment operates under the*CeramTec*brand name and is a leading global producer of high-performance advancedceramics materials and products. Advanced Ceramics serves four principalend-markets: (1) medical; (2) electronics; (3) industrial; and (4) automotive,with strong market positions in various niche markets such as medical products,cutting tools and mechanical applications. Our Advanced Ceramics segmentgenerated net sales of $505.9 million, $452.5 million and $389.6 million forthe years ended December 31, 2008, 2007 and 2006, respectively. See Note3, “Segment Information,” for additional financial information regarding ourAdvanced Ceramics segment.

 

The global ceramicsmarket comprises products and components based on inorganic, non-metallic,microcrystalline materials that are 

 

14

----

 

manufactured at hightemperatures. The global ceramics market can be divided into traditionalceramics, such as bricks, tiles and white ware, and high-performance ceramics,which are ceramic materials and products optimized for special purposes. Highperformance ceramics have superior physical, electrical, chemical or biologicalproperties as compared to traditional ceramics and competing materials, likemetals or plastics. Accordingly, they have increasingly replaced plastics andmetals as key engineering materials. We compete in the high-performanceceramics segment of the market, offering a wide range of high-performanceceramics products from sealing discs for sanitary fittings to ceramiccomponents for hip joint prostheses. These products serve the market’s needsfor materials that are light, strong, corrosion-resistant and capable ofperforming in high-temperature environments.

 

High-performance ceramicsmaterials include ceramic powders, ceramic additives, structural ceramics andfunctional ceramics. Ceramic powders and ceramic additives are inputs to themanufacturing processes of structural and functional ceramics. Structural ceramics,also called engineering ceramics, take advantage of the mechanical propertiessuch as hardness and wear-resistance to produce load-bearing or engineeredcomponents. Due to their resistance to corrosion and heat properties,structural ceramics are also used to perform under special chemical conditionsor at high temperatures.  Functional ceramics, also referred to aselectronic ceramics, focus on the unique electrical and magnetic properties ofceramics. Ceramic applications in electronic components, such as integratedcircuit packages, capacitors and inductors account for the majority of today’shigh-performance ceramic materials. We believe that increasing demand forelectronic components will continue to offer significant growth opportunitiesfor high-performance ceramics, such as piezo ceramics. As a leading supplier ofelectronic ceramics materials, we believe we are well positioned to take

advantage of these growthopportunities.

 

We believe that we haveachieved success in the Advanced Ceramics segment as a result of our focus onselected segments of the high-performance ceramics market and our closecustomer relationships. Almost all of Advanced Ceramics’ products are made toorder, taking into account specific customer requirements. In many cases, ourengineers work in close cooperation with our customers during the design anddevelopment phase of new products to ensure highest quality and customersatisfaction. Through its extensive experience, Advanced Ceramics has gaineddetailed expertise and know-how in its applications areas.

 

*PrincipalProducts*

 

*Medical*.We currently serve the medical applications market with two product groups -ceramic components for hip joint prostheses, such as ball heads and inserts andceramic glove formers for high-quality latex gloves. The ceramic components forhip joint prostheses are mainly supplied to orthopedic implant manufacturers inthe United States and Europe. Besides their high wear resistance and goodfriction behavior, high-performance ceramics are biologically inert, makingthem one of the few materials that are durable and stable enough to withstandthe corrosive effects of bodily fluids. As a result, we expect high-performanceceramics will increasingly become more common for medical applications, such asfor repair and replacement of hips, knees and other human body parts.

 

We believe thatceramic-on-ceramic hip implants benefit from additional substitution effects asyoung people and more active elderly people are better suited to use ceramicimplants given their numerous attractive properties. Currently, the penetrationrate for ceramic-on-ceramic hip implants in Europe is significantly higher thanin North America because the first Food and Drug Administration (“FDA”)approval for ceramic-on-ceramic hip joint prostheses systems was granted in2003. However, given the relative superior performance and positive earlyacceptance levels in the United States, we expect the market forceramic-on-ceramic hip joint prostheses systems to grow significantly in futureyears. We believe we are well positioned to take advantage of the growingmarket as we are currently the only manufacturer of ceramic-on-ceramic hipimplant components used in FDA-approved hip joint prostheses systems in theUnited States. Given the difficulties and time involved in obtaining an FDAapproval, we believe that we will be the sole supplier in the intermediateterm. We also enjoy strong relationships with the largest U.S. and Europeanorthopedics implant manufacturers and are also expanding our focus to possiblenew applications in knee joint and intervertebral disc replacements.

 

*Electronics*.We develop and manufacture substrates, electrical resistor cores and ceramictapes as carriers for electronic circuits. Substrates are ceramic plates withelectrical, thermal and mechanical properties that serve as carriers inelectronic applications. These highly specialized products are used in a widerange of industries, such as the automotive, consumer electronics, aeronauticsand telecommunications industries. The demand for these products is driven, inlarge part, by the activity levels of the semiconductor market as well as apositive substitution effect for ceramic applications.

 

*CuttingTools*. We develop and manufacture products used in cuttingtools, other tools and tooling systems. Ceramic material properties such ashigh melting points, excellent hardness and good wear resistance make ceramicsan excellent high-speed cutting tool material.  In addition, the longerlife and faster cutting speeds possible with ceramic tools allow customers tosave costs by increasing their throughput and reducing the downtimes forreplacing their cutting tools.  We believe we are a leading supplier ofceramic cutting tools, other tools and tooling systems for high speedprocessing in the automotive, metalworking and mechanical engineeringindustries with automotive OEMs and their suppliers being our main customers.

 

*MechanicalApplications and Systems*. We also develop and manufacturehigh performance ceramic components that are used in mechanical applicationsand systems. Key product groups in mechanical applications include cuttingblades, drawing and forming tools, drawing cones and capstans, guide elements,precision parts, pre-forms, friction discs, ceramic discs and cartridges forfaucets. 

 

15

----

 

We primarily supply thegeneral industrial, machinery, metalworking, automotive and textile industrieswith a large number of products customized to the customer requirements.Mechanical systems include products used in the sanitary fittings andautomotive supplier industries in areas where fluids are pumped, compressed orstirred. such as bushings, face seal rings, pump components and valve shims anddiscs.

 

*Otherproducts*. We also produce products used for applications incertain niche markets, such as electrical/thermal and ceramic metal connectionsand pre-forms for the casting process of piston engines, mainly for dieselengines. Other products, such as piezo ceramic components, may experiencegrowth over the next few years, primarily in the automotive sector. In October 2008,we acquired a business that focuses on solutions for wear and corrosionprotection in industrial plants and armor components used in vehicle protection.

 

*Competition*

 

Advanced Ceramics’ keycompetitors are Kyocera Corporation, CoorsTek, Inc., Saint Gobain, TheMorgan Crucible Company plc, Ceradyne Corporation and NGK Ceramics Europe S.A.However, each of these competitors has either a different geographical focus orproduct strategy with respect to small niche applications. Competition in thehigh performance ceramics market is primarily based on product quality, productspecifications and customer service.

 

*Customers*

 

Advanced Ceramics’ keycustomers include Robert Bosch GmbH, Stryker Corporation, EPCOS AG, Siemens AG,De Puy Orthodics, Vishay Europe GmbH, Ideal Standard and Zimmer.

 

**Specialty Compounds*(8% of 2008 net sales)***

 

Our Specialty Compoundssegment develops and manufactures thermoplastic materials possessingspecialized characteristics, such as fire and smoke retardance, reduced weightor barrier properties which are tailored to the specific needs of eachcustomer. These products are grouped into several key end-product areas: wireand cable, consumer performance products, medical applications and regulatedpackaging. Our Specialty Compounds segment had net sales of $261.5 million,$276.6 million and $251.0 million for the years ended December 31, 2008,2007 and 2006, respectively. See Note 3, “Segment Information,” for additionalfinancial information regarding our Specialty Compounds segment.

 

Our Specialty Compoundssegment focuses on sales of higher margin products and operates as a globalspecialty performance plastic compounding business. We developed andcommercialized*SmokeGuard*, ourspecialty compound for use in high-end data and video communication wire andcable, which must meet stringent fire retardant and low smoke generationstandards. We also developed a compound for beverage closure seals andcaps.  This compound prevents ozone from attacking the seal and does notaffect the taste of water and carbonated beverages, therefore significantlyincreasing the shelf life of these beverages. We also focus on thermoplasticelastomer, or TPE, compounds in our consumer performance and automotiveproducts areas. In addition to our product offerings, we provide strong,comprehensive customer service and technical expertise by developing innovativeproducts to satisfy our customers’ unique needs.

 

We have invested in nextgeneration plastic compounding technologies, including the development offluoropolymer materials and the improvement of our production of zero halogenmaterials. Specialty Compounds has worked closely with our Clay-based Additivesbusiness to create a patented composite material that exhibits superior flameretardancy for wire and cable jacketing and sheathing.

 

*PrincipalProducts*

 

*Wireand Cable Compounds*. We develop and manufacture low-smokevinyl and flouropolymer alloys, such as*SmokeGuard*, which are used in high-end data and video communication,fiber optic and fire alarm wire and cable; halogen-free plastics, such as*Megolon*, which are used in industrial,aerospace, shipboard or oil rig cables as well as in communication cables and avariety of TPE compounds, such as*Garaflex*,which are used in flexible cords, tray cables, booster cables, welding cablesand automotive wiring. We believe that there is significant growth potentialfor the wire and cable product line in Europe as a result of the evolution of acommon market standard with higher specifications for wire and cable compounds.European wire and cable standards dictating certain safety specifications suchas fire and smoke resistance are expected to be implemented within the nextseveral years, providing significant new market opportunities for the*SmokeGuard* and*Megolon* product lines. *Megolon*is the trade name for a variety of halogen-free wire and cable products and isthe leading brand name for such products in Europe.

 

*ConsumerPerformance Products*. We develop and manufacture custom-madeplastic compounds for use in products such as moldings, sealing gaskets, toolhandles, writing instruments and ladder feet as well as other TPE-basedproducts. Our product line includes*Garaflex*,*Garaflex V*,*Garaflex E*,*GE Series *and*GM Series*. We have also developed asoft-touch compound,*Evoprene*,that 

has been approved for anumber of applications, including seals for consumer storage devices. We alsodevelop and manufacture compounds for interior and exterior automotiveapplications such as airbag covers, steering wheel covers, gear shift knobs andboots, 

 

16

----

 

handle grips, body sidemolding and window gaskets. In addition, we develop and manufacture a broadrange of compounds for unit soles, uppers, mid-soles, slippers and heels forthe diverse requirements of the footwear market.

 

*MedicalApplications Compounds*. We develop and manufacture a seriesof high-quality polyvinyl chloride, or PVC, compounds which are used tomanufacture products such as tubing, disposable masks, and extraction resistantcompounds used to make products to handle blood and bodily fluids.

 

*RegulatedPackaging.* Under the*Alphaseal* trademark, we develop and manufacture specialty closurematerials for soft drinks, beer, bottled water, juice, and other beverageapplications which improve purity in taste and odor and provide reliablecarbonation retention.

 

*Competition*

 

Specialty Compounds’ keycompetitors are Colorite Plastics Co., ACTEGA DS, European Vinyls Corporation,Georgia Gulf Corporation, Norsk Hydro ASA, PolyOne Corporation, Teknor ApexCompany and W.R. Grace & Co., most of which serve only a subset ofSpecialty Compounds’ markets. We believe that only Teknor Apex is active in allof Specialty Compounds’ markets. Competition in Specialty Compounds occursprimarily on the basis of quality, product innovation and the ability to meetdemanding customer and regulatory specifications.

 

*Customers*

 

Specialty Compounds sellsproducts to a wide range of customers, including Alcoa Inc., Belden/CDT Inc.,BerkTek Consolidated, Coleman Worldwide Corporation, CommScope/Systimax, Inc.,Corning Incorporated and Judd Wire Inc. Each of these companies has been ourcustomer for at least ten years.

 

**Raw Materials**

 

We purchase raw materialsand chemical intermediates from a large number of third parties. We have abroad raw material base with the cost of no single raw material representingmore than 3% of our cost of products sold in 2008. Raw materials constitutedapproximately 52% of our 2008 cost of products sold. The table below lists theten most significant raw materials in 2008 (in terms of dollars) and theprincipal products for which the materials were used.

 
| **Raw Material**                     | ** ** | **Segment**                                                            | ** ** | **Products**                                                                  |
|--------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|
| Titanium-bearing slag                |       | Titanium Dioxide Pigments                                              |       | Titanium Dioxide                                                              |
| Quaternary amines (“quat”) |       | Performance Additives                                                  |       | Organoclays, wood protection products                                         |
| Plasticizers                         |       | Specialty Compounds                                                    |       | Compounds                                                                     |
| Tin                                  |       | Specialty Chemicals                                                    |       | Metal sulfides                                                                |
| Copper                               |       | Performance Additives                                                  |       | Wood protection products                                                      |
| Phosphoric acid                      |       | Specialty Chemicals                                                    |       | Metal surface treatment                                                       |
| Iron-oxide                           |       | Performance Additives                                                  |       | Iron-oxide pigments                                                           |
| PVC resin                            |       | Specialty Compounds                                                    |       | Compounds                                                                     |
| Monoethanolamine                     |       | Performance Additives                                                  |       | Wood protection products                                                      |
| Zinc/Zinc oxide                      |       | Specialty Chemicals, Titanium Dioxide Pigments,  Performance Additives |       | Conversion coating zinc, zinc-based pigments,  zinc phosphate, tan iron-oxide |

 

Titanium-bearing slag,our largest raw material, is the most important raw material used in theproduction of specialty grade titanium dioxide in our Titanium Dioxide businessline of our Titanium Dioxide Pigments segment. We purchase Titanium-bearingslag primarily from two suppliers under long-term contracts.

 

In our Clay-basedAdditives business line of our Performance Additives segment, quaternary amineis sourced under a long-term contract, which expires at the end of 2009 and issubject to monthly adjustment for the price of tallow, the base component ofquat. In our Timber Treatment Chemicals business, we predominantly source quatunder a contract that expires in late 2009, with automatic annual renewalssubject to termination by either party.

 

In our SpecialtyCompounds segment, the plasticizers that are used are generic and considered acommodity product, while other materials are specific and considered specialtyproducts. Our supply contracts for plasticizers do not specify a fixed price,and most of them contain market price and discount adjustments.

 

In our SpecialtyChemicals segment, tin is used in the production of metal sulfides and ispurchased from two suppliers under annual supply agreements.

 

In our Timber TreatmentChemical business, we source copper, a commodity, from several sources. Pricesfor our copper purchases are tied to market conditions. However, we expect thecommercialization of next generation wood protection products to reduce our 

 

17

----

 

exposure to copperprices.

 

Phosphoric acid is usedin our Specialty Chemicals segment and is purchased from various globalsources.  This raw material is used for metal surface treatment chemicalsin our Surface Treatment business. Currently, there are no long-term purchase contracts for this rawmaterial.

 

Historically, we havereceived iron-oxide from multiple sources and have not experienced anysignificant supply shortages. Iron-oxide is used in our Color Pigments andServices business within our Performance Additives segment and is purchasedfrom suppliers in China as a supplement to our iron-oxide production.

 

PVC resin is a commodityproduct used in our Specialty Compounds segment and its pricing is directlyrelated to the price of ethylene and chlorine as well as PVC industry operatingrates and energy prices.

 

We source themonoethanolamine used in our Timber Treatment Chemical business from twosuppliers under contracts that expire in December 2009 and December 2010,each of which automatically renew on an annual basis, subject to termination byeither party.

 

In our PerformanceAdditives segment, zinc oxide is used in the production of tan iron-oxide andzinc phosphate. In our Specialty Chemicals segment, zinc and zinc oxide arepurchased from a few suppliers in Europe and the United States, and we have notexperienced any supply shortages. Prices for these purchases are tied to marketconditions. In our Titanium Dioxide Pigments segment, zinc is used to producezinc-based pigments and is purchased from a number of suppliers under long-termcontracts. There are no long-term zinc purchase contracts in our SpecialtyChemicals or Performance Additives segments.

 

In addition, lithiumbrine is a primary raw material source for all lithium chemicals and is foundin only a small number of locations, including most significantly for us, theAtacama Desert in Chile. We have a long-term contract with the Chileangovernment to mine lithium brine in the Atacama Desert in Chile, which webelieve provides a secure long-term access to lithium.

 

Major requirements forour key raw materials and energy are typically satisfied pursuant tocontractual agreements and/or medium- or long-term relationships withsuppliers. We are not generally dependent on any one supplier for a major partof our raw material requirements, but certain important raw materials areobtained from a few major suppliers. In general, where we have limited sourcesof raw materials, we have developed contingency plans to minimize the effect ofany interruption or reduction in supply, such as sourcing from differentfacilities and multiple suppliers and utilizing alternative formulations.

 

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

 

**IntellectualProperty**

 

Our business is dependentto a large extent on our intellectual property rights, including patents andother intellectual property, trademarks and trade secrets. We believe that ourintellectual property rights play an important role in maintaining ourcompetitive position in a number of the markets we serve. We rely ontechnological know-how and formulation and application expertise in many of ourmanufacturing processes in order to develop and maintain our market positions.Where appropriate, we protect our new technology, applications andmanufacturing processes by seeking patent protection. We have more than 3,000patents and patent applications in key strategic markets worldwide, reflectingour commitment to invest in technology and covering many aspects of ourproducts and processes for making those products. We also own and register inmultiple jurisdictions numerous trade names and trade marks applicable to ourbusiness and products which we believe are important to our business. Inaddition, we have entered into agreements, pursuant to which we licenseintellectual property from third parties for use in our business and we licensecertain intellectual property to third parties. For example, we commercialized*Ecolife*, our next generation timbertreatment preservative from our Timber Treatment Chemicals business, throughour joint venture with Rohm and Haas Company. We also develop intellectualproperty with third parties as discussed below in “Research and Development.”

 

**Researchand Development**

 

We are committed tofurther investing in our businesses, through research and development. Ourresearch and development costs were approximately 2% of our net sales in 2008,which include certain expenses related to modifications and improvements incurrent products. We allocate our research and development resourcesselectively based on the need and requirements of each business line to developinnovative products. Research and development costs are charged to expense, asincurred. Such costs were $51.7 million, $44.0 million and $39.1 million forthe years ended December 31, 2008, 2007 and 2006, respectively.

 

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

 

18

----

 

selected long-termstrategic projects with the aim to develop new competencies and technologies.

 

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

 

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

 

**Seasonality**

 

There is a seasonaleffect on a portion of our sales due to the end-use of some of our products.Our Color Pigments and Services and Timber Treatment Chemicals business linesof our Performance Additives segment show some seasonality related to theoutdoor construction market. As such, the first quarter has historically beenthe quarter where we experience the lowest sales. During this quarter, wetypically build inventory for our construction related businesses, inanticipation of increased sales during the spring and summer months. Thus, thefirst quarter is usually the quarter with the highest working capital requirementsfor us. Other than these seasonal trends in certain end-use markets, ouroverall results of operations tend to show few seasonal effects.

 

**InternationalOperations**

 

The following tablepresents net sales based on geographic area (attributed based on seller’slocation):

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)** | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  sales:**               |       |                                       |       |   |   |   |   |
| Germany                       |       | $                                          | 1,371.0    |   | $ | 1,298.6 |   | $ | 1,140.6 |   |
| United States                 |       | 890.2                                      |       | 852.5 |   | 842.1 |   |
| Rest of Europe                |       | 799.3                                      |       | 655.1 |   | 515.1 |   |
| Rest of World                 |       | 319.6                                      |       | 259.0 |   | 216.9 |   |
|                          |       | $                                          | 3,380.1    |   | $ | 3,065.2 |   | $ | 2,714.7 |   |

 

See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” forfurther details.

 

The following tablepresents our long-lived assets located in the regions indicated:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Long-lived  assets:           |       |                  |       |   |   |
| Germany                       |       | $                     | 791.5      |   | $ | 798.7 |   |
| Rest of Europe                |       | 456.9                 |       | 261.5 |   |
| United States                 |       | 293.4                 |       | 239.1 |   |
| Rest of World                 |       | 210.4                 |       | 209.2 |   |
|                          |       | $                     | 1,752.2    |   | $ | 1,508.5 |   |

 

**Salesand Marketing**

 

We sell our products andservices globally primarily by using our direct sales forces, although we alsosell through distributors in certain of our business lines, such as ColorPigments and Services and Clay-based Additives of our Performance Additivessegment or by using third party sales representatives. Each of our direct salesforces is responsible for marketing only one of our business lines, and isadministered pursuant to policies established by the management of thatbusiness line. Within each business line, these direct sales forces areorganized based on geographic regions, end-use applications or sub-businessdivisions within the business line. As of February 1, 2009, our in-housesales forces consisted of approximately 1,700 personnel worldwide.

 

Our direct sales forcesinteract with our customers to provide both purchasing advice and technicalassistance. In general, our sales forces arrange and coordinate contact betweenour customers and our research and development or technical personnel toprovide quality control and new product solutions. In certain of ourbusinesses, such as the Surface Treatment and Fine Chemicals business lines ofour Specialty Chemicals segment, most sales managers have a chemicalengineering background with advanced degrees and 

significant technicalexperience in applying our products, and they play a critical role indeveloping client relationships and acquiring new clients. Our closeinteraction with our customers and tailored solutions have allowed us todevelop and maintain strong customer 

 

19

----

 

relationships as well asfocus our sales efforts on those customers who we believe will provide us withhigher profit margins in recognition of our superior products, service andtechnical support.

 

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

 

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

 

**FDARegulation**

 

Our Advanced Ceramicssegment and to a lesser extent, our Specialty Chemicals segment, are subject toregulation by the FDA with respect to certain products we produce, includingpharmaceutical intermediates and ceramic-on-ceramic ball head and linercomponents used in hip joint prostheses systems. Foreign, state, local andother authorities also may regulate us and our products. Regulatory agencieshave established requirements that apply to the design, manufacture andmarketing of pharmaceutical and medical device products. We sell ourpharmaceutical intermediates and ceramic-on-ceramic components to othercompanies that also may be regulated by such authorities.

 

*PremarketApproval.* While we are not required to seek FDA approvals forour pharmaceutical intermediates, the customers to whom we supply such productsmay be subject to FDA approval requirements prior to testing a new drug onhumans as well as marketing a new drug for commercial use in the United States.Our customers with FDA approval for a finished drug may also be required toobtain FDA approval of design, manufacturing or labeling changes to thepharmaceutical intermediates used in their finished products.

 

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

 

*ComplianceRequirements*. Once on the market, drug manufacturers andmedical device manufacturers are subject to numerous post-market regulations.

 

Finished devicemanufacturers such as our customers who manufacture hip prostheses systems aresubject to the FDA’s Quality System Regulation, or QSR, which requires qualityassurance practices and procedures that address, among other things: managementresponsibility; audits and training; design controls; purchasing controls;identification and traceability of components; production and process controls;acceptance activities; handling of nonconforming products; the initiation ofcorrective and preventive actions; labeling and packaging controls; handling,storage and distribution of products and complaint handling and record keeping.The FDA does not directly require component suppliers of finished medicaldevices to comply with the QSR. However, because our ceramic-on-ceramic ballhead and liner components are critical elements of hip joint prosthesessystems, our customers may require us to comply with some or all of the QSR.Moreover, the FDA may in the future take the position that the types ofcomponents that we supply meet the definition of a finished device and are thussubject to the QSR. Our current contracts with our customers ofceramic-on-ceramic ball head and liner components require us to comply orassist our customers in complying with various FDA regulatory requirements.

 

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

 

If we or our customersviolate FDA or other governmental regulatory requirements during either thepre- or post-marketing stages, there may be various adverse consequences. Forexample, in the United States, the FDA has the authority to impose fines,injunctions, and civil penalties; recall or seize products; impose operating orimport restrictions, partial suspension or total shutdown of production; delayits approval or refuse to grant approval of new products; or withdraw thesubmission of the approved product from the market.

 

**Safety,Health and Environmental Matters**

 

See Note 19, “Commitmentsand Contingencies,” for a discussion of our safety, health and environmentalmatters.

 

20

----

 

**Employees**

 

As of February 1, 2009,we had approximately 10,200 employees, with 67% located in Europe, 18% in theUnited States and the remaining 15% located in the rest of the world. Of ouremployees, approximately 3,100, or 30%, are subject to either collectivebargaining agreements or other similar arrangements.

 

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

 

**AvailableInformation**

 

Rockwood Holdings, Inc.files annual, quarterly and current reports, proxy statements and otherinformation with the Securities and Exchange Commission (the “SEC”). You mayread and copy any documents we file at the SEC’s public reference room at Room 1580,100 F Street, N.E., Washington D.C. 20549. Please call the SEC at1-800-SEC-0330 for information on the public reference room. The SEC maintainsa website that contains annual, quarterly and current reports, proxy statementsand other information that issuers file electronically with the SEC. The SEC’swebsite is*www.sec.gov.*

 

The Company’s website is*www.rocksp.com*. We have made available,free of charge through our website, our annual report on Form 10-K, andwill make available our quarterly reports on Form 10-Q and current reportson Form 8-K, as well as any amendments to those reports filed or furnishedpursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) as soon asreasonably practicable after such material is electronically filed with, orfurnished to, the SEC. The Company’s proxy statement will be available when filedwith the SEC.

 

**Item1A. Risk Factors.**

 

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

 

***Substantial Leverage—Our available cash and access toadditional capital may be limited by our substantial leverage***

 

We are highly leveragedand have significant debt service obligations. As of December 31, 2008, wehad $2,811.2 million of indebtedness outstanding and total stockholders’ equityof $823.5 million. This level of indebtedness could have important negativeconsequences to us and you, including:

 

·               we may have difficulty obtaining financing in thefuture for working capital, capital expenditures, acquisitions or otherpurposes;

 

·               we will need to use a substantial portion of our availablecash flow to pay interest and principal on our debt, which will reduce theamount of money available to finance our operations and other businessactivities;

 

·               some of our debt, including borrowings under thesenior secured credit facilities, have variable rates of interest, which willexpose us to the risk of increased interest rates;

 

·               our debt level increases our vulnerability to generaleconomic downturns and adverse industry conditions;

 

·               our debt level could limit our flexibility in planningfor, or reacting to, changes in our business and in our industry in general;

 

·               our substantial amount of debt and the amount we needto pay to service our debt obligations could place us at a competitivedisadvantage compared to our competitors that have less debt; and

 

·               our failure to comply with the financial and otherrestrictive covenants in our debt instruments which, among other things,require us to maintain specified financial ratios and limit our ability toincur debt and sell assets, could result in an event of default that, if notcured or waived, could cause our lenders to terminate commitments under ourdebt agreements, declare all amounts, including accrued interest, due andpayable, and enforce their rights in respect of collateral.

 

Our cash interest expensefor the year ended December 31, 2008 was $164.0 million. At December 31,2008, we had $2,007.9 million of variable rate debt. After including thenotional amounts of variable to fixed interest rate swaps, the variable amountwas $699.5 million. A 1% increase in the average interest rate would increasefuture interest expense by approximately $7.0 million per year. As of December 31,2008, our debt service for 2009, which represents expected principal paymentsof our long-term debt and estimated scheduled cash interest payments, wasexpected to be $242.6 million.  See Item 7, “Management’s Discussion andAnalysis of

 

21

----

 

Financial Condition andResults of Operations – Liquidity and Capital Resources – Liquidity –Contractual Obligations” for years beyond 2009.

 

***Additional Borrowings Available—Despite our substantialleverage, we and our subsidiaries may be able to incur more indebtedness. Thiscould further exacerbate the risks described above, including our ability toservice our indebtedness.***

 

We and our subsidiariesmay be able to incur substantial additional indebtedness in the future.Although our indirect, wholly-owned subsidiary, Rockwood Specialties Group, Inc.’s(“Group” or “Group’s”) senior secured credit facilities and the indenturegoverning the senior subordinated notes due 2014 (the “2014 Notes”) containrestrictions on the incurrence of additional indebtedness, such restrictionsare subject to a number of qualifications and exceptions, and under certaincircumstances indebtedness incurred in compliance with such restrictions couldbe substantial. For example, in connection with the formation of a venture withKemira in September 2008, the Titanium Dioxide Pigments venture borrowed€250.0 million ($349.3 million) under a term loan facility agreement. As of December 31,2008, the revolving credit facility under the senior secured credit facilitiesprovided for additional borrowings of up to $225.2 million, after giving effectto $24.8 million of letters of credit issued on our behalf and the revolvingcredit facility under the Titanium Dioxide Pigments venture provided foradditional borrowings of €30.0 million ($41.9 million). There are nooutstanding borrowings under these revolving credit facilities as of December 31,2008. In addition, the term loans and the availability under the revolvingcredit facility under the senior secured credit facilities may be increased byup to $250.0 million in the aggregate, subject to certain exemptions andprovided that Group procures lender commitments for such increase. To theextent new debt is added to our debt levels, the substantial leverage risksdescribed above would increase.

*** ***

***Restrictive Covenants in Our Debt Instruments—Our debt instrumentscontain a number of restrictive covenants which may limit our ability tofinance future operations or capital needs or engage in other businessactivities that may be in our interest.***

 

Group’s senior securedcredit agreement and indenture governing the 2014 Notes and the TitaniumDioxide Pigment’s venture facility agreement impose, and the terms of anyfuture indebtedness may impose, operating and other restrictions on us. Suchrestrictions will affect, and in many respects limit or prohibit, among otherthings, our ability to take certain actions. See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” section for further details. Inaddition, Group’s senior secured credit facilities require us and the TitaniumDioxide Pigment’s venture facility requires the venture to achieve certainfinancial and operating results and maintain compliance with specifiedfinancial ratios. Our ability to comply with these ratios may be affected byevents beyond our control such as a prolonged economic downturn. Therestrictions and financial covenants contained in Group’s senior secured creditagreement and indenture governing the 2014 Notes and the Titanium DioxidePigment’s venture facility could adversely affect our ability to finance ouroperations, acquisitions, investments or strategic plans or other capital needsor to engage in other business activities that would be in our interest.

 

A breach of any of thesecovenants or our inability to comply with the required financial ratios couldresult in a default under the facilities described above. If an event ofdefault occurs under any of these facilities, which includes an event ofdefault under the indenture governing the 2014 Notes, the lenders could electto:

 

·                 declare all borrowings outstanding, together withaccrued and unpaid interest, to be immediately due and payable;

 

·                 require us to apply all of our available cash to repaythe borrowings; or

 

·                 prevent us from making any principal, premium orinterest payments;

 

any of which would resultin an event of default. The lenders will also have the right in thesecircumstances to terminate any commitments they have to provide furtherfinancing. If we were unable to repay or otherwise refinance these borrowings whendue, our lenders could sell the collateral securing the senior secured creditfacilities, which constitutes substantially all of our and our subsidiaries’assets.

 

***Downturns in certain industries and general economicconditions could adversely affect our profitability and liquidity.***

 

In the event that thevolatile conditions affecting worldwide financial markets persist or result ina prolonged economic downturn or recession, our results of operations, cashflows and financial position could be materially and adversely affected. Undersuch circumstances, the demand for our products could decrease, which wouldadversely affect our results of operations. In addition, our products are usedin certain industries, such as the automotive, data and communications andconstruction industries. Prolonged downturns or bankruptcies in one or more ofthese industries could severely reduce demand for our products. For example,sales in our Performance Additives business have been adversely impacted bydownward trends in commercial and residential construction, housing starts andtrends in residential repair and remodeling. Further, a downturn in theautomotive industry, particularly in Europe, may adversely affect the resultsof operations of our Surface Treatment business in our Specialty Chemicalssegment. Moreover, if the value of one or more of our businesses deteriorates,we may be required to record additional impairment charges that could adverselyaffect our results of operations. If we are unable to successfully anticipateor respond to changing economic conditions, our results of operations andfinancial position may be materially and

 

22

----

 

adversely affected.

 

Further, a prolongedeconomic downturn or recession or further market disruption in the capital andcredit markets may adversely impact our future cash flows from operations andour liquidity. For example, the recent deterioration of these markets has had amaterial and adverse impact on our pension plan assets, which may require us tomake certain payments into these plans in the form of a one-time payment orover an extended period, and any further deterioration in the capital marketsmay require us to fund additional amounts in the future. In addition, if ouroperating results deteriorate, we may need to use some or all of our availablecash to reduce our leverage in order to comply with the leverage ratios in ourdebt agreements. Any such payments may materially and adversely impact ourliquidity. If our sources of liquidity are insufficient to meet our needs, wemay need to use other means available to us, such as reduce or delay capitalexpenditures or other cost cutting measures or seek additional sources ofcapital such as through additional borrowings, equity issuances or othersources, to satisfy our liquidity needs. The recent unprecedented adverseconditions in the global capital and credit markets may limit our ability tosecure capital or obtain it on terms and conditions that are acceptable to us.We cannot predict with any certainty the impact of this or any furtherdisruption in these markets or our ability to access these markets in thefuture.

 

***Risks Associated with Acquisitions—We may not be able tosuccessfully integrate completed acquisitions or consummate acquisitions we mayseek to make in the future.***

 

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

 

***Currency Fluctuations—Because a significant portion of ouroperations is conducted in foreign currencies, fluctuations in currencyexchange rates may adversely impact our financial condition and results ofoperations and may affect the comparability of our results between financialperiods.***

 

Our operations areconducted by subsidiaries in many countries. The results of their operationsand financial condition are reported in the local currency and then translatedinto U.S. dollars at the applicable exchange rates for inclusion in ourconsolidated financial statements. The exchange rates between some of thesecurrencies and the dollar in recent years have fluctuated significantly and maycontinue to do so in the future. A significant portion of our net sales andcost of products sold is denominated in euros. Approximately 54% of our 2008 netsales were derived from subsidiaries whose local currency is the euro. Thisincreases the impact of the fluctuation of the euro against the U.S. dollar.

 

Furthermore, because aportion of our debt is denominated in euros, which as of December 31, 2008equaled an aggregate of €1,069.2 million ($1,493.8 million), we aresubject to fluctuation in the exchange rate between the U.S. dollar and theeuro. For example, the dollar-euro noon buying rate announced by the FederalReserve Bank of New York increased from $1.00 = €1.065 on December 31,2000 to $1.00 = €0.7158 on December 31, 2008. Being subject to thiscurrency fluctuation may have an adverse effect on the carrying value of ourdebt and may also affect the comparability of our results of operations betweenfinancial periods. As of December 31, 2008, a weakening or strengtheningof the euro against the U.S. dollar by $0.01 would decrease or increase,respectively, by $10.7 million the U.S. dollar equivalent of our totaleuro-denominated debt of €1,069.2 million. In addition, because ourconsolidated financial statements are reported in U.S. dollars, the translationeffect of such fluctuations has in the past significantly impacted, and may inthe future, significantly impact the carrying value of our debt and results ofoperations and may affect the comparability of our results between financialperiods. We also incur currency transaction risk whenever we enter into eithera purchase or sale transaction using a currency other than the local currencyof the transacting entity. We may not be able to effectively manage ourcurrency translation and/or transaction risks and volatility in currencyexchange rates may have a material adverse effect on the carrying value of ourdebt and results of operations.

 

***Regulation of Our Raw Materials, Products and Facilities—Ourbusiness could be adversely affected by regulation to which our raw materials,products and facilities are subject.***

 

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

 

In addition, some of oursubsidiaries’ products contain raw materials, such as arsenic pentoxide, carbondisulfide, lithium carbonate,

 

23

----

 

tetrahydrofuran, copper,chromic acid, silica, zinc chromate and lead that are deemed hazardousmaterials in certain situations. The use of these materials is regulated andsome of these regulations require product registrations, which also are subjectto renewal and potential revocation. These regulations may affect our abilityto market certain chemicals we produce.

 

There is also a risk thatother key raw materials or one or more of our products may be found to have, orbe recharacterized as having, a toxicological or health-related impact on theenvironment or on our customers or employees. If such a discovery orrecharacterization occurs, the relevant materials, chemicals or products,including products of our customers incorporating our materials or chemicals,may be recalled or banned or we may incur increased costs in order to complywith new regulatory requirements. Change in regulations, or theirinterpretation, may also affect the marketability of certain of ourproducts.  We cannot predict how theseand other findings from regulatory agencies may affect our cash flows orresults of operations.

 

***Manufacturing Hazards—Hazards associated with chemicalmanufacturing could adversely affect our results of operations.***

 

Due to the nature of ourbusiness, we are exposed to the hazards associated with chemical manufacturingand the related storage and transportation of raw materials, products andwastes in our manufacturing facilities or our distribution centers, such asfires, explosions and accidents. These hazards could lead to an interruption orsuspension of operations and have an adverse effect on the productivity andprofitability of a particular manufacturing facility or on our company as awhole. Other hazards include piping and storage tank leaks and ruptures,mechanical failure, employee exposure to hazardous substances, chemical spillsand other discharges or releases of toxic or hazardous substances or gases,inclement weather and natural disasters. These hazards may cause personalinjury and loss of life, damage to property and contamination of theenvironment, which could lead to government fines or work stoppage injunctionsand lawsuits by injured persons. For example, our subsidiaries were named asdefendants in a wrongful death suit filed by the family of an employee who wasfatally injured in an accident in our Clay-based Additives facility inGonzales, Texas. While we are unable to predict the outcome of this case andother such cases, if determined adversely to us, we may not have adequateinsurance to cover such claims and, if not, we may not have sufficient cashflow to pay for such claims. Such outcomes could adversely affect our customergoodwill, cash flow and results of operations.

 

***Raw Materials—Fluctuations in costs of our raw materials or,our access to supplies of our raw materials could adversely affect our resultsof operations.***

 

Although no single rawmaterial represented more than 3% of our cost of products sold in 2008, rawmaterial costs generally account for a high percentage of our total costs ofproducts sold. In 2008, raw materials constituted approximately 52% of our costof products sold. We generally purchase raw materials based on supplyagreements linked to market prices and therefore our results of operations aresubject to short-term fluctuations in raw materials prices. These fluctuationslimit our ability to accurately forecast future raw material costs and henceour profitability.

 

Many of the raw materialswe use are commodities, and the price of each can fluctuate widely for avariety of reasons, including changes in availability, major capacity additionsor reductions or significant facility operating problems. Historically, therehave been some price increases we have not been able to pass through to ourcustomers. This trend may continue in the future. In addition, titanium-bearingslag used in our Titanium Dioxide Pigments segment, is our largest raw material(in terms of dollars) and is sourced primarily from two suppliers. If one ofour suppliers is unable to meet its obligations under our present supplyagreement or we are unable to enter into new supply arrangements on competitiveterms when our existing short-term supply arrangements expire, we may be forcedto pay higher prices to obtain these necessary raw materials. Furthermore,certain of our raw materials, such as cesium and lithium salts, are sourcedfrom countries where political, economic and social conditions may be subjectto instability. In addition, one of our raw materials, lithium brine, requiresa period of gestation before it can be used to produce lithium compounds. Inthe event there is an increase in market demand for lithium products, orunfavorable weather conditions at the lithium ponds, as we experienced in early2006, we may not be able to respond to such market demand on a timely basis.Any interruption of supply or any price increase of raw materials could resultin our inability to meet demand for our products, loss of customer goodwill andhigher costs of producing our products.

 

***Energy Costs—Fluctuations in energy costs could have anadverse effect on our results of operations.***

 

Energy purchases in 2008constituted approximately 7% of Rockwood’s cost of products sold. Fluctuationsin the price of energy limit our ability to accurately forecast future energycosts and consequently our profitability. For example, natural gas prices werevolatile and continued to increase in 2008, due in part to global politicalconditions and weather conditions. Rising energy costs may increase our rawmaterial costs and negatively impact our customers and the demand for ourproducts. These risks will be heightened if our customers or productionfacilities are in locations experiencing severe energy shortages. For example,our lithium facility in Chile has experienced a shortage of natural gas due tothe Argentine government’s decision to ration its supply of natural gas toChile. If energy prices fluctuate significantly, or we experience severe energyshortages, our business, in particular, our Titanium Dioxide segment, orresults of operations may be adversely affected.

 

24

----

 

***Environmental, Health and Safety Regulation—Compliance withextensive environmental, health and safety laws could require materialexpenditures or changes in our operations.***

 

Our operations aresubject to extensive environmental, health and safety laws and regulations atnational, international and local levels in numerous jurisdictions. In addition,our production facilities and a number of our distribution centers requireoperating permits that are subject to renewal. The nature of the chemicalsindustry exposes us to risks of liability under these laws and regulations dueto the production, storage, transportation, disposal and sale of chemicals andmaterials that can cause contamination or personal injury if released into theenvironment. In 2008, our capital expenditures for safety, health andenvironmental matters (“SHE”) were $28.1 million. For 2009, we estimate capitalexpenditures for compliance with SHE laws to be at similar levels. We may bematerially impacted in the future by the Registration, Evaluation andAuthorization of Chemicals, or REACH, legislation which became effective in theEuropean Union (“EU”) on June 1, 2007. We estimate our cost of compliancewith REACH to be approximately $5.0 million in 2009 and 2010 and approximately$3.0 million per year from 2011 through 2018, although we may incur additionalcosts.

 

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

 

In addition, thediscovery of contamination arising from historical industrial operations atsome of our former and present properties has exposed us, and in the future maycontinue to expose us, to cleanup obligations and other damages. For example,soil and groundwater contamination is known to exist at several of ourfacilities. At December 31, 2008, we had approximately $55.1 million inreserves for estimated environmental liabilities and estimated the potentialrange of exposure for such liabilities to be between $55.1 million and $96.6million.

 

***Environmental Indemnities—We may be subject to environmentalindemnity claims relating to properties we have divested.***

 

The discovery ofcontamination arising from properties that we have divested may expose us toindemnity obligations under the sale agreements with the buyers of suchproperties or cleanup obligations and other damages under applicableenvironmental laws. For example, we have obligations to indemnify the buyers ofthe former explosives business and automotive ignition systems business ofDynamit Nobel for certain environmental matters. Under such sale agreements,these indemnities are not limited as to amount. In addition, we agreed toindemnify the buyers of our Groupe Novasep subsidiary for three years forcertain known and unknown environmental actions which may arise in the future,and the buyer of our former Electronics business for five and seven years, foron-site and off-site environmental liabilities, respectively, related to suchbusiness. We may not have adequate insurance coverage or cash flows to makesuch indemnity payments. Such payments may be costly and may adversely affectour financial condition and results of operations.

 

***Product Liability—Due to the nature of our business andproducts, we may be liable for damages arising out of product liability claims.***

 

The sale of our productsinvolves the risk of product liability claims. For example, some of thechemicals or substances that are used in our businesses, such as arsenicpentoxide, have been alleged to represent potentially significant health andsafety concerns. Class action suits had been filed in Louisiana, Floridaand Arkansas, for example, naming one of our subsidiaries and a number ofcompetitors of our Timber Treatment Chemicals business line in our PerformanceAdditives segment, as well as treaters and retailers, as defendants.

 

In addition, oursubsidiary has been named as a defendant in personal injury suits in severaljurisdictions with retailers and treaters named as other defendants.Furthermore, there are other similar suits, including putative class actions,pending against retailers, treaters and other formulators to which we may beeventually named as a defendant. These suits allege, among other things,product liability claims in connection with the use of timber products treatedwith CCA, which utilizes arsenic pentoxide as a raw material. Other legalactions in which we participate or which relate to our business include thefollowing:

 

·                 a subsidiary in our Advanced Ceramics segment has beennamed as a defendant in several product liability lawsuits in Europe relatingto broken artificial hip joints, which allege negligent manufacturing by oursubsidiary of ceramic components used in the production of artificial hipjoints.

 

·                 a subsidiary in our Specialty Compounds segment hasbeen named in lawsuits relating to compounds we supplied our customers toproduce medical products and packaging materials. The suits allege, among otherthings, contract and tort causes of action.

 

25

----

 

·                 our customer has been named in a class action lawsuitin New Jersey relating to a prosthesis hip replacement system using ceramiccomponents. The lawsuit alleges a violation of the Consumer Fraud Act, designdefect, breach of warranty and negligence based on our customer’s design andmanufacture of hip implant systems.

 

·                 a subsidiary in our Specialty Chemicals segment hasbeen named as a defendant in several lawsuits in the United States regardingexposure to solvents and other chemicals contained in some of our products.

 

Also, because many of ourproducts are integrated into our customers’ products, we may be requested toparticipate in or share in the costs of a product recall conducted by acustomer. For example, some of our businesses, including those within ourSpecialty Chemicals, Advanced Ceramics and Specialty Compounds segments, supplyproducts to customers in the automotive industry. In the event one of thesecustomers conducts a product recall that it believes is related to one of ourproducts, we may be asked to participate in or fund in whole or in part such arecall.

 

We are unable to estimateour exposure, if any, to the above-mentioned lawsuits at this time. We may besubject to future claims with regard to these suits or others like them and wemay not be able to avoid significant product liability exposure. A successfulproduct liability claim or series of claims against us for which we are nototherwise indemnified or insured could materially increase our operating costsor prevent such operating subsidiary from satisfying its financial obligations.For example, for policies renewed on or after November 2002, our insurersexcluded CCA from our insurance coverage under our general liability policies.We may not have sufficient cash flow from operations or assets to pay ajudgment resulting from a product liability claim or product recall, if any,for which there is no or inadequate insurance coverage. Any such judgment orproduct recall could materially increase our operating costs or prevent suchoperating subsidiary from satisfying its financial obligations.

 

***Product Liability—Due to the nature of our business andproducts, we may be liable for damages arising out of certain indemnity claims.***

 

We may be subject toindemnity claims for product liability lawsuits relating to products we havesold. For example, our Timber Treatment Chemicals business has entered intoindemnity agreements with various customers who purchased CCA-based woodprotection products. Pursuant to those agreements, one of our subsidiariesagreed to defend and hold harmless those customers for certain causes ofaction, based on domestic mammalian, and in some cases, human toxicity, causedby our CCA-based wood protection products, subject to certain conditions. OurTimber Treatment Chemicals business, and several of our customers were named asdefendants in several suits, including putative class actions, relating toCCA-based wood protection products. Our Timber Treatment Chemicals business hasreceived and may in the future receive claims for indemnity from customers inconnection with litigation relating to CCA-based wood protection products andmay be required to pay indemnity claims under such agreements to one or more ofits customers. If our Timber Treatment Chemicals business is required to payone or more indemnity claims, insurance or indemnity arrangements from EvonikDegussa (the successor to Laporte, from which the specialty chemicals businesslines that formed Rockwood in the KKR Acquisition were acquired) may not coversuch claims and, if not, our subsidiary may not have sufficient free cash flowto pay such claims. We are unable to estimate our exposure, if any, to these claimsand lawsuits at this time.

 

In addition, ourSpecialty Chemicals segment’s subsidiary that formerly manufactured sealantsfor insulating glass and resins for laminated glass has been named as adefendant in several lawsuits relating to alleged negligent manufacturing ofthose products. Pursuant to the sale and purchase agreement with respect to thedivested “glass” business, this subsidiary may be required to pay indemnityclaims, mainly re-glazing costs.  Our insurance may not cover such claimsand, in such a case, our subsidiary may not have sufficient cash flow to paythese claims. One or more of these claims could adversely affect our financialcondition or results of operations.

 

***FDA Regulation—Some of our manufacturing processes andfacilities, pharmaceutical customers and medical device customers are subjectto regulation by the FDA or similar foreign agencies. These requirements couldadversely affect our results of operations.***

 

Regulatory requirementsof the FDA are complex. Any failure to comply with them could subject us and/orour customers to fines, injunctions, civil penalties, lawsuits, recall orseizure of products, total or partial suspension of production, denial ofgovernment approvals, withdrawal of marketing approvals and criminal prosecution.Any of these actions could adversely impact our net sales, undermine goodwillestablished with our customers, damage commercial prospects for our productsand materially adversely affect our results of operations.

 

The manufacture andsupply of ceramic-on-ceramic ball head and liner components for hip jointprostheses systems by our Advanced Ceramics segment may be subject to the FDA’sQuality System Regulation, which imposes current Good Manufacturing Practicerequirements on the manufacture of medical devices. Certain lithium compoundsmanufactured by our Fine Chemicals business line of our Specialty Chemicalssegment are subject to FDA regulation.

 

In addition, medicaldevice customers of our Advanced Ceramics segment to whom we supply our ceramic-on-ceramicball head and liner components are subject to FDA regulation, includingpremarket approval of their products and post market compliance

 

26

----

 

requirements. The FDA maytake three years or longer to grant premarket approval, if at all. Onceapproved, our customers’ total hip prostheses systems may be withdrawn from themarket either voluntarily by our customers or as a result of the FDA’s or aforeign equivalent’s withdrawal of marketing approval or removal of suchproducts for a number of reasons including safety, current Good ManufacturingPractice or Quality System Regulation problems with our products or ourcustomers’ final products. For example, a customer in our Advanced Ceramicssegment initiated a voluntary recall in January 2008 of its hip implantsystem. These factors could significantly limit our net sales generated by ourAdvanced Ceramics segment and may have a material adverse effect on ourfinancial condition and results of operations.

 

***Competition—Our industry is highly competitive. The end-usemarkets in which we compete are also highly competitive. This competition mayadversely affect our results of operations.***

 

We face significantcompetition from major international producers as well as smaller regionalcompetitors. Our most significant competitors include major chemicals andmaterials manufacturers and diversified companies, a number of which haverevenues and capital resources exceeding ours. In addition, there is increasingcompetition from market participants in China.

 

Within the end-usemarkets in which we compete, competition between products is intense.Substitute products also exist for many of our products. Therefore, we facesubstantial risk that certain events, such as new product development by ourcompetitors, changing customer needs, production advances for competingproducts, price changes in raw materials, our failure to secure patents or theexpiration of patents, could result in declining demand for our products as ourcustomers switch to substitute products or undertake manufacturing of suchproducts on their own. If we are unable to develop and produce or market ourproducts to effectively compete against our competitors, our results ofoperations may materially suffer.

 

We believe that ourcustomers are increasingly looking for strong, long-term relationships with afew key suppliers that help them improve product performance, reduce costs, orsupport new product development. To satisfy these growing customer requirements,our competitors have been consolidating within product lines through mergersand acquisitions. We may also need to invest and spend more on research anddevelopment and marketing costs to strengthen existing customer relationships,as well as attract new customers. As a result, our substantial debt level couldlimit our flexibility to react to these industry trends and our ability toremain competitive.

 

***Product Innovation—If we are not able to continue ourtechnological innovation and successful commercial introduction of newproducts, our profitability could be adversely affected.***

 

Our industries and theend-use markets into which we sell our products experience periodictechnological change and product improvement. Manufacturers periodically introducenew generations of products or require new technological capacity to developcustomized products. Our future growth will depend on our ability to gauge thedirection of the commercial and technological progress in all key end-usemarkets and upon our ability to fund and successfully develop, manufacture andmarket products in such changing end-use markets. We will have to continue toidentify, develop and market innovative products on a timely basis to replaceor enhance existing products in order to maintain our profit margins and ourcompetitive position. We may not be successful in developing new productsand/or technology, either alone or with third parties, or licensingintellectual property rights from third parties on a commercially competitivebasis. Our new products may not be accepted by our customers. If we fail tokeep pace with the evolving technological innovations in our end-use markets ona competitive basis, our business, financial condition and results ofoperations could be adversely affected.

 

***Dependence on Intellectual Property—If our intellectualproperty were copied by competitors, or if they were to develop similarintellectual property independently, our results of operations could benegatively affected.***

 

Our success depends to asignificant degree upon our ability to protect and preserve our intellectualproperty rights, which rights we own or use pursuant to licenses granted to usby third parties. The confidentiality and patent assignment agreements we enterinto with most of our key employees and third parties to protect theconfidentiality, ownership and use of intellectual property may be breached,may not be enforceable, or may provide for joint ownership or ownership by athird party. In addition, we may not have adequate remedies for a breach by theother party, which could adversely affect our intellectual property rights. Theuse of our intellectual property rights or intellectual property similar toours by others or our failure to protect such rights could reduce or eliminateany competitive advantage we have developed, adversely affecting our net sales.If we must sue to protect, defend or enforce our intellectual property rights,any suits or proceedings could result in significant costs and diversion ofcompany resources and management attention, and we may not prevail in suchaction.  We are currently involved in afew actions related to misappropriation of our intellectual property by formeremployees.  In addition, when our patentsexpire, competitors or new market entrants may manufacture productssubstantially similar to our products previously protected by a patent. Forexample, our patent in ACQ technology expired in May 2007 and as a result,there has been a new entrant into this market.

 

We conduct research anddevelopment activities with third parties and license certain intellectualproperty rights from third parties and we plan to continue to do so in thefuture. For example, in our Timber Treatment Chemicals business, wecommercialized Ecolife, our next generation timber treatment preservative fromour Timber Treatment Chemicals business, through our joint venture with Rohmand Haas Company. We endeavor to license or otherwise obtain intellectualproperty rights on terms favorable to us. However, we

 

27

----

 

may not be able tolicense or otherwise obtain intellectual property rights on such terms or atall. Our inability to license or otherwise obtain such intellectual propertyrights could have a material adverse effect on our ability to create acompetitive advantage and create innovative solutions for our customers, whichwill adversely affect our net sales and our relationships with our customers.

 

The steps we take toprotect our intellectual property may not provide us with any competitiveadvantage and may be challenged by third parties. We have been and currentlyare subject to oppositions of our patents and trademarks by third partiesbefore regulatory bodies in certain jurisdictions. Our failure to defend thesepatents or registered trademarks may limit our ability to protect theintellectual property rights that these applications were intended to cover. Inaddition, a failure to obtain and defend our trademark registrations may impedeour marketing and branding efforts and competitive position. A failure toprotect our intellectual property rights could have a material adverse effecton demand for our products and our net sales.

 

***Risk of Intellectual Property Litigation—Our products orprocesses may infringe the intellectual property rights of others, which maycause us to pay unexpected litigation costs or damages or prevent us fromselling our products.***

 

Although it is ourintention to avoid infringing or otherwise violating the intellectual propertyrights of others, our processes and products may infringe or otherwise violatethe intellectual property rights of others. We may be subject to legalproceedings and claims, including claims of alleged infringement by us or ourlicensees of the patents, trademarks and other intellectual property rights ofthird parties. Intellectual property litigation is expensive andtime-consuming, regardless of the merits of any claim, and could divert ourmanagement’s attention from operating our businesses. If we were to discover orbe notified that our processes or products potentially infringe or otherwiseviolate the intellectual property rights of others, we may need to obtainlicenses from these parties or substantially re-engineer our products andprocesses in order to avoid infringement. We might not be able to obtain thenecessary licenses on acceptable terms, or at all, or be able to re-engineerour products successfully. Moreover, if we are sued for infringement and losethe suit, we could be required to pay substantial damages and/or be enjoinedfrom using or selling the infringing products or technology. Any of theforegoing could cause us to incur significant costs and prevent us from sellingour products.

 

***International Operations—As a global business, we are exposedto local business risks in different countries which could have a materialadverse effect on our financial condition or results of operations and thevalue of our common stock.***

 

We have significantoperations in many countries, including manufacturing facilities, research anddevelopment facilities, sales personnel and customer support operations.Currently, we operate, or others operate on our behalf, facilities in countriessuch as Brazil, Chile, China, Czech Republic, India, Malaysia, Poland, Portugal,Singapore, South Africa, South Korea, Taiwan and Turkey. Of our total net salesin 2008 of $3,380.1 million, approximately 71% were generated by shipments tocountries outside North America. Our operations are affected directly andindirectly by global regulatory, economic and political conditions, including:

 

·                 new and different legal and regulatory requirements inlocal jurisdictions;

 

·                 managing and obtaining support and distribution forlocal operations;

 

·                 increased costs of, and availability of,transportation or shipping;

 

·                 credit risk and financial conditions of localcustomers and distributors;

 

·                 potential difficulties in protecting intellectualproperty;

 

·                 risk of nationalization of private enterprises byforeign governments;

 

·                 potential imposition of restrictions on investments;

 

·                 potentially adverse tax consequences, includingimposition or increase of withholding and other taxes on remittances and otherpayments by subsidiaries;

 

·                 capital controls; and

 

·                 local political, economic and social conditions,including the possibility of hyperinflationary conditions and politicalinstability in certain countries.

 

In addition, ourfacilities may be targets of terrorist activities that could result in full orpartial disruption of the activities of such facilities. We may not succeed indeveloping and implementing policies and strategies to counter the foregoingfactors effectively in each location where we do business. Our failure to do socould limit our ability to sell products, compete or receive payments forproducts sold in such locations.

 

Furthermore, oursubsidiaries are subject to the export controls and economic embargo rules andregulations of the United States, violations of which may carry substantialpenalties. These regulations limit the ability of our subsidiaries to market,sell, distribute or

 

28

----

 

otherwise transfer theirproducts or technology to prohibited countries or persons. Failure to complywith these regulations could subject our subsidiaries to fines, enforcementactions and/or have an adverse affect on our reputation and the value of ourcommon stock.

 

***Retention of Key Personnel—If we lose certain key personnelor are unable to hire additional qualified personnel, we may not be able toexecute our business strategy.***

 

Our success depends, inpart, upon the continued services of our highly skilled personnel involved inmanagement, research, production, sales and distribution, and, in particular,upon the efforts and abilities of our executive officers and key employees.Although we believe that we are adequately staffed in key positions and that wewill be successful in retaining key personnel, we may not be able to retainsuch personnel on acceptable terms or at all. Furthermore, if we lose theservice of any executive officers or key employees, we may not be able toexecute our business strategy. We do not have key-person life insurancecovering any of our employees.

 

***Relations with Employees—We are subject to stringent laborand employment laws in certain jurisdictions in which we operate, and ourrelationship with our employees could deteriorate, which could adversely impactour operations.***

 

A majority of ourfull-time employees are employed outside the United States, particularly inGermany where many of our businesses are located. In certain jurisdictionswhere we operate, particularly in Germany, labor and employment laws arerelatively stringent and, in many cases, grant significant job protection tocertain employees, including rights on termination of employment. In addition,in certain countries where we operate, including Germany, our employees are membersof unions or are represented by a works council as required by law. We areoften required to consult and seek the consent or advice of these unions and/orrespective works’ councils. These regulations and laws coupled with therequirement to consult with the relevant unions or works’ councils couldsignificantly limit our flexibility in managing costs and responding to marketchanges.

 

Furthermore, with respectto our employees that are subject to collective bargaining arrangements orsimilar arrangements (approximately 30% of our full-time employees as of February 1,2009), we may not be able to negotiate labor agreements on satisfactory termsand actions by our employees may disrupt our business. If these workers were toengage in a strike, work stoppage or other slowdown, we could experience asignificant disruption of our operations and/or higher ongoing labor costs. Inaddition, if our other employees were to become unionized, we could experiencea significant disruption of our operations and/or higher ongoing labor costs.

 

***Tax Liabilities—If mg technologies ag (now known as GEAGroup Aktiengesellschaft) or Degussa UK Holdings, Ltd. fail to satisfytheir contractual obligations, we may be subject to increased tax exposureresulting from pre-acquisition periods.***

 

Under the terms ofcertain purchase agreements, third party sellers have agreed to substantiallyindemnify us for tax liabilities pertaining to the pre-acquisition periods. Tothe extent such companies fail to indemnify or satisfy their obligations, or ifany amount is not covered by the terms of the indemnity, we would be requiredto record an adjustment to goodwill to satisfy any such liabilities and couldbe negatively impacted in future periods through increased tax expense.

*** ***

***Net Loss—We have experienced losses in the past and mayexperience losses in the future and cannot be certain that our net operatingloss carryforwards will continue to be available to offset our tax liability.***

 

We have incurred netlosses in the past and we may incur net losses in the future. We may notgenerate cash flow sufficient to meet debt service obligations and othercapital requirements, such as working capital and maintenance capitalexpenditures. As of December 31, 2008, we had deferred tax assets of $53.1million related to worldwide net operating loss carryforwards. Additionally, atDecember 31, 2008, we had a total valuation allowance of $84.7 million. Ifour operating performance deteriorates in the future in certain taxjurisdictions, we may be unable to realize these net operating losscarryforwards and we may be required to record an additional valuationallowance.

 

***Anticipated Capital Expenditures—Our required capitalexpenditures may exceed our estimates.***

 

Our capital expenditures,excluding capital leases, for the year ended December 31, 2008 were $224.0million, which consisted of expenditures to maintain and improve existingequipment and substantial investments in new equipment. For 2009, we expectcapital expenditures to be below 2008 levels. However, future capitalexpenditures may be significantly higher, depending on the investmentrequirements of each of our business lines, and may also vary substantially ifwe are required to undertake actions to compete with new technologies in ourindustry. We may not have the capital necessary to undertake these capitalinvestments. If we are unable to do so, we may not be able to effectivelycompete in some of our markets.

 

***Control—A conflict may arise between our interests and thoseof KKR.***

 

Affiliates of KKR ownapproximately 29.9% of our common stock on an undiluted basis. Althoughaffiliates of KKR no longer hold a majority of our outstanding common stock,they continue to have a significant impact on the vote in any election ofdirectors. In 

 

29

----

 

addition, representativesof KKR occupy two of the seven seats on our board of directors. As a result,even though representatives of KKR do not occupy a majority of the seats on ourboard of directors, affiliates of KKR have substantial influence over ourdecisions to enter into any corporate transaction and whether any transactionthat requires the approval of the stockholders is approved. For example,affiliates of KKR could seek to cause us to sell revenue-generating assets,which could impair our long-term ability to declare dividends or grow ourbusiness. Additionally, KKR is in the business of making investments incompanies and may from time to time acquire and hold interests in businessesthat compete directly or indirectly with us. They may also pursue acquisitionopportunities that may be complementary to our business, and as a result, thoseacquisition opportunities may not be available to us.

 

**Item1B. Unresolved Staff Comments.**

 

None.

 

**Item2. Properties.**

 

We are an internationalbusiness, serving customers worldwide. To service our customers efficiently, wemaintain 96 manufacturing facilities in 26 countries around the world with astrategy of global, regional and local manufacturing to optimize our serviceoffering and minimize production cost to our customers. We believe thesefacilities are suitable and adequate for their intended use. The table belowpresents summary information with respect to these facilities:

 
| **Segment**              | ** ** | **Country**     | ** ** | **Locations**                    | ** ** | **Leased/Owned** | ** ** | **Major  Applications/Industry**                                                    |
|--------------------------|------------|-----------------|------------|----------------------------------|------------|------------------|------------|-------------------------------------------------------------------------------------|
| **Specialty  Chemicals** | ** ** | ** **      | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **                                                                          |
| ** **               | ** ** | ** **      | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **                                                                          |
| Surface  Treatment       |       | Australia       |       | Bayswater North                  |       | Owned            |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       | Girraween                        |       | Leased           |       | Aerospace and  general industry                                                     |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | Brazil          |       | Diadema-Săo  Paulo          |       | Leased           |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | Canada          |       | Bramalea,  Ontario               |       | Owned            |       | Pre-treatment  technologies and aerospace                                           |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | China           |       | Changchun (JV)                   |       | Leased           |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       | Chongqing (JV)                   |       | Leased           |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       | Shanghai (JV)                    |       | Leased           |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | France          |       | Sens                             |       | Owned            |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       | Soissons                         |       | Owned            |       | Aerospace                                                                           |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | Germany         |       | Mönchengladbach             |       | Owned            |       | General industry                                                                    |
|                     |       |            |       | Langelsheim (1)                  |       | Owned            |       | Automotive  technologies, other pre-treatment technologies and aerospace (sealants) |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | India           |       | Chennai (JV)                     |       | Leased           |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       | Kalyan (JV)                      |       | Owned            |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       | Pune (JV)                        |       | Owned            |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | Italy           |       | Giussano                         |       | Owned            |       | Automotive and  other pre-treatment technologies                                    |
|                     |       |            |       | Roveredo in  Piano               |       | Leased           |       | General industry                                                                    |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | Mexico          |       | El Marqués,  Querétaro |       | Leased           |       | Automotive  technologies, other pre-treatment technologies and aerospace            |
|                     |       |            |       |                             |       |             |       |                                                                                |
|                     |       | The Netherlands |       | Oss                              |       | Owned            |       | Automotive and  other pre-treatment technologies                                    |

 

30

----

 
|                         |       | Poland         |       | Warsaw                |       | Leased     |       | Automotive and  other pre-treatment technologies                                                                  |
|------------------------------|------------|----------------|------------|-----------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------|
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Singapore      |       | Singapore             |       | Leased     |       | Advanced  technologies and non-automotive pre-treatment technologies                                              |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | South Africa   |       | Boksburg              |       | Owned      |       | Automotive and other  pre-treatment technologies                                                                  |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Spain          |       | Canovelles            |       | Owned      |       | Automotive and  other pre-treatment technologies                                                                  |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Sweden         |       | Bålsta           |       | Owned      |       | Automotive and  other pre-treatment technologies                                                                  |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Switzerland    |       | Dintikon              |       | Leased     |       | Pre-treatment  technologies                                                                                       |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Turkey         |       | Gebze                 |       | Owned      |       | Automotive and  other pre-treatment technologies                                                                  |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | United Kingdom |       | Bletchley             |       | Owned      |       | Automotive  technologies, other pre-treatment technologies and aerospace                                          |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | United States  |       | Jackson, MI           |       | Owned      |       | General industry                                                                                                  |
|                         |       |           |       | La Mirada, CA         |       | Leased     |       | Pre-treatment  technologies and aerospace                                                                         |
|                         |       |           |       | Romulus, MI           |       | Owned      |       | Automotive  technologies, other pre-treatment technologies and aerospace                                          |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
| Fine Chemicals               |       | Austria        |       | Arnoldstein           |       | Leased     |       | Metal sulfides                                                                                                    |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Chile          |       | La Negra              |       | Owned      |       | Lithium-carbonate  and lithium chloride                                                                           |
|                         |       |           |       | Salar de Atacama      |       | Owned      |       | Lithium brine  and Potash                                                                                         |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Germany        |       | Langelsheim (1)       |       | Owned      |       | Butyllithium,  lithium-chloride, specialty products, lithium metal, lithium-hydrides,  cesium, and special metals |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Taiwan         |       | Taichung              |       | Owned      |       | Butyllithium                                                                                                      |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | United States  |       | Kings Mountain,  NC   |       | Owned      |       | Metal and  battery                                                                                                |
|                         |       |           |       | New  Johnsonville, TN |       | Owned      |       | Butyllithium and  specialty products                                                                              |
|                         |       |           |       | Pasadena, TX          |       | Owned      |       | Butyllithium                                                                                                      |
|                         |       |           |       | Phoenix, AZ           |       | Leased     |       | Zirconium  products                                                                                               |
|                         |       |           |       | Silver Peak, NV       |       | Owned      |       | Lithium-carbonate  and lithium hydroxide                                                                          |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
| **Performance  Additives**   | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | ** **                                                                                                        |
| ** **                   | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | ** **                                                                                                        |
| Color Pigments  and Services |       | China          |       | Shenzhen              |       | Owned      |       | Coatings and construction                                                                                         |
|                         |       |           |       | Taicang               |       | Owned      |       | Coatings and  specialties                                                                                         |
|                         |       |           |       | Xinzhuang,  Changshu  |       | Leased     |       | Construction                                                                                                      |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | France         |       | Comines               |       | Owned      |       | Coatings                                                                                                          |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Germany        |       | Hainhausen            |       | Owned      |       | Construction and  coatings                                                                                        |
|                         |       |           |       | Walluf                |       | Owned      |       | Construction and  coatings                                                                                        |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | Italy          |       | Turin                 |       | Owned      |       | Coatings,  specialties and construction                                                                           |
|                         |       |           |       |                  |       |       |       |                                                                                                              |
|                         |       | United Kingdom |       | Birtley               |       | Owned      |       | Driers                                                                                                            |
|                         |       |           |       | Kidsgrove             |       | Owned      |       | Coatings and  specialties                                                                                         |

 

31

----

 
|                           |       |           |       | Sudbury                |       | Owned      |       | Coatings and  specialties                                                                                 |
|--------------------------------|------------|----------------|------------|------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------|
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | United States  |       | Beltsville, MD         |       | Owned      |       | Coatings,  specialties and construction                                                                   |
|                           |       |           |       | Cartersville, GA       |       | Owned      |       | Construction                                                                                              |
|                           |       |           |       | East St. Louis,  IL    |       | Owned      |       | Specialties                                                                                               |
|                           |       |           |       | Easton, PA             |       | Owned      |       | Coatings,  specialties and construction                                                                   |
|                           |       |           |       | Harleyville, SC        |       | Owned      |       | Construction                                                                                              |
|                           |       |           |       | King of Prussia,  PA   |       | Owned      |       | Construction                                                                                              |
|                           |       |           |       | Los Angeles, CA        |       | Owned      |       | Coatings,  specialties and construction                                                                   |
|                           |       |           |       | Ocala, FL              |       | Owned      |       | Coatings,  specialties and construction                                                                   |
|                           |       |           |       | St. Louis, MO          |       | Owned      |       | Coatings,  specialties and construction                                                                   |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
| Timber Treatment  Chemicals    |       | United Kingdom |       | Barrow-in-Furness      |       | Leased     |       | Wood protection  products and treatment                                                                   |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | United States  |       | Freeport, TX           |       | Owned      |       | Construction and  other industrial markets                                                                |
|                           |       |           |       | Harrisburg, NC         |       | Owned      |       | Wood protection  products and treatment                                                                   |
|                           |       |           |       | Valdosta, GA           |       | Owned      |       | Wood protection  products and treatment                                                                   |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
| Clay-based  Additives          |       | Germany        |       | Duisburg (2)           |       | Owned      |       | Flocculants                                                                                               |
|                           |       |           |       | Ibbenbueren            |       | Leased     |       | Flocculants                                                                                               |
|                           |       |           |       | Moosburg               |       | Leased     |       | Paints and inks                                                                                           |
|                           |       |           |       | Schwarzheide           |       | Leased     |       | Flocculants                                                                                               |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | United Kingdom |       | Widnes, Cheshire       |       | Owned      |       | Paper-making,  consumer and household care and coatings and paper                                         |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | United States  |       | Gonzales, TX           |       | Owned      |       | Paints, inks and  oilfields and paper-making                                                              |
|                           |       |           |       | Louisville, KY         |       | Owned      |       | Paints and inks                                                                                           |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
| **Titanium  Dioxide Pigments** | ** ** | ** **     | ** ** | ** **             | ** ** | ** ** | ** ** | ** **                                                                                                |
| ** **                     | ** ** | ** **     | ** ** | ** **             | ** ** | ** ** | ** ** | ** **                                                                                                |
| Titanium Dioxide               |       | Finland        |       | Pori                   |       | Owned      |       | Plastics,  paints, packaging inks, coatings and paper                                                     |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | Germany        |       | Duisburg  (2) (3) |       | Owned      |       | Fibers,  plastics, paints, coatings and paper                                                             |
|                           |       |           |       | Oberhausen             |       | Leased     |       | Cosmetics                                                                                                 |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | United States  |       | Lawrence, MA           |       | Leased     |       | Cosmetics                                                                                                 |
|                           |       |           |       | Northvale, NJ          |       | Leased     |       | Cosmetics                                                                                                 |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
| Functional  Additives          |       | Germany        |       | Duisburg  (2) (3) |       | Owned      |       | Coatings, plastics,  fibers, paper, pharmaceuticals, PVC stabilizers and glass fiber reinforced  plastics |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
| **Advanced  Ceramics**         | ** ** | ** **     | ** ** | ** **             | ** ** | ** ** | ** ** | ** **                                                                                                |
| ** **                     | ** ** | ** **     | ** ** | ** **             | ** ** | ** ** | ** ** | ** **                                                                                                |
|                           |       | Brazil         |       | Nova Odessa            |       | Leased     |       | Automotive                                                                                                |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | China          |       | Suzhou                 |       | Leased     |       | General industry                                                                                          |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | Czech Republic |       | Sumperk                |       | Owned      |       | General industry                                                                                          |
|                           |       |           |       | Dolni Rychnov          |       | Owned      |       | Electronics                                                                                               |
|                           |       |           |       |                   |       |       |       |                                                                                                      |
|                           |       | Germany        |       | Ebersbach              |       | Owned      |       | Automotive and  general industry                                                                          |

 

32

----

 
|                     |       |           |       | Lauf                   |       | Owned                 |       | Automotive,  electronics and general industry                                                                |
|--------------------------|------------|----------------|------------|------------------------|------------|-----------------------|------------|--------------------------------------------------------------------------------------------------------------|
|                     |       |           |       | Lohmar                 |       | Owned, partly  leased |       | Ballistic  protection, wear/corrosion protection                                                             |
|                     |       |           |       | Marktredwitz           |       | Owned                 |       | Electronic,  automotive, medical and general industry                                                        |
|                     |       |           |       | Plochingen             |       | Owned                 |       | Medical,  automotive and general industry                                                                    |
|                     |       |           |       | Wilhermsdorf           |       | Leased                |       | Automotive                                                                                                   |
|                     |       |           |       | Wittlich               |       | Leased                |       | General industry                                                                                             |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | Malaysia       |       | Seremban               |       | Owned                 |       | Medical and  general industry                                                                                |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | Mexico         |       | Puebla                 |       | Owned                 |       | Automotive                                                                                                   |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | Poland         |       | Gorzyce                |       | Leased                |       | Automotive                                                                                                   |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | South Korea    |       | Suwon                  |       | Leased                |       | Electronics                                                                                                  |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | United Kingdom |       | Colyton                |       | Owned                 |       | Electronics                                                                                                  |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | United States  |       | Birmingham, AL         |       | Owned                 |       | Wear/corrosion  protection                                                                                   |
|                     |       |           |       | Laurens, SC            |       | Owned                 |       | Automotive,  electronics and general industry                                                                |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
| **Specialty  Compounds** | ** ** | ** **     | ** ** | ** **             | ** ** | ** **            | ** ** | ** **                                                                                                   |
| ** **               | ** ** | ** **     | ** ** | ** **             | ** ** | ** **            | ** ** | ** **                                                                                                   |
|                     |       | Canada         |       | Stoney Creek,  Ontario |       | Owned                 |       | Footwear,  automotive and consumer products                                                                  |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | Italy          |       | Azeglio                |       | Owned                 |       | Rubber compounds                                                                                             |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | United Kingdom |       | Melton Mowbray         |       | Owned                 |       | TPE/Consumer  products, packaging, medical, automotive and wire and cable sheathing  products                |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
|                     |       | United States  |       | Leominster, MA         |       | Owned                 |       | Wire and cable  sheathing, consumer goods, footwear, automotive and industrial products                      |
|                     |       |           |       | Pineville, NC          |       | Owned                 |       | Wire and cable  sheathing, packaging, medical, consumer goods, footwear, automotive and  industrial products |
|                     |       |           |       |                   |       |                  |       |                                                                                                         |
| **Corporate  and other** | ** ** | ** **     | ** ** | ** **             | ** ** | ** **            | ** ** | ** **                                                                                                   |
| ** **               | ** ** | ** **     | ** ** | ** **             | ** ** | ** **            | ** ** | ** **                                                                                                   |
| Wafer Reclaim            |       | France         |       | Greasque               |       | Owned                 |       | Wafer reclaim                                                                                                |

 

----

(1)         This facility is shared by both business divisions ofthe Specialty Chemicals segment.

 

(2)         This facility is shared by both the PerformanceAdditives segment and the Titanium Dioxide Pigments segment.

 

(3)         This facility is shared by the two business divisionsof the Titanium Dioxide Pigments segment.

 

**Item3. 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.” However, we do not believethat there is any other individual, governmental, legal proceeding orarbitration that is likely to have a material adverse effect on our business,results of operations, cash flows or financial condition.  We cannotpredict the outcome of any litigation or the potential for future litigation.

 

33

----

 

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 appealed this decision and, in early2009, the appellate court affirmed on all counts with the exception of thenegligence claim, which it reversed and remanded to the trial court. We willcontinue to vigorously defend this matter. While we believe our subsidiary hasmeritorious defenses against Hospira’s claims and do not believe thatresolution of this matter will have a material adverse effect on our businessor financial condition, we cannot predict the ultimate outcome of thislitigation and resolution of this claim may have a material adverse effect onour results of operations or cash flows in any quarterly or annual reportingperiod.

 

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 in Europe relating to alleged negligent manufacturing ofthose products. 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 thesematters will have a material adverse effect on our business or financialcondition, we cannot predict the ultimate outcome of this litigation, and theresolution of one or more of these claims may have a material adverse effect onour results of operations or cash flows in any quarterly or annual reportingperiod.

 

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

 

During the fourth quarterof the year ended December 31, 2008, no matters were submitted to a voteof security holders.

 

**PART II**

 

**Item5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities.**

 

The Company’s commonstock is traded on the New York Stock Exchange under the ticker symbol ROC. Asof February 27, 2009, there were approximately 102 holders of record ofthe Company’s common stock.

 

The following tablesummarizes the Company’s quarterly common stock information:

 
| **2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------|------------|----------|------------|---------|------------|
| First    |       | $        | 34.76      |    | $          | 26.82 |   |
| Second   |       | 43.71    |       | 32.61   |       |
| Third    |       | 39.97    |       | 24.04   |       |
| Fourth   |       | 25.66    |       | 5.37    |       |
|          |            |          |            |         |            |  |  |

 
| **2007** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------|------------|----------|------------|---------|------------|
| First    |       | $        | 28.41      |    | $          | 24.12 |   |
| Second   |       | 37.06    |       | 27.48   |       |
| Third    |       | 39.32    |       | 29.16   |       |
| Fourth   |       | 40.00    |       | 31.00   |       |
|          |            |          |            |         |            |  |  |

 

Rockwood’s operations areconducted through its subsidiaries and its ability to make payments on anyobligations it may have is dependent on the earnings and the distribution offunds from its subsidiaries. As a result, we are dependent upon cash dividendsand distributions and other transfers from our subsidiaries to make dividendpayments on our common stock. The amounts available to us to pay cash dividendsare restricted by our subsidiaries’ debt agreements. Under Group’s seniorsecured credit facilities and indenture governing the 2014 Notes, Group isgenerally restricted from making dividends or other distributions to us. Anydecision to declare and pay dividends in the future will be made at thediscretion of our board of directors and will depend on, among other things,our results of operations, cash requirements, financial condition, contractualrestrictions and other factors that our board of directors may deem relevant.See further discussion in liquidity section of Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”

 

There were no repurchasesof any of the Company’s common stock by or on behalf of the Company during thefourth quarter of 2008 

 

34

----

 

and no sales of unregisteredequity securities by the Company during the fiscal year ended December 31,2008.

 

**StockPerformance Graph**

 

The following graphcompares the performance through December 31, 2008 of a hypothetical $100investment made on August 17, 2005 in (a) our common stock, (b) theS&P 500 Index ® and (c) the S&P Supercomposite Specialty ChemicalsIndex (S15SPCH).

 

 

**Item6. Selected Financial Data.**

 

The following selectedconsolidated financial data of the Company’s five most recent years ended December 31,2008 should be read in conjunction with Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and Item 8, “FinancialStatements and Supplementary Data.” The Statement of Operations data set forthbelow with respect to the three years in the period ended December 31,2008 and the Balance Sheet data as of December 31, 2008 and 2007, arederived from the Company’s audited financial statements included elsewhere inthis document. The Statement of Operations data for the years ended December 31,2005 and 2004 and the Balance Sheet data as of December 31, 2006, 2005 and2004 are derived from audited consolidated financial statements not includedherein.  As previously discussed, all periods presented have beenreclassified to account for the sale of the Groupe Novasep segment, theElectronics business sold, excluding the European wafer reclaim business, andthe sale of the pool and spa chemicals business as discontinued operations.

 

35

----

 
| ** **                                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **($ in millions, except per share data; shares in thousands)**                                      | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statement  of operations data:**                                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales:                                                                                                |       |                        |       |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                                                      |       | $                           | 1,232.6    |   | $ | 1,082.9 |   | $ | 918.3 |   | $ | 842.0 |   | $ | 321.1 |   |
| Performance  Additives                                                                                    |       | 835.6                       |       | 798.5 |   | 724.8 |   | 648.9 |   | 586.0 |   |
| Titanium Dioxide  Pigments                                                                                |       | 534.8                       |       | 442.9 |   | 409.1 |   | 399.2 |   | 162.2 |   |
| Advanced  Ceramics                                                                                        |       | 505.9                       |       | 452.5 |   | 389.6 |   | 369.6 |   | 146.3 |   |
| Specialty  Compounds                                                                                      |       | 261.5                       |       | 276.6 |   | 251.0 |   | 237.5 |   | 200.4 |   |
| Corporate and  other                                                                                      |       | 9.7                         |       | 11.8 |   | 21.9 |   | 24.4 |   | 28.0 |   |
| Total net sales                                                                                           |       | 3,380.1                     |       | 3,065.2 |   | 2,714.7 |   | 2,521.6 |   | 1,444.0 |   |
| Cost of products  sold                                                                                    |       | 2,365.8                     |       | 2,089.1 |   | 1,859.0 |   | 1,723.4 |   | 1,047.2 |   |
| Gross profit                                                                                              |       | 1,014.3                     |       | 976.1 |   | 855.7 |   | 798.2 |   | 396.8 |   |
| Selling, general  and administrative expenses                                                             |       | 661.3                       |       | 597.6 |   | 540.4 |   | 481.6 |   | 276.9 |   |
| Impairment  charges (1)                                                                                   |       | 809.5                       |       | — |   | 2.2 |   | 0.4 |   | 11.0 |   |
| Restructuring  and other severance costs (2)                                                              |       | 35.3                        |       | 12.0 |   | 4.9 |   | 15.2 |   | 1.1 |   |
| Management  services agreement termination fee (3)                                                        |       | —                      |       | — |   | — |   | 10.0 |   | — |   |
| Gain on sale of  assets and other (4)                                                                     |       | (2.4                        | )          | (4.7 | ) | (0.3 | ) | (4.4 | ) | — |   |
| Operating (loss)  income                                                                                  |       | (489.4                      | )          | 371.2 |   | 308.5 |   | 295.4 |   | 107.8 |   |
| Other expenses,  net:                                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Interest expense  (5)                                                                                     |       | (231.1                      | )          | (219.3 | ) | (199.9 | ) | (221.5 | ) | (165.0 | ) |
| Interest income                                                                                           |       | 6.0                         |       | 11.5 |   | 2.4 |   | 9.9 |   | 2.0 |   |
| Gain (loss) on  early extinguishment of debt (6)                                                          |       | 4.0                         |       | (18.6 | ) | — |   | (26.2 | ) | — |   |
| Refinancing  expenses (7)                                                                                 |       | —                      |       | (0.9 | ) | — |   | (1.0 | ) | (27.0 | ) |
| Foreign exchange  (loss) gain (8)                                                                         |       | (32.3                       | )          | 7.8 |   | 8.6 |   | 112.2 |   | (124.8 | ) |
| Other, net (9)                                                                                            |       | 0.7                         |       | — |   | 1.8 |   | 2.6 |   | (2.8 | ) |
| Other expenses,  net                                                                                      |       | (252.7                      | )          | (219.5 | ) | (187.1 | ) | (124.0 | ) | (317.6 | ) |
| (Loss) income  from continuing operations before taxes and minority interest                              |       | (742.1                      | )          | 151.7 |   | 121.4 |   | 171.4 |   | (209.8 | ) |
| Income tax  (benefit) provision                                                                           |       | (23.9                       | )          | 62.3 |   | 61.3 |   | 55.6 |   | 21.4 |   |
| (Loss) income  from continuing operations before minority interest                                        |       | (718.2                      | )          | 89.4 |   | 60.1 |   | 115.8 |   | (231.2 | ) |
| Minority  interest in continuing operations (10)                                                          |       | 83.6                        |       | (7.9 | ) | — |   | — |   | — |   |
| Net (loss)  income from continuing operations                                                             |       | (634.6                      | )          | 81.5 |   | 60.1 |   | 115.8 |   | (231.2 | ) |
| Income (loss)  from discontinued operations, net of tax (11)                                              |       | 3.3                         |       | 25.3 |   | 48.1 |   | (23.0 | ) | 15.1 |   |
| Gain on sale of  discontinued operations, net of tax (12)                                                 |       | 42.9                        |       | 210.4 |   | — |   | — |   | — |   |
| Minority  interest in discontinued operations (13)                                                        |       | —                      |       | (0.1 | ) | (5.2 | ) | 3.0 |   | — |   |
| Net (loss)  income                                                                                        |       | $                           | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   | $ | 95.8 |   | $ | (216.1 | ) |
|                                                                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Net (loss)  income from continuing operations applicable to common shareholders - basic  and diluted (14) |       | $                           | (634.6     | ) | $ | 81.5 |   | $ | 60.1 |   | $ | 111.5 |   | $ | (235.4 | ) |
| Net (loss)  income applicable to common shareholders - basic and diluted (14)                             |       | $                           | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   | $ | 91.5 |   | $ | (220.3 | ) |
|                                                                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| **(Loss)  earnings per common share data (15):**                                                          | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic (loss)  earnings per common share:                                                                  |       |                        |       |   |   |   |   |   |   |   |   |
| (Loss) earnings  from continuing operations                                                               |       | $                           | (8.58      | ) | $ | 1.10 |   | $ | 0.81 |   | $ | 1.89 |   | $ | (7.12 | ) |
| Earnings (loss)  from discontinued operations, net of tax                                                 |       | 0.63                        |       | 3.20 |   | 0.59 |   | (0.34 | ) | 0.46 |   |
| Basic (loss)  earnings per share                                                                          |       | $                           | (7.95      | ) | $ | 4.30 |   | $ | 1.40 |   | $ | 1.55 |   | $ | (6.66 | ) |
| Weighted average  number of shares outstanding                                                            |       | 73,983                      |       | 73,817 |   | 73,782 |   | 59,133 |   | 33,054 |   |
| Diluted (loss)  earnings per common share:                                                                |       |                        |       |   |   |   |   |   |   |   |   |
| (Loss) earnings  from continuing operations                                                               |       | $                           | (8.58      | ) | $ | 1.07 |   | $ | 0.80 |   | $ | 1.86 |   | $ | (7.12 | ) |
| Earnings (loss)  from discontinued operations, net of tax                                                 |       | 0.63                        |       | 3.09 |   | 0.57 |   | (0.34 | ) | 0.46 |   |
| Diluted (loss)  earnings per share                                                                        |       | $                           | (7.95      | ) | $ | 4.16 |   | $ | 1.37 |   | $ | 1.52 |   | $ | (6.66 | ) |
| Weighted average  number of shares outstanding                                                            |       | 73,983                      |       | 76,279 |   | 75,044 |   | 60,002 |   | 33,054 |   |
|                                                                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| **Cash  flow data:**                                                                                      | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash provided  by operating activities                                                                |       | $                           | 296.6      |   | $ | 368.5 |   | $ | 302.6 |   | $ | 257.6 |   | $ | 162.3 |   |
| Net cash (used  in) provided by investing activities                                                      |       | (295.5                      | )          | 377.6 |   | (248.8 | ) | (276.6 | ) | (2,232.9 | ) |
| Net cash  provided by (used in) financing activities                                                      |       | 104.7                       |       | (411.8 | ) | (102.7 | ) | 8.9 |   | 2,134.4 |   |
| Effect of  exchange rate changes on cash                                                                  |       | 12.8                        |       | (10.3 | ) | (13.8 | ) | 1.0 |   | 5.6 |   |
| Net increase  (decrease) in cash and cash equivalents                                                     |       | $                           | 118.6      |   | $ | 324.0 |   | $ | (62.7 | ) | $ | (9.1 | ) | $ | 69.4 |   |

 

36

----

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| **($ in millions)**                              | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Other  data:**                                      | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation and  amortization                        |       | $                           | 258.9      |   | $ | 211.7 |   | $ | 174.4 |   | $ | 156.7 |   | $ | 90.3 |   |
| Capital  expenditures, excluding capital leases       |       | 224.0                       |       | 193.2 |   | 165.1 |   | 159.4 |   | 73.9 |   |
| EBITDA (16)                                           |       | (258.1                      | )          | 571.2 |   | 493.3 |   | 539.7 |   | 43.5 |   |
| Non-cash charges  and (gains) included in EBITDA (17) |       | 841.8                       |       | (3.7 | ) | (6.4 | ) | (98.8 | ) | 149.9 |   |
| Other special  charges included in EBITDA (18)        |       | 55.2                        |       | 34.9 |   | 19.0 |   | 38.3 |   | 79.7 |   |
|                                                       |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| **($ in millions)**                         | ** ** | **2008**               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Balance  sheet data:**                         | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                       |       | $                      | 468.7      |   | $ | 350.1 |   | $ | 27.7 |   | $ | 100.5 |   | $ | 91.3 |   |
| Working capital  (19)                            |       | 987.5                  |       | 818.3 |   | 857.1 |   | 779.1 |   | 934.3 |   |
| Property, plant  and equipment, net              |       | 1,752.2                |       | 1,508.5 |   | 1,296.3 |   | 1,156.8 |   | 1,236.8 |   |
| Total assets                                     |       | 5,177.3                |       | 5,514.9 |   | 5,219.9 |   | 4,816.5 |   | 5,388.6 |   |
| Total long-term  debt, including current portion |       | 2,811.2                |       | 2,581.4 |   | 2,838.7 |   | 2,761.2 |   | 3,280.5 |   |
| Redeemable  convertible preferred stock          |       | —                 |       | — |   | — |   | — |   | 34.3 |   |
| Stockholders’  equity                       |       | 823.5                  |       | 1,571.6 |   | 1,120.5 |   | 834.7 |   | 624.0 |   |
|                                                  |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                As part of our annual goodwill impairment review, werecorded a goodwill impairment charge of $809.5 million in the fourth quarterof 2008 (See Note 7, “Goodwill,” for further details).  We recorded impairment charges of $2.2million related to the write-down of property, plant and equipment in 2006within our Specialty Chemicals segment and $0.4 million related to the write-downof property, plant and equipment in 2005 within our Performance Additivessegment. As part of our impairment testing in 2004, we determined that therewere goodwill impairments of $4.0 million in the wafer reclaim business in ourformer Electronics segment. We also determined that there was a property, plantand equipment impairment of $7.0 million in 2004 in the wafer reclaim businessin our former Electronics segment.

 

(2)                Restructuring and other severance costs includecertain expenses incurred in connection with severance charges and asset write-offsrelated to consolidations and cessations of certain of our operations.  In 2008, we recorded $35.3 million ofrestructuring and other severance costs primarily related to headcountreductions throughout the Company.  SeeNote 16, “Restructuring And Other Severance Costs,” for further details.

 

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

 

(4)                We recorded net gains of $2.4 million, $4.7 million,$0.3 million and $4.4 million for the years ended December 31, 2008, 2007,2006 and 2005, respectively, related to asset sales. The gain recorded for theyear ended December 31, 2008 primarily relates to the sale of land thatwas acquired as part of the acquisition of Dynamit Nobel in 2004, partiallyoffset by the liquidation of a joint venture in the Titanium Dioxide Pigmentssegment. The gain recorded for the year ended December 31, 2007 primarilyrelates to the sale of the U.S. wafer reclaim business that was part of theformer Electronics segment.

 

(5)                For the years ended December 31, 2008, 2007,2006, 2005 and 2004, interest expense included (losses) gains of $(51.5)million, $(32.2) million, $7.2 million, $22.4 million and $6.0 million,respectively, representing the movement in the mark-to-market valuation of ourinterest rate and cross-currency swaps for the periods. In addition, for theyears ended December 31, 2008, 2007, 2006, 2005 and 2004, interestexpense, net includes $9.6 million, $9.2 million, $9.5 million, $10.6 millionand $7.2 million, respectively, of amortization expense related to deferredfinancing costs.

 

(6)                In the fourth quarter of 2008, we redeemed €11.0million of our 2014 Notes at a discount and recorded a gain of $4.0 million. Inthe second quarter of 2007, we paid a redemption premium of $14.5 million andwrote off $4.1 million of deferred financing costs associated with theredemption of the 2011 Notes on May 15, 2007. In the third quarter of2005, we paid a redemption premium of $13.2 million to redeem long-term debtand wrote off $13.0 million of deferred financing costs associated with thedebt repaid in connection with the IPO.

 

(7)                In March 2007, we expensed $0.9 million relatedto the fourth amendment of the senior secured credit agreement to refinance alloutstanding borrowings under the tranche F term loans with new tranche G termloans. In December 2005, we expensed $1.0 million in connection with thethird amendment under the senior secured credit facilities. In 2004, we wroteoff $27.0 million of deferred financing costs in connection with debt repaymentand refinancing.

 

(8)                Foreign exchange (loss) gain represents thetranslation impact on non-operating euro denominated transactions and intercompanyfinancing arrangements. In 2004, this amount also included a $10.9 million mark-to-marketrealized loss on foreign currency derivative agreements that we entered into inconnection with the Dynamit Nobel Acquisition.

 

37

----

 
| (9)    |   | The Company recorded $1.8 million of income in 2006  primarily related to the correction of an error related to a previously  unrecorded asset in the Titanium Dioxide Pigments segment. The effect of this  adjustment to our consolidated financial statements for the year ended  December 31, 2005 is not material. In 2005, we recorded $2.6 million of  income primarily related to the reversal of a bad debt reserve of $2.9  million related to a note receivable from the buyer in connection with the  sale of a business by Dynamit Nobel prior to the Dynamit Nobel Acquisition  for which the cash was collected from the buyer in 2005. In 2004, the loss of  $2.8 million primarily relates to a stamp duty tax paid on certain assets  transferred in the United Kingdom in connection with the KKR Acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (10)   |   | Minority interest in continuing operations  represents the total of the minority party’s interest in certain investments  (principally the Viance, LLC joint venture and the Titanium Dioxide Pigments  venture).  In 2008, minority interest includes  the goodwill impairment charge recorded in the Titanium Dioxide Pigments  venture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (11)   |   | As noted above, we sold our Groupe Novasep  subsidiary in January 2007, our Electronics business, excluding our  European wafer reclaim business, in December 2007 and our pool and spa  chemicals business in October 2008.   The results of these businesses have been accounted for as  discontinued operations in the accompanying Consolidated Statements of  Operations for all periods presented (see Note 2, “Discontinued Operations,”  for further details).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | An impairment charge of $44.7 million was recorded  in 2005 primarily related to the write-down of property, plant and equipment  in conjunction with the downsizing of the Rohner facility within our former  Groupe Novasep segment. In addition, in March 2006, we sold Rohner AG  and recorded a pre-tax loss of $11.5 million.   These items were recorded in discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (12)   |   | Primarily related to a gain of $40.5 million (net of  tax) in 2008 on the sale of the pool and spa chemicals business and gains in  2007 of $115.6 million (net of tax) on the sale of Groupe Novasep and $94.8  million (net of tax) on the sale of the Electronics business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (13)   |   | Represents the minority interest in discontinued  operations related to the Groupe Novasep subsidiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (14)   |   | Represents the net income (loss) applicable to  common shareholders after reducing net income (loss) by the amount of  accumulated and unpaid dividends and the accretion to the redemption value of  the redeemable convertible preferred stock for the respective period. See  Note 14, “Earnings Per Share.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (15)   |   | Net earnings (loss) per share is calculated by  dividing net income (loss) applicable to common shareholders by the weighted  average shares outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (16)   |   | EBITDA is defined as net income (loss) plus interest  expense, net, income tax provision (benefit) and depreciation and  amortization. EBITDA is not a recognized term under U.S. GAAP and does not  purport to be an alternative to net income (loss) as an indicator of  operating performance or to cash flows from operating activities as a measure  of liquidity. Additionally, EBITDA is not intended to be a measure of free  cash flow for management’s discretionary use, as it does not consider certain  cash requirements such as interest payments, tax payments and debt service  requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | The amounts shown for EBITDA differ from the amounts  calculated under the definition of consolidated EBITDA used in our debt  agreements. The definition of EBITDA used in our debt agreements permits  further adjustments for certain cash and non-cash charges and gains; the  indenture governing the 2014 Notes and the facility agreement governing the  Titanium Dioxide Pigments venture exclude certain adjustments permitted under  the senior secured credit agreement. Consolidated EBITDA as adjusted  (“Adjusted EBITDA”) is used in our debt agreements to determine compliance  with financial covenants and our ability to engage in certain activities,  such as incurring additional debt and making certain payments. In addition to  covenant compliance, our management also uses Adjusted EBITDA to assess our  operating performance and to calculate performance-based cash bonuses and  determine whether certain performance-based stock options vest, as both such  bonuses and options are tied to Adjusted EBITDA targets. For a discussion of  the adjustments, uses and the limitations on the use of Adjusted EBITDA, see  Item 7, “Management’s Discussion and Analysis of Financial Condition and  Results of Operations—Factors Which Affect Our Results of Operations—Special  Note Regarding Non-GAAP Financial Measures.” |

 

38

----

 

The following table setsforth a reconciliation of net income (loss) to EBITDA for the periodsindicated:

 
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (loss)  income                                                 |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   | $ | 95.8 |   | $ | (216.1 | ) |
| (Income) loss  from discontinued operations, net of tax            |       | (3.3                                       | )          | (25.3 | ) | (48.1 | ) | 23.0 |   | (15.1 | ) |
| Gain on sale of  discontinued operations, net of tax               |       | (42.9                                      | )          | (210.4 | ) | — |   | — |   | — |   |
| Minority  interest in discontinued operations                      |       | —                                     |       | 0.1 |   | 5.2 |   | (3.0 | ) | — |   |
| Net (loss)  income from continuing operations                      |       | (634.6                                     | )          | 81.5 |   | 60.1 |   | 115.8 |   | (231.2 | ) |
| Minority  interest in continuing operations (a)                    |       | (83.6                                      | )          | 7.9 |   | — |   | — |   | — |   |
| (Loss) income  from continuing operations before minority interest |       | (718.2                                     | )          | 89.4 |   | 60.1 |   | 115.8 |   | (231.2 | ) |
| Income tax  (benefit) provision                                    |       | (23.9                                      | )          | 62.3 |   | 61.3 |   | 55.6 |   | 21.4 |   |
| Interest expense                                                   |       | 231.1                                      |       | 219.3 |   | 199.9 |   | 221.5 |   | 165.0 |   |
| Interest income                                                    |       | (6.0                                       | )          | (11.5 | ) | (2.4 | ) | (9.9 | ) | (2.0 | ) |
| Depreciation and  amortization                                     |       | 258.9                                      |       | 211.7 |   | 174.4 |   | 156.7 |   | 90.3 |   |
| EBITDA                                                             |       | $                                          | (258.1     | ) | $ | 571.2 |   | $ | 493.3 |   | $ | 539.7 |   | $ | 43.5 |   |

 

----

| (a)    |   | Minority interest in continuing operations  represents the total of the minority party’s interest in certain investments  (principally the Viance, LLC joint venture and the Titanium Dioxide Pigments  venture).                                                                                                                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| (17)   |   | EBITDA, as defined above, contains the following  non-cash charges and gains for which we believe adjustment is permitted under  our senior secured credit agreement, each of which is described under Item 7,  “Management’s Discussion and Analysis of Financial Condition and Results of  Operations—Factors Which Affect Our Results of Operations—Special Charges and  Credits”: |

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Impairment  charges                        |       | $                                          | 809.5      |   | $ | — |   | $ | 2.2 |   | $ | 0.4 |   | $ | 11.0 |   |
| Write-off of  deferred debt issuance costs |       | —                                     |       | 4.1 | (a) | — |   | 13.0 | (a) | 25.0 |   |
| Foreign exchange  loss (gain)              |       | 32.3                                       |       | (7.8 | ) | (8.6 | ) | (112.2 | ) | 113.9 |   |
|                                       |       | $                                          | 841.8      |   | $ | (3.7 | ) | $ | (6.4 | ) | $ | (98.8 | ) | $ | 149.9 |   |

 

----

| (a)    |   | Represents pre-tax charges of $4.1 million related  to the write-off of deferred debt issuance costs associated with the  redemption of the 2011 Notes in May 2007 and pre-tax charges of $13.0  million related to the write-off of deferred debt issuance costs associated  with debt repaid with IPO proceeds in 2005.  These amounts are reported  in “loss on early extinguishment of debt” in the Consolidated Statements of  Operations. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (18)   |   | In addition to non-cash charges and gains, our  EBITDA contains the following other special charges and gains for which we  believe adjustment is permitted under our senior secured credit agreement,  each of which is described under Item 7, “Management’s Discussion and  Analysis of Financial Condition and Results of Operations—Factors Which  Affect Our Results of Operations—Special Charges and Credits”:                     |

 

39

----

 
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                          | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Restructuring  and other severance costs (a)           |       | $                                          | 35.3       |   | $ | 12.0 |   | $ | 5.3 |   | $ | 15.7 |   | $ | 1.1 |   |
| Systems/organization  establishment expenses           |       | 12.9                                       |       | 4.2 |   | 10.7 |   | 3.9 |   | 4.8 |   |
| Acquisition and  disposal costs                        |       | 1.7                                        |       | 2.3 |   | 1.9 |   | 1.1 |   | 0.3 |   |
| Stamp duty tax                                         |       | —                                     |       | — |   | — |   | — |   | 4.0 |   |
| Inventory  write-up charges                            |       | 6.9                                        |       | 5.7 |   | 1.1 |   | — |   | 53.8 |   |
| Long-term debt  redemption (discount) premium          |       | (4.0                                       | )          | 14.5 |   | — |   | 13.2 |   | — |   |
| Refinancing  expenses                                  |       | —                                     |       | 0.9 |   | — |   | 1.0 |   | 2.0 |   |
| Management  services agreement termination fee         |       | —                                     |       | — |   | — |   | 10.0 |   | — |   |
| Gain on sale of  assets and other                      |       | (2.4                                       | )          | (4.7 | ) | (0.3 | ) | (4.4 | ) | — |   |
| Acquired  in-process research and development          |       | 2.9                                        |       | — |   | — |   | — |   | — |   |
| Foreign exchange  loss on foreign currency derivatives |       | —                                     |       | — |   | — |   | — |   | 10.9 |   |
| Other                                                  |       | 1.9                                        |       | — |   | 0.3 |   | (2.2 | ) | 2.8 |   |
|                                                   |       | $                                          | 55.2       |   | $ | 34.9 |   | $ | 19.0 |   | $ | 38.3 |   | $ | 79.7 |   |

 

----

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

 

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

 

The EBITDA amounts in the above tables do not include $1.8 million,$68.3 million, $51.9 million and $20.6 million for the years ended December 31,2007, 2006, 2005 and 2004, respectively, of Adjusted EBITDA from the formerGroupe Novasep segment which was sold on January 9, 2007; $37.6 million,$35.3 million, $28.9 million and $28.2 million for the years ended December 31,2007, 2006, 2005 and 2004, respectively, of Adjusted EBITDA from theElectronics business sold on December 31, 2007; and $5.4 million, $12.0million, $12.0 million, $10.9 million and $10.5 million for the years ended December 31,2008, 2007, 2006, 2005 and 2004, respectively, of Adjusted EBITDA from the pooland spa chemicals business sold on October 10, 2008.

 

**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

*In 2008, we completed the sale ofour pool and spa chemicals business and in 2007, we completed the sale of ourGroupe Novasep and Electronics segments, excluding our European wafer reclaimbusiness. As a result, our consolidated financial statements have beenreclassified to reflect these segments as discontinued operations for allperiods presented. See Note 2, “Discontinued Operations,” for further details.*

 

*The following discussion containsforward-looking statements that involve numerous risks and uncertainties. Ouractual results could differ materially from those discussed in theforward-looking statements as a result of these risks and uncertainties,including those set forth under Item 1, “Business—Forward-Looking Statements”and Item 1A, “Risk Factors.” You should read the following discussion andanalysis together with Item 6, “Selected Financial Data,” our consolidatedfinancial statements and the notes to those statements that appear elsewhere inthis Annual Report. Amounts may not recalculate due to rounding differences.*

 

*Unless otherwise noted, all balanceswhich are denominated in euros are converted at the December 31, 2008exchange rate of €1.00 = $1.3971.*

 

**General**

 

We are a global developer, manufacturer and marketer of technologicallyadvanced, high value-added specialty chemicals and advanced materials. We servemore than 60,000 customers across a wide variety of industries and geographicareas. We operate through five business segments: (1) Specialty Chemicals;(2) Performance Additives; (3) Titanium Dioxide Pigments; (4) AdvancedCeramics; and (5) Specialty Compounds.

 

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

 

Our cost of products sold consists of variable and fixed components.Our variable costs are proportional to volume and consist principally of rawmaterials, packaging and related supplies, certain energy costs, and certaindistribution costs including inbound, outbound, and internal shipping andtransfer costs. Our fixed costs are not significantly impacted by productionvolume and consist principally of certain fixed manufacturing costs and otherdistribution network costs, including warehousing. Fixed manufacturing 

 

40

----

 

costs comprise headcount-related costs and overhead, includingdepreciation, periodic maintenance costs, purchasing and receiving costs,inspection costs and certain energy costs.

 

Our selling, general and administrative expenses include research anddevelopment costs, sales and marketing, divisional management expenses andcorporate services including cash management, legal, benefit planadministration and other administrative and professional services.

 

We are focused on growth, productivity, cost reduction, marginexpansion, bolt-on acquisitions, divestment of non-core businesses and debtreduction. In connection with this focus, among other things:

 

·                  Wehave cut costs, reduced overhead and eliminated duplicative positions in bothacquired and existing businesses. In 2007, we closed two U.K. facilitiesacquired in a 2006 acquisition by our Specialty Compounds segment.  We also implemented a restructuring plan in March 2008in our Color Pigments and Services business in connection with the businessacquired from Elementis plc.  Thisincluded the reorganization and relocation of the North American Finance and ITservices and the closure of three manufacturing facilities. In the fourthquarter of 2008, a restructuring plan was implemented in our SurfaceTreatment business within our Specialty Chemicals segment which includedheadcount reductions and the closure of two manufacturing facilities by mid2009.

 

·                  Inthe fourth quarter of 2008, we reduced overhead and eliminated duplicativepositions throughout the Company as part of our global cost controlinitiatives.

 

·                  Weacquired the global color pigments business of Elementis plc in August 2007that is included in our Color Pigments and Service business within ourPerformance Additives segment. In August 2008, we acquired HollidayPigments, which is also included in our Color Pigments and Service business,and in September 2008, we acquired Nalco’s Finishing Technologies businesswhich is included in our Specialty Chemicals segment;

 

·                  Wecompleted the Titanium Dioxide Pigments venture with Kemira in September 2008.See Note 4, “Acquisitions,” for further details; and

 

·                  Wecompleted the sale of our Groupe Novasep segment in January 2007 and ourUnited States wafer reclaim business in February 2007.  In December 2007, we completed the saleof our Electronics business, excluding our European wafer reclaim business andin October 2008, we completed the sale of our pool and spa chemicalsbusiness.

 

**Factors Which Affect Our Results ofOperations**

 

**Our Markets**

 

Because the businesses in our segments generally serve many unrelatedend-use markets, we discuss the principal market conditions on a segment basisrather than a consolidated basis. The principal market conditions in oursegments and regions in which we operate that impacted our results ofoperations during the periods presented include the following:

 

***Specialty Chemicals***

 

·                  Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aerospace industries. Sales growth in the SurfaceTreatment business occurred in 2007 and continued in 2008 in most markets andregions served, primarily aerospace, general industrial and European automotiveindustries. This growth was driven by price increases and the impact ofbolt-on acquisitions made in December 2007 and September 2008 thatoffset raw material cost increases and lower volumes from a slowdown in theautomotive markets.  Results in 2009could be negatively impacted by economic downturns in all business sectors andregions.

 

·                  Demandfor our lithium products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven by demand for lithium carbonate inindustrial applications, the aluminum business, glass ceramics, cement and thegeneral demand in China. Sales of lithium products specifically used in lifescience applications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. Growth in the FineChemicals business occurred in 2007 and continued in 2008 in most marketsegments, driven by price increases and higher sales volumes of lithiumapplications.  However, the economicdownturn could have a negative impact on our results in 2009.

 

***PerformanceAdditives***

 

·                  Generally,a trend towards the increased use of colored concrete products in the NorthAmerican construction market has historically had a positive effect on ourColor Pigments and Services business line. However, a general slowdown inthe construction market negatively impacted North American construction salesbeginning in 2007. North American volumes were 

 

41

----

 

lower in 2008 and areexpected to be down again in 2009 due to the severe contraction in theconstruction industry. Sales in our Color Pigments and Services business inNorth America were favorably impacted in 2008 by the acquisition of the globalcolor pigments business of Elementis plc in August 2007 and theacquisition of Holliday Pigments in August 2008, as well as higher sellingprices implemented to help recover raw material and energy costincreases. Unlike North America, construction volumes in Europe in ourColor Pigments and Services business increased slightly in 2007. However,weaker economic conditions in Europe resulted in a reduction in Europeanconstruction volumes in 2008 and we expect this trend to continue in 2009.

 

·                  Thechange in the market to environmentally advanced wood treatment chemicalproducts, such as alkaline copper quaternary, or ACQ, and the phase out ofchromated copper arsenate, or CCA, for residential use previously had a positiveimpact on the Timber Treatment Chemicals business, which is a leading supplierof these higher margin products. However, the market position of ACQ wasnegatively impacted in 2007 and 2008 by customer shifts to substitute products,a general slowdown in the construction market and the use of wood substitutes.These trends are expected to continue in 2009. The expiration of the ACQ patentin May 2007 had a negative impact on our results of operations, as atleast one new competitor has entered the market and others may follow.  We recently introduced our newest *Ecolife* system which utilizes *Ecovance,*a high-performance non-metallic preservative withenhanced environmental benefits. Commercialization began in 2008, but did nothave a significant impact in 2008 and is not expected to have a significantimpact in 2009.

 

·                  Inthe Clay-based Additives business, sales were up slightly in 2007 and continuedto increase in 2008 as increased selling prices and volumes for oilfieldapplications and increased selling prices of coatings and inks were partiallyoffset by lower volumes of coatings and carbonless applications.  As a result of the economic slowdown, salesvolumes are expected to be lower in 2009.

 

·                  Rawmaterial costs have increased in general in the Performance Additives segment,in particular, iron oxide for Color Pigments and Services, quaternary amine (“quat”)for Clay-based Additives and monoethanolamine (“MEA”) for Timber TreatmentChemicals. Our ability to pass on additional selling price increases forraw material increases in 2009 is uncertain in these businesses.

 

***Titanium DioxidePigments***

 

·                  Demandfor our titanium dioxide products in anatase grade is driven mainly by demandin the synthetic fiber industry, while demand for titanium dioxide products inrutile grade and our functional additives is driven by demand in the coatings,construction, cosmetics, pharmaceutical, food, paper and plasticsindustries. Market conditions, including pricing pressure and currentindustry overcapacity, have continued to negatively impact thissegment. Volumes and selling prices in the fiber anatase businessdecreased in 2007 and continued to decline in 2008.  While sales of titanium dioxide products inrutile grade were up slightly in 2007 on increased volumes, sales of theseproducts were down in 2008 due to lower selling prices, partially offset byslightly higher volumes.  Our functionaladditives business increased in 2007 on higher selling prices and volumes, butwas down in 2008 on lower volumes.  Theeconomic downturn could have a negative impact on the results of theseapplications in 2009.

 

·                  Asdiscussed in Note 4, “Acquisitions,” we completed the formation of a venturewith Kemira on September 1, 2008 that focuses on producing and marketingspecialty titanium dioxide pigments for the synthetic fiber, packaging inks,cosmetics, pharmaceutical and food industries.

 

***Advanced Ceramics***

 

·                  Demandfor our ceramic medical devices is mainly tied to the aging population inEurope and the United States. Although the volume of our products used inmedical device applications sold experienced double-digit growth each year from2001 through 2005, in 2006 some customers in the U.S. reduced their demand dueto high inventory levels and delayed approvals resulting in lower volumes.However, sales of our medical device applications increased in 2007 on highervolumes and continued to increase in 2008. We expect this trend to continuethroughout 2009.

 

·                  Despitethe negative impact of pricing pressure from Asian competitors, sales ofceramic products for use in cutting tool products were higher in 2007 due tovolume increases and new customer projects. Volumes of cutting toolapplications were up slightly in 2008.  Sales of mechanical systems andapplications were up in 2007, but were lower in 2008 on decreased volumes.Sales of electronic applications were lower in 2007 primarily on decreasedvolumes and continued to decrease in 2008 on lower selling prices andvolumes.  Sales of our multi-functionalapplications were higher in 2007 from increased volumes, but were down in 2008from lower volumes and selling prices.

 

Volumes for theseapplications, particularly cutting tools, electronics and multi-functional, areexpected to be lower in 2009 as they are negatively impacted by the economicdownturn, particularly in the automotive industry.

 

42

----

 

***Specialty Compounds***

 

·                  Ourlargest product line in the Specialty Compounds segment is wire and cablecompounds. Sales within this product line are dependent upon thetelecommunications market and related sectors, specifically demand for high-endvoice and data communication wire and cable, for which our Specialty Compoundssegment is a significant provider of sheathing materials. Newly developed non-halogenproducts for wire and cable data communication, military and other applicationshave expanded business in North America for those applications and createdopportunities in Europe. Although sales of wire and cable products were upslightly in 2007, sales growth was due to the acquisition of the Megolondivision of Scapa Group, plc. As a result of a general downturn in the wire andcable market, volumes of wire and cable products were down slightly in 2008 andare expected to decline in 2009.

 

·                  Mostof the other end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product, but many are alsoapplication specific, such as automotive. We are focusing more of our effortstowards increasing high margin specialty products, in particular, thermoplasticelastomers, and less of our efforts in automotive and footwear. Our net salesin consumer/industrial thermoplastic elastomers were up in 2007, but were flatin 2008.  Net sales of regulatedpackaging were lower in 2007 and 2008 and are expected to continue to declinein 2009.

 

·                  Rawmaterial prices for polyvinyl chloride (“PVC”) resin and plasticizers, key rawmaterials used in the production of wire and cable products, were slightlylower in 2007, but were up in 2008.  We expect the prices of PVC resin andplasticizers to be lower in 2009.

 

**Global Exposure**

 

We operate a geographically diverse business. Of our 2008 net sales,54% were shipments to Europe, 29% to North America (predominantly the UnitedStates) and 17% to the rest of the world. For a geographic description of theorigin of our net sales and location of our long-lived assets, see Note 3, “SegmentInformation.”

 

We estimate that we sold to customers in more than 60 countries duringthis period. Currently, we serve our diverse and extensive customer base with96 manufacturing facilities in 26 countries. Consequently, we are exposed toglobal economic and political changes, particularly currency fluctuations thatcould impact our profitability and demand for our products.

 

Our sales and production costs are mainly denominated in U.S. dollarsor euros. Our results of operations and financial condition have beenhistorically impacted by the fluctuation of the euro against our reportingcurrency, the U.S. dollar. For the year ended December 31, 2008, theaverage exchange rate of the euro against the U.S. dollar was higher comparedto 2007. As a result, our net sales, gross profit and operating income werepositively impacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

**Raw Materials**

 

Raw materials constituted approximately 52% of our 2008 cost ofproducts sold. We have a broad raw material base, with the cost of no singleraw material representing more than 3% of our cost of products sold in 2008.Nonetheless, the significant price fluctuations our raw materials haveexperienced in the past during periods of high demand have had an adverseimpact on our results of operations. In particular, higher prices foriron-oxide used in the Color Pigments business of our Performance Additivessegment had a negative impact on results in 2007 and 2008.  We cannot accurately predict the impact ofany future price increases for raw materials or any raw material shortages onour business as a whole or in specific geographic regions. In addition, we maynot be able to pass on raw material price increases to our customers.  Seedetails of our ten most significant raw materials (in terms of dollars) in Item1, “Business — Raw Materials.”

 

**Energy Costs**

 

In 2008, energy purchases represented approximately 7% of our cost ofproducts sold. However, within certain business lines, such as our TitaniumDioxide Pigments segment and the Color Pigments and Services and Clay-basedAdditives businesses of our Performance Additives segment, energy costs aremore significant. The cost of products sold for certain of our businesses,including Color Pigments and Services and Clay-based Additives, increases whenthe price of natural gas in North America rises. Natural gas prices in NorthAmerica were relatively stable in 2007, but were higher during 2008.  Natural gas prices in Europe, where ourTitanium Dioxide Pigments segment is located, have historically been relativelystable, although prices were higher in 2007 and 2008 compared to prior years.

 

**Income Taxes**

 

As of December 31, 2008, the Company has U.S. federal and foreigncorporate tax loss carryforwards (excluding state and local 

 

43

----

 

amounts) of approximately $197.6 million, of which $43.5 million expirein years 2009 through 2028 and of which $154.1 million have no currentexpiration date. Included in the U.S. federal and foreign carryforwards areU.S. federal tax loss carryforwards of $24.1 million that expire in yearsthrough 2027, of which $1.2 million are subject to limitations. The Company alsohas state and local tax loss carryforwards of approximately $204.5 millionexpiring in years 2009 through 2028.

 

The worldwide valuation allowance decreased by $15.2 million to $84.7million at December 31, 2008. Of this amount, $42.1 million was a chargeto income tax expense, $16.3 million represented a decrease to othercomprehensive income, $35.4 million was reversed primarily as a result of thereduction in U.S. deferred tax assets due to the sale of the pool and spachemicals business and $2.8 million represented a decrease recorded togoodwill. The remainder related to foreign currency translation adjustments andother balance sheet items.

 

**Acquisitions**

 

During the periods presented, we made certain selective acquisitionsand strategic transactions pursuant to our business strategy of achievingprofitable growth. See Note 4, “Acquisitions,” for further details.

 

**Special Charges and Credits**

 

During the periods presented, we incurred certain special charges thatincluded goodwill impairment charges, systems/organization establishmentexpenses, restructuring and other severance costs, foreign exchange gains andlosses and inventory write-up charges. See “Items excluded from Adjusted EBITDA”section in Note 3, “Segment Information,” for a discussion of special chargesand credits recorded in the years ended December 31, 2008, 2007 and 2006.

 

**Special Note Regarding Non-GAAPFinancial Measures**

 

A non-GAAP financial measure is generally defined by the SEC as onethat purports to measure historical or future financial performance, financialposition or cash flows but excludes or includes amounts that would not be soadjusted in the most comparable U.S. GAAP measure. From time to time in thismanagement’s discussion and analysis, we disclose non-GAAP financial measures,primarily Adjusted EBITDA, as defined below.

 

**Definition of Adjusted EBITDA**

 

The presentation of consolidated Adjusted EBITDA contained in thisreport is calculated using the definition set forth in the senior securedcredit agreement as a basis and reflects management’s interpretations thereof.Adjusted EBITDA, which is referred to under the senior secured credit agreementas “Consolidated EBITDA,” is defined in the senior secured credit agreement asconsolidated earnings (which, as defined in the senior secured creditagreement, equals income (loss) before the deduction of income taxes ofRockwood Specialties Group, Inc. and the Restricted Subsidiaries (as suchterm is defined in the senior secured credit agreement), excludingextraordinary items) plus:

 

·                  interestexpense;

·                  depreciationexpense;

·                  amortizationexpense, including amortization of deferred financing fees;

·                  extraordinarylosses and non-recurring charges;

·                  non-cashcharges;

·                  losseson asset sales;

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

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

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

·                  anyfees and expenses related to permitted acquisitions;

·                  anydeduction for minority interest expense; and

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

 

less:

 

·                  extraordinarygains and non-recurring gains;

·                  non-cashgains; and

·                  gainson asset sales,

 

44

----

 

in all cases, subject to certain exclusions.

 

For presentation purposes within this report, we use the computationset forth in our senior secured credit agreement as a basis which reflectsmanagement’s interpretations thereof. Management has determined thatstock-based compensation costs, which are non-cash charges, will not be anadjustment in calculating Adjusted EBITDA as these costs will be an ongoingrecurring cost to the Company. These costs are recorded in selling, general andadministrative expenses in the Consolidated Statements of Operations.Specifically, the calculation of Adjusted EBITDA according to the indentureunderlying our 2014 Notes and the facility agreement governing our TitaniumDioxide Pigments venture excludes certain adjustments prescribed within thesenior secured credit agreement. Given that borrowings under the senior securedcredit agreement are secured by most of our assets and given that thecalculation does not materially differ from the calculation of Adjusted EBITDAfor performance measurement purposes, we believe this is the most appropriatecomputation of Adjusted EBITDA to present.

 

**Management’s Uses**

 

We use Adjusted EBITDA on a consolidated basis to assess our operatingperformance. We believe this financial measure on a consolidated basis ishelpful in highlighting trends in our overall business because the itemsexcluded in calculating Adjusted EBITDA have been deemed by management to havelittle or no bearing on our day-to-day operating performance. It is also themost significant criterion in our calculation of performance-based cash bonusesand our determination of whether certain performance-based stock options andrestricted stock units vest, all of which are tied to Adjusted EBITDA targets.

 

We also use Adjusted EBITDA on a consolidated basis as a liquiditymeasure. We believe this financial measure on a consolidated basis is importantin analyzing our liquidity because our senior secured credit agreement andindenture governing the 2014 Notes contain financial covenants that aredetermined based on Adjusted EBITDA. These covenants are material terms ofthese agreements, because they govern substantially all of our long-term debt,which in turn represents a substantial portion of our capitalization.Non-compliance with these financial covenants under our senior secured creditfacilities—our maximum total leverage ratio and our minimum interest coverageratio, in particular—could result in the lenders requiring us to immediatelyrepay all amounts borrowed. Any such acceleration could also lead to the noteholdersaccelerating the maturity of the 2014 Notes. In addition, if we cannot satisfythese financial covenants in the indenture governing the 2014 Notes, we cannotengage in certain activities, such as incurring additional indebtedness ormaking certain payments. Consequently, Adjusted EBITDA is critical to ourassessment of our liquidity.

 

We also use Adjusted EBITDA on a segment basis as the primary measureused by our chief operating decision maker, our Chief Executive Officer, toevaluate the ongoing performance of our business segments and reporting units.On a segment basis, we define Adjusted EBITDA as operating income excludingdepreciation and amortization, certain non-cash gains and charges, certainother special gains and charges determined by our senior management to benon-recurring gains and charges and certain items deemed by our seniormanagement to have little or no bearing on the day-to-day operating performanceof our business segments and reporting units. The adjustments made to operatingincome directly correlate with the adjustments to net income in calculatingAdjusted EBITDA on a consolidated basis pursuant to the senior secured creditagreement, which reflects management’s interpretations thereof.

 

**Limitations**

 

Adjusted EBITDA has limitations as an analytical tool, and should notbe viewed in isolation and is not a substitute for U.S. GAAP measures ofearnings and cash flows. Material limitations associated with making theadjustments to our earnings and cash flows to calculate Adjusted EBITDA, andusing this non-GAAP financial measure as compared to the most directlycomparable U.S. GAAP financial measures, include:

 

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

 

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

 

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

 

An investor or potential investor may find any one or all of theseitems important in evaluating our performance, results of operations, financialposition and liquidity. Management compensates for the limitations of usingnon-GAAP financial measures by using them only to supplement our U.S. GAAPresults to provide a more complete understanding of the factors and trendsaffecting our business.

 

45

----

 

Adjusted EBITDA is not an alternative to net income (loss) or income(loss) from continuing operations before taxes and minority interest oroperating income or cash flows from operating activities as calculated andpresented in accordance with U.S. GAAP. You should not rely on Adjusted EBITDAas a substitute for any such U.S. GAAP financial measures. We strongly urge youto review the reconciliations of Adjusted EBITDA to U.S. GAAP financialmeasures and other financial information, in each case included elsewhere inthis Annual Report. We also strongly urge you not to rely on any single financialmeasure to evaluate our business. Our measure of Adjusted EBITDA may not becomparable to those of other companies.

 

**Results of Operations**

 

**Actual Results of Operations**

 

The following table presents the major components of our operations onan actual basis and Adjusted EBITDA (the reconciliation to net (loss) income isset forth in—Reconciliation of Net (Loss) Income to Adjusted EBITDA for theyears ended December 31, 2008, 2007 and 2006), including as a percentageof net sales, for the periods presented. See Note 3, “Segment Information,” forsegment information and a reconciliation to income (loss) from continuingoperations before taxes and minority interest to Adjusted EBITDA on a segmentbasis.

 

46

----

 
| ** **                                                                  | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                               | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Statement  of operations data:**                                          |       |                                       |       |   |   |   |   |
| **Net  sales:**                                                             |       |                                       |       |   |   |   |   |
| Specialty  Chemicals                                                        |       | $                                          | 1,232.6    |   | $ | 1,082.9 |   | $ | 918.3 |   |
| Performance  Additives                                                      |       | 835.6                                      |       | 798.5 |   | 724.8 |   |
| Titanium Dioxide  Pigments                                                  |       | 534.8                                      |       | 442.9 |   | 409.1 |   |
| Advanced  Ceramics                                                          |       | 505.9                                      |       | 452.5 |   | 389.6 |   |
| Specialty  Compounds                                                        |       | 261.5                                      |       | 276.6 |   | 251.0 |   |
| Corporate and  other                                                        |       | 9.7                                        |       | 11.8 |   | 21.9 |   |
| Total net sales                                                             |       | 3,380.1                                    |       | 3,065.2 |   | 2,714.7 |   |
|                                                                        |       |                                       |       |   |   |   |   |
| Gross profit                                                                |       | 1,014.3                                    |       | 976.1 |   | 855.7 |   |
|                                                                        |       | 30.0                                       | %          | 31.8 | % | 31.5 | % |
| Selling, general  and administrative expenses                               |       | 661.3                                      |       | 597.6 |   | 540.4 |   |
|                                                                        |       | 19.6                                       | %          | 19.5 | % | 19.9 | % |
| Impairment  charges                                                         |       | 809.5                                      |       | — |   | 2.2 |   |
| Restructuring  and other severance costs                                    |       | 35.3                                       |       | 12.0 |   | 4.9 |   |
| Gain on sale of  assets and other                                           |       | (2.4                                       | )          | (4.7 | ) | (0.3 | ) |
| **Operating  income (loss):**                                               |       |                                       |       |   |   |   |   |
| Specialty  Chemicals                                                        |       | 223.7                                      |       | 206.9 |   | 155.0 |   |
|                                                                        |       | 18.1                                       | %          | 19.1 | % | 16.9 | % |
| Performance  Additives                                                      |       | (438.5                                     | )          | 81.5 |   | 79.7 |   |
|                                                                        |       | (52.5                                      | )%         | 10.2 | % | 11.0 | % |
| Titanium Dioxide  Pigments                                                  |       | (229.0                                     | )          | 38.4 |   | 45.8 |   |
|                                                                        |       | (42.8                                      | )%         | 8.7 | % | 11.2 | % |
| Advanced  Ceramics                                                          |       | 96.6                                       |       | 83.8 |   | 68.0 |   |
|                                                                        |       | 19.1                                       | %          | 18.5 | % | 17.5 | % |
| Specialty  Compounds                                                        |       | (83.9                                      | )          | 22.0 |   | 21.9 |   |
|                                                                        |       | (32.1                                      | )%         | 8.0 | % | 8.7 | % |
| Corporate and  other                                                        |       | (58.3                                      | )          | (61.4 | ) | (61.9 | ) |
| Total operating  (loss) income                                              |       | (489.4                                     | )          | 371.2 |   | 308.5 |   |
| **Other  expenses, net:**                                                   |       |                                       |       |   |   |   |   |
| Interest expense                                                            |       | (231.1                                     | )          | (219.3 | ) | (199.9 | ) |
| Interest income                                                             |       | 6.0                                        |       | 11.5 |   | 2.4 |   |
| Gain (loss) on  early extinguishment of debt                                |       | 4.0                                        |       | (18.6 | ) | — |   |
| Refinancing  expenses                                                       |       | —                                     |       | (0.9 | ) | — |   |
| Foreign exchange  (loss) gain, net                                          |       | (32.3                                      | )          | 7.8 |   | 8.6 |   |
| Other, net                                                                  |       | 0.7                                        |       | — |   | 1.8 |   |
| Other expenses,  net                                                        |       | (252.7                                     | )          | (219.5 | ) | (187.1 | ) |
| (Loss) income  from continuing operations before taxes andminority interest |       | (742.1                                     | )          | 151.7 |   | 121.4 |   |
| Income tax  (benefit) provision                                             |       | (23.9                                      | )          | 62.3 |   | 61.3 |   |
| (Loss) income  from continuing operations before minority interest          |       | (718.2                                     | )          | 89.4 |   | 60.1 |   |
| Minority  interest in continuing operations, net of tax                     |       | 83.6                                       |       | (7.9 | ) | — |   |
| Net (loss)  income from continuing operations                               |       | (634.6                                     | )          | 81.5 |   | 60.1 |   |
| Income from  discontinued operations, net of tax                            |       | 3.3                                        |       | 25.3 |   | 48.1 |   |
| Gain on sale of  discontinued operations, net of tax                        |       | 42.9                                       |       | 210.4 |   | — |   |
| Minority  interest in discontinued operations, net of tax                   |       | —                                     |       | (0.1 | ) | (5.2 | ) |
| Net (loss)  income                                                          |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   |
| **Adjusted  EBITDA:**                                                       |       |                                       |       |   |   |   |   |
| Specialty  Chemicals                                                        |       | $                                          | 313.0      |   | $ | 262.2 |   | $ | 206.6 |   |
|                                                                        |       | 25.4                                       | %          | 24.2 | % | 22.5 | % |
| Performance  Additives                                                      |       | 107.1                                      |       | 150.7 |   | 128.7 |   |
|                                                                        |       | 12.8                                       | %          | 18.9 | % | 17.8 | % |
| Titanium Dioxide  Pigments                                                  |       | 83.1                                       |       | 82.7 |   | 81.9 |   |
|                                                                        |       | 15.5                                       | %          | 18.7 | % | 20.0 | % |
| Advanced Ceramics                                                           |       | 150.2                                      |       | 128.1 |   | 104.8 |   |
|                                                                        |       | 29.7                                       | %          | 28.3 | % | 26.9 | % |
| Specialty  Compounds                                                        |       | 34.0                                       |       | 34.3 |   | 31.7 |   |
|                                                                        |       | 13.0                                       | %          | 12.4 | % | 12.6 | % |
| Corporate and  other                                                        |       | (48.5                                      | )          | (55.6 | ) | (47.8 | ) |
| Total Adjusted  EBITDA (a)                                                  |       | $                                          | 638.9      |   | $ | 602.4 |   | $ | 505.9 |   |

 

----

(a)                This amount doesnot include $1.8 million and $68.3 million for the years ended December 31,2007 and 2006, respectively, of Adjusted EBITDA from the former Groupe Novasepsegment which was sold on January 9, 2007; $37.6 million and $35.3 millionfor the years ended December 31, 2007 and 2006, respectively, of AdjustedEBITDA from the Electronics business sold on December 31, 2007; and $5.4million, $12.0 million and $12.0 million for the years ended December 31,2008, 2007 and 2006, respectively, of Adjusted EBITDA from the pool and spachemicals business sold on October 10, 2008.

 

47

----

 

Thefollowing table presents the changes in the major components of our operationson a historical basis in dollars and percentages:

 
| ** **                                                                       | ** ** | **Change: 2008 versus 2007** | ** ** | **Change: 2007 versus 2006** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                       | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                                       | ** ** | ** **                                  | ** ** | **%**                                       | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                                    | ** ** | **Total**                                   | ** ** | **Change**                                  | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement  of operations data:**                                               |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  sales:**                                                                  |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                             |       | $                                           | 149.7      |                                        | 13.8       | % | $ | 53.0 |   | $ | 96.7 |   | $ | 164.6 |   | 17.9 | % | $ | 63.7 |   | $ | 100.9 |   |
| Performance  Additives                                                           |       | 37.1                                        |       | 4.6                                         |       | 3.8 |   | 33.3 |   | 73.7 |   | 10.2 |   | 22.9 |   | 50.8 |   |
| Titanium Dioxide  Pigments                                                       |       | 91.9                                        |       | 20.7                                        |       | 32.9 |   | 59.0 |   | 33.8 |   | 8.3 |   | 36.7 |   | (2.9 | ) |
| Advanced  Ceramics                                                               |       | 53.4                                        |       | 11.8                                        |       | 35.7 |   | 17.7 |   | 62.9 |   | 16.1 |   | 34.7 |   | 28.2 |   |
| Specialty  Compounds                                                             |       | (15.1                                       | )          | (5.5                                        | )          | (3.1 | ) | (12.0 | ) | 25.6 |   | 10.2 |   | 9.1 |   | 16.5 |   |
| Corporate and  other                                                             |       | (2.1                                        | )          | (17.8                                       | )          | 0.7 |   | (2.8 | ) | (10.1 | ) | (46.1 | ) | 0.9 |   | (11.0 | ) |
| Total net sales                                                                  |       | 314.9                                       |       | 10.3                                        |       | 123.0 |   | 191.9 |   | 350.5 |   | 12.9 |   | 168.0 |   | 182.5 |   |
|                                                                             |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                                     |       | 38.2                                        |       | 3.9                                         |       | 45.9 |   | (7.7 | ) | 120.4 |   | 14.1 |   | 55.8 |   | 64.6 |   |
|                                                                             |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses                                    |       | 63.7                                        |       | 10.7                                        |       | 25.5 |   | 38.2 |   | 57.2 |   | 10.6 |   | 33.8 |   | 23.4 |   |
| Impairment  charges                                                              |       | 809.5                                       |       |                                        |       |   |   | 809.5 |   | (2.2 | ) |   |   |   |   | (2.2 | ) |
| Restructuring  and other severance costs                                         |       | 23.3                                        |       |                                        |       |   |   | 23.3 |   | 7.1 |   |   |   |   |   | 7.1 |   |
| Gain on sale of  assets and other                                                |       | 2.3                                         |       |                                        |       |   |   | 2.3 |   | (4.4 | ) |   |   |   |   | (4.4 | ) |
| Total operating  expenses                                                        |       | 898.8                                       |       | 148.6                                       |       | 25.5 |   | 873.3 |   | 57.7 |   | 10.5 |   | 33.8 |   | 23.9 |   |
| **Operating  income (loss):**                                                    |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                             |       | 16.8                                        |       | 8.1                                         |       | 9.1 |   | 7.7 |   | 51.9 |   | 33.5 |   | 10.3 |   | 41.6 |   |
| Performance  Additives                                                           |       | (520.0                                      | )          | (638.0                                      | )          | 1.1 |   | (521.1 | ) | 1.8 |   | 2.3 |   | 1.7 |   | 0.1 |   |
| Titanium Dioxide  Pigments                                                       |       | (267.4                                      | )          | (696.4                                      | )          | 1.8 |   | (269.2 | ) | (7.4 | ) | (16.2 | ) | 3.2 |   | (10.6 | ) |
| Advanced  Ceramics                                                               |       | 12.8                                        |       | 15.3                                        |       | 8.8 |   | 4.0 |   | 15.8 |   | 23.2 |   | 7.4 |   | 8.4 |   |
| Specialty  Compounds                                                             |       | (105.9                                      | )          | (481.4                                      | )          | 0.3 |   | (106.2 | ) | 0.1 |   | 0.5 |   | 0.4 |   | (0.3 | ) |
| Corporate and  other                                                             |       | 3.1                                         |       | 5.0                                         |       | (0.7 | ) | 3.8 |   | 0.5 |   | 0.8 |   | (1.0 | ) | 1.5 |   |
| Total                                                                            |       | (860.6                                      | )          | (231.8                                      | )          | 20.4 |   | (881.0 | ) | 62.7 |   | 20.3 |   | 22.0 |   | 40.7 |   |
| **Other  income (expenses):**                                                    |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                                 |       | (11.8                                       | )          | 5.4                                         |       | 0.9 |   | (12.7 | ) | (19.4 | ) | (9.7 | ) | (2.2 | ) | (17.2 | ) |
| Interest income                                                                  |       | (5.5                                        | )          | (47.8                                       | )          | (0.3 | ) | (5.2 | ) | 9.1 |   | 379.2 |   | (0.8 | ) | 9.9 |   |
| Gain (loss) on  early extinguishment of debt                                     |       | 22.6                                        |       |                                        |       |   |   |   |   | (18.6 | ) |   |   |   |   |   |   |
| Refinancing expenses                                                             |       | 0.9                                         |       |                                        |       |   |   |   |   | (0.9 | ) |   |   |   |   |   |   |
| Foreign exchange  (loss) gain, net                                               |       | (40.1                                       | )          |                                        |       |   |   |   |   | (0.8 | ) |   |   |   |   |   |   |
| Other, net                                                                       |       | 0.7                                         |       |                                        |       |   |   |   |   | (1.8 | ) |   |   |   |   |   |   |
| **(Loss)  income from continuing operations before taxes and minority interest** |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                                              |       | 1.1                                         |       |                                        |       |   |   |   |   | 55.3 |   |   |   |   |   |   |   |
| Performance  Additives                                                           |       | (533.1                                      | )          |                                        |       |   |   |   |   | (7.5 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                       |       | (272.3                                      | )          |                                        |       |   |   |   |   | (12.5 | ) |   |   |   |   |   |   |
| Advanced  Ceramics                                                               |       | 10.4                                        |       |                                        |       |   |   |   |   | 14.5 |   |   |   |   |   |   |   |
| Specialty  Compounds                                                             |       | (104.6                                      | )          |                                        |       |   |   |   |   | (0.7 | ) |   |   |   |   |   |   |
| Corporate and  other                                                             |       | 4.7                                         |       |                                        |       |   |   |   |   | (18.8 | ) |   |   |   |   |   |   |
| Total                                                                            |       | (893.8                                      | )          |                                        |       |   |   |   |   | 30.3 |   |   |   |   |   |   |   |
| Income tax  (benefit) provision                                                  |       | (86.2                                       | )          |                                        |       |   |   |   |   | 1.0 |   |   |   |   |   |   |   |
| (Loss) income  from continuing operations before minority interest               |       | (807.6                                      | )          |                                        |       |   |   |   |   | 29.3 |   |   |   |   |   |   |   |
| Minority  interest in continuing operations, net of tax                          |       | 91.5                                        |       |                                        |       |   |   |   |   | (7.9 | ) |   |   |   |   |   |   |
| Net (loss)  income from continuing operations                                    |       | (716.1                                      | )          |                                        |       |   |   |   |   | 21.4 |   |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                                 |       | (22.0                                       | )          |                                        |       |   |   |   |   | (22.8 | ) |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                             |       | (167.5                                      | )          |                                        |       |   |   |   |   | 210.4 |   |   |   |   |   |   |   |
| Minority  interest in discontinued operations, net of tax                        |       | 0.1                                         |       |                                        |       |   |   |   |   | 5.1 |   |   |   |   |   |   |   |
| Net (loss)  income                                                               |       | $                                           | (905.5     | )                                           |       |   |   |   |   |   | $ | 214.1 |   |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                            |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                             |       | $                                           | 50.8       |                                        | 19.4       | % | $ | 11.7 |   | $ | 39.1 |   | $ | 55.6 |   | 26.9 | % | $ | 13.4 |   | $ | 42.2 |   |
| Performance  Additives                                                           |       | (43.6                                       | )          | (28.9                                       | )          | 2.0 |   | (45.6 | ) | 22.0 |   | 17.1 |   | 4.2 |   | 17.8 |   |
| Titanium Dioxide  Pigments                                                       |       | 0.4                                         |       | 0.5                                         |       | 5.2 |   | (4.8 | ) | 0.8 |   | 1.0 |   | 6.9 |   | (6.1 | ) |
| Advanced  Ceramics                                                               |       | 22.1                                        |       | 17.3                                        |       | 12.0 |   | 10.1 |   | 23.3 |   | 22.2 |   | 10.6 |   | 12.7 |   |
| Specialty  Compounds                                                             |       | (0.3                                        | )          | (0.9                                        | )          | — |   | (0.3 | ) | 2.6 |   | 8.2 |   | 0.9 |   | 1.7 |   |
| Corporate and  other                                                             |       | 7.1                                         |       | 12.8                                        |       | (0.8 | ) | 7.9 |   | (7.8 | ) | (16.3 | ) | (0.8 | ) | (7.0 | ) |
| Total Adjusted  EBITDA                                                           |       | $                                           | 36.5       |                                        | 6.1        | % | $ | 30.1 |   | $ | 6.4 |   | $ | 96.5 |   | 19.1 | % | $ | 35.2 |   | $ | 61.3 |   |

 

----

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

 

***Year ended December 31, 2008 comparedto year ended December 31, 2007***

 

**Overview**

 

Net sales increased$314.9 million for the year ended December 31, 2008 compared with theprior year primarily due to the impact of bolt-on acquisitions, the positiveimpact of currency changes of $123.0 million and increased selling prices of$115.6 million. See further discussion by segment below.

 

48

----

 

Operating incomedecreased $860.6 million for the year ended December 31, 2008 comparedwith the prior year due to a goodwill impairment charge of $809.5 million,lower sales volumes, higher raw material and energy costs in all businesses andrestructuring and other severance costs recorded in 2008 primarily related tocost control measures. The positive impact of currency changes of $20.4million, increased selling prices and lower corporate costs due to decreased incentivecompensation-related costs and professional fees had a favorable impact on operatingincome.

 

Adjusted EBITDA increased$36.5 million for the year ended December 31, 2008 primarily due to thepositive impact of currency changes of $30.1 million, the selling priceincreases noted above and decreased corporate costs.

 

Net income from continuingoperations decreased $716.1 million compared with the prior year primarily fromthe goodwill impairment charge, higher interest expense recorded in the yearended December 31, 2008 due to an increase in mark-to-market losses on ourinterest rate hedging instruments and increased foreign exchange losses onfinancing activities recorded in 2008. This was partially offset by the increases noted above and costs of$18.6 million incurred in 2007 to redeem our 2011 Notes.

 

Minority interest incontinuing operations, net of tax increased $91.5 million primarily related tothe goodwill impairment charge recorded in the Titanium Dioxide Pigmentsventure in the fourth quarter of 2008.

 

Income from discontinuedoperations, net of tax was $3.3 million for the year ended December 31,2008 and was comprised of income from operating the pool and spa chemicalsbusiness that was sold in October 2008. In the year ended December 31,2007, income from discontinued operations, net of tax was $25.3 million and wasprimarily comprised of income from operating the pool and spa chemicalsbusiness and the Electronics business which was sold in December 2007.

 

The gain on sale ofdiscontinued operations, net of tax for the year ended December 31, 2008of $42.9 million is primarily related to the sale of the pool and spa chemicalsbusiness in October 2008. For the year ended December 31, 2007, thegain on sale of discontinued operations of $210.4 million is related to gain of$115.6 million (net of taxes) on the sale of Groupe Novasep and the gain of$94.8 million (net of taxes) on the sale of the Electronics business.

 

Net income decreased$905.5 million for the year ended December 31, 2008 compared with theprior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.   Net sales increased $149.7 millionover the prior year, including the positive impact of currency changes of $53.0million. In the Fine Chemicals business, higher selling prices of lithiumproducts, as well as increased volumes, had a favorable impact on net sales.Net sales in the Surface Treatment business were favorably impacted by higherselling prices and the impact of bolt-on acquisitions in December 2007 andSeptember 2008.

 

*PerformanceAdditives*.   Net sales increased $37.1 million overthe prior year due to acquisitions in August 2007 and 2008.  Also, increased selling prices in our ColorPigments and Services and Clay-based Additives businesses and the positiveimpact of currency changes of $3.8 million had a favorable impact on net sales.This was partially offset by lower volumes of construction-related products inour Color Pigments and Services and Timber Treatment Chemicals businesses.

 

*TitaniumDioxide Pigments*.   Net sales increased $91.9million over the prior year due to the completion of the venture with Kemira onSeptember 1, 2008 and the positive impact of currency changes of $32.9million.  This was partially offset bysignificantly lower net sales on lower volumes, as well as lower selling pricesof titanium dioxide products, primarily commodity grade, and lower volumes offunctional additives.

 

*AdvancedCeramics*.   Net sales increased $53.4 million overthe prior year primarily due to the positive impact of currency changes of$35.7 million, increased volumes of medical applications and the impact ofbolt-on acquisitions made in April 2007 and October 2008. This waspartially offset by lower selling prices and volumes in most applications,particularly in mechanical systems and applications and multifunctionalceramics.

 

*SpecialtyCompounds*.   Net sales decreased $15.1 million overthe prior year due to lower volumes in most businesses, particularly in wireand cable and regulated packaging applications, and the negative impact ofcurrency changes of $3.1 million.  Thiswas partially offset by increased selling prices.

 

*Corporateand other*.   Net sales decreased $2.1 million overthe prior year due to lower volumes and selling prices in the European waferreclaim business.

 

**Grossprofit**

 

Gross profit increased$38.2 million over the prior year due to the positive impact of currencychanges of $45.9 million and the sales 

 

49

----

 

increases noted above, inparticular selling price increases. This was partially offset by raw materialcost increases, particularly from the impact of higher phosphoric acid and tincosts in our Specialty Chemicals segment, higher iron-oxide costs in our ColorPigments and Services business, higher quat costs in our Clay-based additivesbusiness and higher ethylene vinyl acetate, plasticizer and PVC resin costs inour Specialty Compounds segment. We also experienced lower volumes in our ColorPigments and Services, Timber Treatment Chemicals and Titanium Dioxide Pigmentsbusinesses and higher depreciation and amortization costs in most businessesincluding the impact of acquisitions. Gross profit as a percentage of netsales decreased to 30.0% for the year ended December 31, 2008 from 31.8%for the year ended December 31, 2007.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $63.7 million over the prioryear due in part to the impact of currency changes of $25.5 million. HigherSG&A costs were also recorded in a few segments, particularly in SpecialtyChemicals and Advanced Ceramics, related to increased sales volumes. SG&Aexpenses as a percentage of net sales was 19.6% in the year ended December 31,2008 compared to 19.5% for the year ended December 31, 2007.

 

**Impairmentcharges**

 

We recorded a goodwill impairmentcharge of $809.5 million in the fourth quarter of 2008 due to the significant dropin global stock valuations, the substantial reduction in the market valuationof Rockwood and comparable companies, and the continuing negative globaleconomic and market outlook. In particular, the downturn in the constructionindustry has had a negative impact on a number of our businesses. As a result,we recorded a non-cash goodwill impairment charge in the following businesses:Color Pigments and Services ($293.2 million), Timber Treatment Chemicals ($88.3million) and Clay-based Additives ($75.1 million) within our PerformanceAdditives segment; Titanium Dioxide Pigments segment ($247.7 million); andSpecialty Compounds segment ($105.2 million). See further discussion in “CriticalAccounting Policies and Estimates,” in Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” and Note 7, “Goodwill.”

 

**Restructuringand other severance costs**

 

We recorded $35.3 millionof restructuring and other severance costs for the year ended December 31,2008 throughout the Company.  Thesecharges primarily related to headcount reductions as part of our global costcontrol initiatives.  We recorded $12.0million of restructuring charges for the year ended December 31, 2007 formiscellaneous restructuring actions in the Specialty Chemicals, PerformanceAdditives, Advanced Ceramics and Corporate and other segments for headcountreductions and facility closures. See Note 16, “Restructuring And OtherSeverance Costs,” for further details.

 

**Gain onsale of assets**

 

We recorded a gain of$2.4 million for the year ended December 31, 2008 primarily related to thesale of land that was acquired as part of the acquisition of Dynamit Nobel in2004. For the year ended December, 2007, we recorded a gain of $4.7 millionprimarily related to the sale of our U.S. wafer reclaim business.

 

**Operatingincome**

 

*SpecialtyChemicals*.   Operating income increased $16.8million over the prior year primarily due to the positive impact of currencychanges of $9.1 million and higher sales discussed above. This increase waspartially offset by higher raw material costs of $25.5 million, primarily forphosphoric acid and tin, increased depreciation and amortization costs of $15.3million, including the impact of bolt-on acquisitions made in December 2007and September 2008, and increased restructuring and other severance costsof $14.6 million.

 

*PerformanceAdditives*.   Operating income decreased $520.0million over the prior year due to the goodwill impairment charge of $456.6million, lower sales volumes discussed above, and higher raw material costs of$46.7 million, particularly higher iron-oxide costs in the Color Pigments andServices business and higher quat costs in our Clay-based Additivesbusiness. Higher depreciation and amortization costs of $9.6 millionprimarily due to the acquisitions made in August 2007 and 2008 andincreased restructuring and other severance costs of $8.1 million also had anunfavorable impact on operating income.

 

*TitaniumDioxide Pigments*.   Operating income decreased$267.4 million over the prior year primarily due to the goodwill impairmentcharge of $247.7 million, lower sales volumes and selling prices discussedabove, increased depreciation and amortization costs of $13.9 million andhigher energy costs of $8.7 million. This was partially offset by increasedsales related to the completion of the venture with Kemira on September 1,2008.

 

*AdvancedCeramics*.   Operating income increased $12.8million over the prior year primarily due to the positive impact of currencychanges of $8.8 million, the increased sales volumes noted above andproductivity improvements. The impact of bolt-on acquisitions made in April 2007and October 2008 also had a favorable impact on operating income. Thisincrease was partially offset by lower selling prices and increaseddepreciation and amortization costs of $6.5 million primarily related to theacquisitions discussed above.

 

50

----

 

*SpecialtyCompounds*.   Operating income decreased $105.9million over the prior year due to the goodwill impairment charge of $105.2million, lower sales volumes discussed above and higher raw material costs of$12.6 million, particularly ethylene vinyl acetate, plasticizer and PVC resincosts.  This was partially offset bylower operating costs and higher selling prices.

 

*Corporateand other.*   Operating loss decreased $3.1 millionprimarily due to lower incentive compensation related costs and lowerprofessional fees, partially offset by lower gains on asset sales and higherdepreciation and amortization costs.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interest expense increased $11.8 millionover the prior year. The years ended December 31, 2008 and 2007 includedlosses of $51.5 million and $32.2 million, respectively, representing themovement in the mark-to-market valuation of our interest rate hedginginstruments. The remaining interest expense decrease of $7.5 million isprimarily due to the redemption of the 2011 Notes in May 2007 in theaggregate amount of $273.4 million, partially offset by increased debt levelsrelated to the completion of the Titanium Dioxide Pigments venture.

 

*Interestincome*.  Interest income decreased $5.5 million forthe year ended December 31, 2008 compared to the same period in the prioryear due to lower average cash balances in 2008 compared to prior year andlower short-term average rates.

 

*Gain/Losson early extinguishment of debt.*   In the fourthquarter of 2008, we redeemed €11.0million of our senior subordinated notes due in 2014 at a discount and recordeda gain of $4.0 million. In the second quarter of 2007, we paid a redemptionpremium of $14.5 million and wrote off $4.1 million of deferred financing costsassociated with the redemption of the 2011 Notes in May 2007.

 

*Refinancingexpenses*.  In March 2007,we expensed $0.9 million related to the fourth amendment of the senior securedcredit agreement resulting in a 50 basis point reduction on our tranche G termloans.

 

*Foreignexchange, net*.   For the year ended December 31,2008, we had foreign exchange losses of $32.3 million primarily due to theimpact of the weaker British Pound as of December 31, 2008 versus December 31,2007 related to non-operating euro-denominated transactions. For the year endedDecember 31, 2007, we had foreign exchange gains of $7.8 million primarilyrelated to euro-denominated debt, cash and inter-company loans.

 

**Provisionfor income taxes**

 

The effective income taxrate for the year ended December 31, 2008 was 3.2% and an income taxbenefit of $23.9 million was recorded for the year ended December 31,2008. The effective income tax rate compared to the federal statutory rate wasnegatively impacted primarily by non-deductible book goodwill impairments. Itwas also impacted negatively by domestic losses which are not tax effected as aresult of a full valuation allowance and positively impacted by geographicearnings mix and an allocation of tax benefits to continuing operations. Theeffective income tax rate was 41.1% for the year ended December 31, 2007and was favorably impacted by certain non-recurring items, primarily related tothe impact of a statutory rate change in certain European jurisdictions and theallocation of tax benefits to continuing operations.

 

**Minorityinterest in continuing operations**

 

For the years ended December 31,2008 and 2007, we recorded minority interest in continuing operations of $83.6million and $(7.9) million.  Minorityinterest represents the minority interest portion of the Viance, LLC jointventure completed in January 2007 between our Timber Treatment Chemicalsbusiness and Rohm and Haas Company and the minority interest portion of theTitanium Dioxide Pigments venture completed in September 2008 between ourTitanium Dioxide Pigments segment and Kemira. Minority interest in 2008 is primarily related to the goodwillimpairment charge recorded in the Titanium Dioxide Pigments venture in thefourth quarter of 2008.

 

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

 

Net loss from continuingoperations for the year ended December 31, 2008 was $634.6 million ascompared to net income from continuing operations of $81.5 million for theprior year for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $3.3 million for the year ended December 31,2008 from operating the pool and spa chemicals business that was sold in October 2008,compared to $25.3 million for the year ended December 31, 2007, due toincome from operating the Electronics business, that was sold in December 2007and the pool and spa chemicals business.

 

**Gain onsale of discontinued operations, net of tax**

 

The gain on sale ofdiscontinued operations, net of tax, of $42.9 million recorded for the yearended December 31, 2008 is primarily 

 

51

----

 

related to the sale ofthe pool and spa chemicals business in October 2008.  For the year ended December 31, 2007, werecorded a gain on sale, net of tax, of $115.6 million as a result of the saleof the Groupe Novasep segment in January 2007 and a gain, net of tax, of$94.8 million as a result of the sale of the Electronics business in December 2007.

 

**Minorityinterest in discontinued operations**

 

Minority interest indiscontinued operations represents the minority interest portion of GroupeNovasep’s net income for the year ended December 31, 2007.

 

**Net(loss) income**

 

Net loss for the yearended December 31, 2008 was $588.4 million as compared to net income of$317.1 million for the year ended December 31, 2007 for the reasonsdescribed above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.   Adjusted EBITDA increased $50.8million over the prior year primarily due to the impact of higher salesdiscussed above and the positive impact of currency changes of $11.7 million.This increase was partially offset by higher raw material costs of $25.5million as discussed above.

 

*PerformanceAdditives*.   Adjusted EBITDA decreased $43.6million over the prior year due to lower sales volumes and higher raw materialcosts of $46.7 million as discussed above.

 

*TitaniumDioxide Pigments*.   Adjusted EBITDA increased $0.4million over the prior year primarily due to the impact of currency changes of$5.2 million, as well as by increased sales related to the completion of theventure with Kemira on September 1, 2008. This was partially offset by thelower sales volumes and selling prices discussed above and higher energy costsof $8.7 million.

 

*AdvancedCeramics*.   Adjusted EBITDA increased $22.1 millionover the prior year primarily due to the impact of the increased sales volumesnoted above, productivity improvements and the positive impact of currencychanges of $12.0 million. The impact of bolt-on acquisitions made in April 2007and October 2008 also had a favorable impact on Adjusted EBITDA. Thisincrease was partially offset by lower selling prices.

 

*SpecialtyCompounds*.   Adjusted EBITDA decreased $0.3 millionprimarily due to the lower sales volumes discussed above and higher rawmaterial costs of $12.6 million, particularly ethylene vinyl acetate,plasticizer and PVC resin costs.  Thiswas partially offset by lower operating costs and higher selling prices.

 

*Corporateand other.*   Adjusted EBITDA increased $7.1 millionprimarily due to lower incentive compensation related costs and lowerprofessional fees.

 

***Year ended December 31, 2007 comparedto year ended December 31, 2006***

 

**Overview**

 

Net sales increased$350.5 million for the year ended December 31, 2007 compared with theprior year driven by increased selling prices of $76.4 million, strong demandin a number of our segments, particularly in our Specialty Chemicals segment,and higher volumes related to acquisitions. The positive impact of currencychanges of $168.0 million also had a favorable impact on net sales. See furtherdiscussion by segment below.

 

Operating income andAdjusted EBITDA also increased for the year ended December 31, 2007compared with the prior year primarily due to the impact of the sales increasesnoted above. Operating income and Adjusted EBITDA were negatively impacted byhigher raw material costs in most businesses.

 

Net income fromcontinuing operations increased $21.4 million in the year ended December 31,2007 compared with the prior year primarily due to the reasons noted above.This was partially offset by costs of $18.6 million incurred in the secondquarter of 2007 to redeem our 2011 Notes and higher interest expense recordedin the year ended December 31, 2007 compared to the prior year due to anincrease in mark-to-market losses on our interest rate hedging instruments.

 

Income from discontinuedoperations, net of tax, decreased $22.8 million in the year ended December 31,2007 compared with the prior year primarily due to the sale of Groupe Novasepin January 2007, partially offset by the tax benefit recorded in the firstquarter of 2006 related to the favorable treatment on the sale of Rohner AG in2006.  See further details in Note 2, “Discontinued Operations.”

 

The gain on sale ofdiscontinued operations, net of tax, of $210.4 million for the year ended December 31,2007 was comprised of the gain of $115.6 million (net of taxes) on the sale ofGroupe Novasep and a gain of $94.8 million (net of taxes) on the sale of the 

 

52

----

 

Electronics business,excluding the European wafer reclaim business.

 

Net income increased$214.1 million in the year ended December 31, 2007 compared with the prioryear primarily due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.   Net sales increased $164.6 millionover the prior year, primarily on higher selling prices, as well as increasedvolumes and the positive impact of currency changes of $63.7 million. In theFine Chemicals business, higher selling prices of lithium products, as well asincreased volumes, had a favorable impact on net sales. Net sales in theSurface Treatment business were favorably impacted by higher selling prices andincreased volumes in most markets, particularly in European automotive,aerospace and general industrial applications.

 

*PerformanceAdditives*.   Net sales increased $73.7 million overthe prior year primarily due to the acquisition of the global color pigmentsbusiness of Elementis plc completed on August 31, 2007, increased sellingprices of ACQ products and the positive impact of currency changes of $22.9million. This was partially offset by lower construction volumes in NorthAmerica in our Color Pigments and Services business and lower volumes in ourTimber Treatment Chemicals business.

 

*TitaniumDioxide Pigments*.   Net sales increased $33.8million over the prior year due to the positive impact of currency changes of$36.7 million.  Excluding the impact of currency changes, net sales weredown as lower volumes and prices of titanium dioxide in anatase grade werepartially offset by higher selling prices for functional additives and highervolumes of titanium dioxide products in rutile grade.

 

*AdvancedCeramics*.   Net sales increased $62.9 million overthe prior year primarily due to the positive impact of currency changes of$34.7 million and the impact of bolt-on acquisitions made in April 2007and May 2006. Higher volumes in most businesses, particularly in medical,cutting tools, mechanical systems, and multi-functional ceramics also had afavorable impact on net sales. This was partially offset by lower sellingprices and volume declines in electronic applications.

 

*SpecialtyCompounds*.   Net sales increased $25.6 million overthe prior year due to higher volumes resulting from an acquisition made in October 2006in the wire and cable business and the positive impact of currency changes of$9.1 million.

 

*Corporateand other*.   Net sales decreased $10.1 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$120.4 million over the prior year primarily due to the selling price increasesnoted above, as well as productivity improvements and the positive impact ofcurrency changes of $55.8 million. This was partially offset by raw materialcost increases, particularly from the impact of higher zinc and other rawmaterial costs in our Specialty Chemicals segment, higher iron-oxide and cobaltraw material costs in our Color Pigments and Services business and highercopper costs in our Timber Treatment Chemicals business of our PerformanceAdditives segment. Gross profit as a percentage of net sales was 31.8% in theyear ended December 31, 2007 versus 31.5% in the year ended December 31,2006. Gross profit in 2007 includes a reduction of $5.7 million primarily dueto an inventory write-up charge related to the acquisition of the global colorpigments business of Elementis plc. In 2006, gross profit was lower due toan inventory write-up charge of $1.1 million.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $57.2 million over the prioryear primarily due to the impact of currency changes of $33.8 million. HigherSG&A costs were also recorded in a number of our segments related toincreased sales volumes. SG&A expenses as a percentage of net sales were19.5% in the year ended December 31, 2007 compared to 19.9% in the yearended December 31, 2006, as a result of higher net sales impacted byselling price increases.

 

**Impairmentcharges**

 

We recorded an impairmentcharge of $2.2 million in 2006 related to the write-down of machinery andequipment in the Fine Chemicals division of the Specialty Chemicals segment.

 

**Restructuringand other severance costs**

 

We recorded $12.0 millionof restructuring charges in the year ended December 31, 2007 formiscellaneous restructuring actions in the Specialty Chemicals, PerformanceAdditives, Advanced Ceramics and Corporate and other segments.  In theCorporate and other segment, $4.7 million of restructuring charges wererecorded for the year ended December 31, 2007 primarily related to therestructuring of the wafer reclaim business.  We recorded $4.9 million ofrestructuring charges in the year ended December 31, 2006 

 

53

----

 

for miscellaneousrestructuring actions in the Specialty Chemicals, Performance Additives,Advanced Ceramics and Corporate and other segments for miscellaneous headcountreductions and facility closures. See Note 16, “Restructuring And OtherSeverance Costs,” for further details.

 

**Gain onsale of assets**

 

We recorded gains of $4.7million and $0.3 million for the years ended December 31, 2007 and 2006,respectively.  The gain of $4.7 millionfor the year ended December 31, 2007 is primarily related to the sale ofour U.S wafer reclaim business.

 

**Operatingincome**

 

*SpecialtyChemicals*.   Operating income increased $51.9million primarily due to the impact of higher sales in both the SurfaceTreatment and Fine Chemicals businesses and the positive impact of currencychanges of $10.3 million. This increase was partially offset by higher rawmaterial costs of $25.2 million primarily related to zinc and other rawmaterials.

 

*PerformanceAdditives*.   Operating income increased $1.8million over the prior year due to the positive impact of currency changes of$1.7 million. This increase was partially offset by the lower sales volumesdiscussed above, and higher raw material costs of $9.8 million, particularlycopper costs in the Timber Treatment Chemicals business, higher iron-oxide andcobalt costs in our Color Pigments and Services business and higher quat costsin our Clay-based Additives business.  Higher depreciation andamortization costs of $14.0 million primarily due to the Viance, LLC jointventure formed in January 2007 and the acquisition of the global colorpigments business of Elementis plc, along with increased inventory write-upcharges of $4.7 million primarily related to the Elementis acquisition, alsohad an unfavorable impact on operating income.

 

*TitaniumDioxide Pigments*.   Operating income decreased $7.4million over the prior year due to higher raw material costs of $4.6 million,particularly zinc and other raw material costs, higher energy costs of $2.1million, an unfavorable mix and lower selling prices of titanium dioxideproducts.  This decrease was partially offset by the positive impact ofcurrency changes of $3.2 million.

 

*AdvancedCeramics*.   Operating income increased $15.8million over the prior year primarily due to the impact of increased sales inmost businesses, productivity improvements and the positive impact of currencychanges of $7.4 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 $7.4 million related to the acquisition discussed above.

 

*SpecialtyCompounds*.   Operating income increased $0.1million due to the positive impact of currency changes of $0.4 million, highersales volumes from the acquisition completed in October 2006 and afavorable product mix.  This waspartially offset by higher depreciation and amortization costs of $2.5 millionrelated to an acquisition in October 2006.

 

*Corporateand other.*   Operating loss decreased $0.5 millionover the prior year primarily due to higher gains on asset sales of $4.0million primarily related to the sale of our U.S. wafer reclaim business andlower professional fees incurred regarding systems and internal controldocumentation required in connection with the Company’s compliance with theSarbanes-Oxley Act of 2002.  This was partially offset by additional stockcompensation expense related to the May 2007 equity grant, higher legalaccruals and increased restructuring charges.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interest expense increased $19.4 millionin the year ended December 31, 2007 compared to the prior year. The yearsended December 31, 2007 and 2006 included losses of $32.2 million andgains of $7.2 million, respectively, representing the movement in themark-to-market valuation of our interest rate hedging instruments. The remaininginterest expense decrease of $20.0 million is primarily due to lowerinterest expense related to the redemption in May 2007 of the 2011 Notesin the aggregate amount of $273.4 million.

 

*Interestincome*.  Interest income increased $9.1 million inthe year ended December 31, 2007 compared to the prior year from interestearned on cash from operations and interest earned on cash equivalents stemmingfrom the net cash proceeds received from the sale of Groupe Novasep and theformation of the Viance, LLC joint venture in January 2007.

 

*Loss onearly extinguishment of debt. * In May 2007, we paida redemption premium of $14.5 million and wrote off $4.1 million of deferredfinancing costs associated with the redemption of the 2011 Notes in May 2007.

 

*Refinancingexpenses*.   In March 2007, we expensed $0.9million related to the fourth amendment of the senior secured credit agreementresulting in a 50 basis point reduction on our new tranche G term loans.

 

*Foreignexchange gain, net*.   For the years ended December 31,2007 and 2006, we had foreign exchange gains of $7.8 million and $8.6 million,respectively, primarily related to euro-denominated debt, cash andinter-company loans.

 

54

----

 

*Other,net*.   For the year ended December 31, 2006,we recorded $1.8 million of income in connection with the correction of animmaterial error related to a previously unrecorded asset in the TitaniumDioxide Pigments segment of $1.6 million.

 

**Provisionfor income taxes**

 

The effective income taxrate for the year ended December 31, 2007 was 41.1%. We recorded an incometax provision of $62.3 million for the year ended December 31, 2007.  The effective income tax rate was favorablyimpacted by certain non-recurring items, primarily a reduction related to theimpact of statutory rate changes in certain European jurisdictions and theallocation of tax benefits to continuing operations. The effective income taxrate for the year ended December 31, 2006 was 50.5% and was negativelyimpacted by an increase in the valuation allowances primarily related to theU.S. operations and favorably impacted by the foreign rate differential.

 

**Minorityinterest in continuing operations**

 

Minority interestrepresents the minority interest portion of the Viance, LLC joint venture thatwas completed in January 2007 between our Timber Treatment Chemicalsbusiness and Rohm and Haas Company.

 

**Netincome from continuing operations**

 

Net income fromcontinuing operations was $81.5 million as compared to net income fromcontinuing operations of $60.1 million for the year ended December 31,2006 for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax decreased to $25.3 million for the year ended December 31,2007 compared to income of $48.1 million for the year ended December 31,2006 due to income earned from the Groupe Novasep segment in the year ended December 31,2006 and the tax benefit recorded in the first quarter of 2006 related to thefavorable treatment on the sale of Rohner AG. As noted above, the GroupeNovasep segment was sold in January 2007.

 

**Gain onsale of discontinued operations, net of tax**

 

This included a gain onsale of $115.6 million (net of tax) as a result of the sale of the GroupeNovasep segment in January 2007 and a gain on sale of $94.8 million (netof tax) as a result of the sale of the Electronics business, excluding theEuropean wafer reclaim business, in December 2007.

 

**Minorityinterest in discontinued operations**

 

Minority interest indiscontinued operations represents the minority interest portion of GroupeNovasep’s net income for the years ended December 31, 2007 and 2006.

 

**Netincome**

 

Net income for the yearended December 31, 2007 was $317.1 million as compared to net income of$103.0 million for the year ended December 31, 2006 for the reasonsdescribed above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.   Adjusted EBITDA increased $55.6million primarily due to higher sales in both the Surface Treatment and FineChemicals businesses and the positive impact of currency changes of $13.4million. This increase was partially offset by higher raw material costs.

 

*PerformanceAdditives*.   Adjusted EBITDA increased $22.0million over the prior year primarily from the selling price increases notedabove.  The positive impact of currency changes of $4.2 million and theacquisition of the global color pigments business of Elementis plc that wascompleted on August 31, 2007 also had a favorable impact on AdjustedEBITDA. This was partially offset by higher raw material costs and thelower sales volumes discussed above.

 

*TitaniumDioxide Pigments*.   Adjusted EBITDA increased $0.8million over the prior year due to the positive impact of currency changes of$6.9 million. Excluding the impact of currency changes, Adjusted EBITDA waslower due to higher raw material and energy costs, an unfavorable mix and lowerselling prices.

 

*AdvancedCeramics*.   Adjusted EBITDA increased $23.3 millionover the prior year primarily due to the impact of the bolt-on acquisition madein April 2007, productivity improvements and the positive impact ofcurrency changes of $10.6 million. Increased sales in most businesses also hada favorable impact on Adjusted EBITDA. This increase was partially offset by lowerselling prices.

 

55

----

 

*SpecialtyCompounds*.   Adjusted EBITDA increased $2.6 millionprimarily due to higher volumes resulting from an acquisition made in October 2006in the wire and cable business and a favorable product mix.

 

*Corporateand other*.   Adjusted EBITDA loss increased $7.8million primarily due to higher legal accruals and the recording of additionalstock compensation expense related to the May 2007 equity grant.

 

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

 

Because we view AdjustedEBITDA on both a consolidated basis and segment basis as an operatingperformance measure, we use net (loss) income as the most comparable U.S. GAAPmeasure on a consolidated basis. The following table, which sets forth theapplicable components of Adjusted EBITDA, presents a reconciliation of net (loss)income to Adjusted EBITDA on a consolidated basis:

 
| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net (loss)  income                                                           |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   |
| Income from  discontinued operations, net of tax                             |       | (3.3                                       | )          | (25.3 | ) | (48.1 | ) |
| Gain on sale of  discontinued operations, net of tax                         |       | (42.9                                      | )          | (210.4 | ) | — |   |
| Minority  interest in discontinued operations, net of tax                    |       | —                                     |       | 0.1 |   | 5.2 |   |
| Net (loss)  income from continuing operations                                |       | (634.6                                     | )          | 81.5 |   | 60.1 |   |
| Income tax  (benefit) provision                                              |       | (23.9                                      | )          | 62.3 |   | 61.3 |   |
| Minority  interest in continuing operations, net of tax                      |       | (83.6                                      | )          | 7.9 |   | — |   |
| (Loss) income  from continuing operations before taxes and minority interest |       | (742.1                                     | )          | 151.7 |   | 121.4 |   |
| Interest expense  (a)                                                        |       | 231.1                                      |       | 219.3 |   | 199.9 |   |
| Interest income                                                              |       | (6.0                                       | )          | (11.5 | ) | (2.4 | ) |
| Depreciation and  amortization                                               |       | 258.9                                      |       | 211.7 |   | 174.4 |   |
| Impairment  charges                                                          |       | 809.5                                      |       | — |   | 2.2 |   |
| Restructuring  and other severance costs (b)                                 |       | 35.3                                       |       | 12.0 |   | 5.3 |   |
| Systems/organization  establishment expenses                                 |       | 12.9                                       |       | 4.2 |   | 10.7 |   |
| Acquisition and  disposal costs                                              |       | 1.7                                        |       | 2.3 |   | 1.9 |   |
| Inventory  write-up charges                                                  |       | 6.9                                        |       | 5.7 |   | 1.1 |   |
| (Gain) loss on  early extinguishment of debt (c)                             |       | (4.0                                       | )          | 18.6 |   | — |   |
| Refinancing  expenses                                                        |       | —                                     |       | 0.9 |   | — |   |
| Acquired  in-process research and development                                |       | 2.9                                        |       | — |   | — |   |
| Gain on sale of  assets and other                                            |       | (2.4                                       | )          | (4.7 | ) | (0.3 | ) |
| Foreign exchange  loss (gain), net                                           |       | 32.3                                       |       | (7.8 | ) | (8.6 | ) |
| Other                                                                        |       | 1.9                                        |       | — |   | 0.3 |   |
| Total Adjusted  EBITDA (d)                                                   |       | $                                          | 638.9      |   | $ | 602.4 |   | $ | 505.9 |   |

 

----

(a)                Includes (losses)gains of $(51.5) million, $(32.2) million and $7.2 million for the years ended December 31,2008, 2007 and 2006, respectively, representing the movement in themark-to-market valuation of the Company’s interest rate and cross-currencyhedging instruments.

 

(b)               Includes inventorywrite-downs of $0.4 million recorded in cost of products sold for the yearended December 31, 2006.

 

(c)                For the year endedDecember 31, 2008, we redeemed €11.0 million of our senior subordinatednotes due in 2014 at a discount and recorded a gain of $4.0 million. For theyear ended December 31, 2007, a redemption premium of $14.5 million waspaid and $4.1 million of deferred financing costs were written off inconnection with the redemption of the 2011 Notes.

 

(d)               This amount doesnot include $1.8 million and $68.3 million for the years ended December 31,2007 and 2006, respectively, of Adjusted EBITDA from the former Groupe Novasepsegment which was sold in January 2007; $37.6 million and $35.3 millionfor the years ended December 31, 2007 and 2006, respectively, of AdjustedEBITDA from the Electronics segment sold in December 2007; and $5.4million, $12.0 million and $12.0 million for the years ended December 31,2008, 2007 and 2006, respectively, of Adjusted EBITDA from the pool and spachemicals business sold in October 2008.

 

56

----

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

*OperatingActivities.*   Net cash provided by operatingactivities was $296.6 million, $368.5 million and $302.6 million in 2008,2007 and 2006, respectively. Net cash from operating activities decreased in2008 primarily from the higher use of operating cash from working capitalchanges and the reduction in operating cash flows due to the divestiture of theElectronics business, partially offset by lower cash interest expense. Net cashfrom operating activities increased in 2007 primarily from higher operatingincome and lower cash interest expense, partially offset by higher use ofoperating cash from working capital changes and lower operating cash flows dueto the Groupe Novasep divestiture.

 

*InvestingActivities*.   Net cash (used in) provided byinvesting activities was $(295.5) million, $377.6 million and$(248.8) million in 2008, 2007 and 2006, respectively. Net cash used ininvesting activities for the year ended December 31, 2008 included theacquisitions of Holliday Pigments, Nalco’s Finishing Technologies business andother acquisitions in 2008 and increased capital expenditures. This waspartially offset by the sale proceeds from the sale of the pool and spachemicals business in the fourth quarter of 2008 and funds received related tothe claim settlement between the Company and GEA Group in the first quarter of2008.  See Note 7, “Goodwill,” for further details.  Net cash provided by investing activities forthe year ended December 31, 2007 increased primarily due to proceedsreceived from the sale of the Electronics business, the sale of the GroupeNovasep segment and the formation of the Viance, LLC joint venture. This waspartially offset by acquisitions made in 2007, including the acquisition of theglobal color pigments business of Elementis plc in August 2007, and highercapital expenditures. Net cash used for investing activities for the year endedDecember 31, 2006 was primarily comprised of capital expenditures andacquisitions. Net cash used for acquisitions in 2006 was related tobusinesses acquired in our Advanced Ceramics and Specialty Compounds segments.

 

*FinancingActivities.*   Net cash provided by (used in)financing activities was $104.7 million, $(411.8) million and$(102.7) million in 2008, 2007 and 2006, respectively.  For the year ended December 31, 2008,net cash provided by financing activities included $362.5 million related tothe financing of the Titanium Dioxide Pigments venture, partially offset by thepayment of assumed debt to the minority shareholder of the Titanium DioxidePigments venture of $141.4 million. For the year ended December 31,2007, net cash used in financing activities included the redemption of our 105/8% Senior Subordinated Notes that were due in 2011 in the aggregate principalamount of $273.4 million and related redemption premiums of $14.5 million. Forthe year ended December 31, 2006, net cash used in financing activitieswas primarily comprised of scheduled debt payments for long-term debt.

 

**Liquidity**

 

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. Events that occurred in 2008 that had an impact on ourliquidity include:

 

·                  In March 2008, we received €18.8million ($29.1 million) from GEA Group and GEA North America for the settlementof all existing and future non-tax related claims resulting from the sale andpurchase agreement entered into in connection with the Dynamit NobelAcquisition in April 2004.

 

·                  In the third quarter of 2008, weacquired Holliday Pigments for approximately €46.0 million ($68.6 million usingan August 11, 2008 exchange rate of €1.00 = $1.4909) and Nalco’s FinishingTechnologies business for approximately $75.0 million.

 

·                  In September 2008, we completedthe Titanium Dioxide Pigments venture with Kemira. The venture’s acquisition ofthe shares of the Rockwood and Kemira entities was facilitated by theborrowings under a term loan of €250.0 million ($362.5 million using a September 3,2008 exchange rate of €1.00 = $1.4498).  The venture made a payment of€97.5 million ($141.4 million using a September 3, 2008 exchange rate) tothe venture’s minority shareholder.

 

·                  In October 2008, we sold thepool and spa chemicals business and received net cash proceeds of $122.0million.

 

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 are substantiallyhigher than historical amounts.  We believe that based on currentconditions in our industry and markets, our cash reserves, cash flows fromoperations and borrowings available under our revolving credit facility will beadequate sources of liquidity for the remainder of 2009. However, aprolonged economic downturn or recession may have a material adverse impact onour results of operations, cash flows from operations and our liquidity. If ouroperating results deteriorate, we may need to use some or all of our availablecash to reduce our leverage in order to comply with the leverage ratios in ourdebt agreements. If these sources are insufficient to fund our liquidity needs,we may need to use other means available to us, such as reduce or delay capitalexpenditures or take other cost cutting measures or seek additional sources ofcapital. In addition, any future major acquisitions, business combinations orother such events may require us to seek additional capital resources, such asthrough additional borrowings, equity issuances or other sources, to satisfyour liquidity needs.  The recent unprecedented adverse conditions in theglobal capital and credit markets may limit our ability to secure capital orobtain it on terms and conditions that are acceptable to us.  We cannotpredict with any certainty the impact of this or any further disruption inthese markets or our

 

57

----

 

ability to access thesemarkets in the future. See Item 1, “Business,” and Item 1A, “Risk Factors.”

 

In addition, ourliquidity may be negatively impacted due to funding obligations related tocertain pension plans. We have several pension plans located in Germany,Finland, the United Kingdom and the United States, which have been adverselyimpacted by market conditions. For example, based upon recent investmentperformance of pension assets in a pension plan covering the majority of ourGerman employees, we may have to increase funding and/or make a significantpayment to the plan via a one-time payment and/or long-term fundingarrangement. However, this could change significantly based on the investmentperformance of the pension plan and the future performance of the pension planassets. Any further deterioration of the capital markets or returns availablein such markets may materially and adversely impact our pension plan assets andincrease our funding obligations for one or more of these plans and adverselyimpact our liquidity. We cannot predict the impact of this or any furthermarket disruption on our pension funding obligations.

 

As of December 31,2008, we had actual total indebtedness of $2,811.2 million. The revolvingcredit facility under the senior secured credit facilities provided foradditional borrowings of up to $225.2 million as of December 31, 2008.There were no outstanding borrowings under this revolving credit facility as ofDecember 31, 2008. The revolving credit facility under the TitaniumDioxide Pigments venture facility provided for additional borrowings of up to€30.0 million ($41.9 million). As of December 31, 2008, there were nooutstanding borrowings under this revolving credit facility.

 

As of December 31,2008, we had cash and cash equivalents of $468.7 million from several sources,including cash from operations and the net cash proceeds received from the saleof the Electronics business in December 2007 and pool and spa chemicalsbusiness in October 2008, less cash used for certain selectiveacquisitions.

 

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

 

·                  tranche A-1 term loans in anaggregate principal amount of €22.8 million ($31.9 million) and tranche A-2term loans in an aggregate principal amount of €99.4 million ($138.9 million),each maturing on July 30, 2011 and bearing interest at EURIBOR plus 1.75%;

 

·                  tranche E term loans in an aggregateprincipal amount of $1,104.9 million, maturing on July 30, 2012 andbearing interest at the Company’s option of either (i)  LIBOR plus 1.50%or (ii) ABR plus 0.75%. For the year ended December 31, 2008, we haveelected to use option (i)  LIBOR plus 1.50%;

 

·                  tranche G term loans in an aggregateprincipal amount of €265.2 million ($370.5 million) maturing on July 30,2012 and bearing interest of EURIBOR plus 1.75%; and

 

·                  a revolving credit facility in anaggregate principal amount of $250.0 million maturing on July 30,2010, bearing interest at the Company’s option of either (i)  LIBOR plus1.75% or (ii) ABR plus 1.00%. As of December 31, 2008, we had noborrowings outstanding under this facility and had outstanding letters ofcredit of $24.8 million that reduced our availability under the creditfacility.

 

In each case, theinterest rates are subject to step-downs determined by reference to aperformance test. LIBOR is the London inter-bank offered rate. ABR is thealternate base rate, which is the highest of Credit Suisse’s prime rate and thefederal funds effective rate plus 0.5%. Tranche A-1 and A-2 term loans arepayable in January and July of each year at escalating percentages ofthe original principal amount. Tranche E and tranche G term loans arepayable in January and July of each year at amounts equal to 0.5% ofthe principal amount of the former tranche D term loans and tranche Fterm loans, respectively, with the remainder due at the final maturity date.

 

The borrowings of ourindirect, wholly-owned subsidiaries, Rockwood Specialties Group, Inc. andRockwood Specialties Limited under the senior secured credit facilities areguaranteed and secured by assets and pledges of capital stock.

 

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

 

*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(including certain adjustments for acquisitions and synergies), which reflectsmanagement’s interpretations thereof:

 

·                  a leverage ratio: for thetwelve-month period ended December 31, 2008, net debt (total debt pluscapital lease obligations, 

 

58

----

 

minus cash up to amaximum of $100.0 million) to Adjusted EBITDA must be less than 4.50 to 1; forsuch period, our ratio equaled 3.97 to 1; and

 

·                  an interest coverage ratio: for thetwelve-month period ended December 31, 2008, Adjusted EBITDA to cashinterest expense (interest expense, net excluding deferred debt issuance costamortization and the movements in the mark-to market value of our interest rateand cross-currency interest rate derivatives) must be at least 1.95 to 1; forsuch period, our ratio equaled 4.28 to 1.

 

Effective January 1,2009, our leverage ratio must be 4.25 to 1 under the terms of our creditagreement. These covenants are material terms of the senior secured creditagreement. Non-compliance with these covenants or other covenants could resultin a default under the senior secured credit agreement and the lenders couldelect to declare all amounts borrowed immediately due and payable. Any suchacceleration would also result in a default under the indenture governing the2014 Notes, which could lead to the note holders electing to declare theprincipal, premium, if any, and interest on the then outstanding notesimmediately due and payable.  The senior secured credit agreement containsa cross default provision for indebtedness in excess of $30.0 million;therefore, a default under the indenture governing the 2014 Notes, the TitaniumDioxide Pigments term loans or other indebtedness may cause the lenders todeclare the principal and interest on the then outstanding senior securedcredit facilities immediately due and payable.

 

As discussed above, theleverage ratio under the senior secured credit agreement must be less than 4.25to 1 effective January 1, 2009, with no further reductions thereafter.  We may use available cash in excess of $100.0million to pay down debt at any time in order to reduce this leverageratio.  As of December 31, 2008, wehad cash and cash equivalents of $468.7 million.

 

See Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations—“Definitionsof Adjusted EBITDA,” for a discussion of the definition of Adjusted EBITDA usedin calculating our financial covenants.

 

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

 

*2014Notes.*   The 2014 Notes have an aggregate principalamount of €364.0 million ($508.5 million) in the case of the Euro notes and$200.0 million in the case of the U.S. Dollar notes, and mature on November 15,2014. Interest on the 2014 Notes is payable semi-annually on May 15 and November 15.Interest on the 2014 Notes accrues at the rate of 7.625% in the case of theEuro notes and 7.500% in the case of the U.S. Dollar notes. Certain of ourdomestic subsidiaries guarantee the 2014 Notes on a senior subordinatedunsecured basis.  In the fourth quarterof 2008, we redeemed €11.0 million of our 2014 Notes at a discount and recordeda gain of $4.0 million.  We may useavailable cash to redeem additional 2014 Notes at any time to reduce ourleverage ratio.

 

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), paydividends or make other equity distributions or repurchase capital stock, makeinvestments or other restricted payments, create liens, transfer or sell assets,restrict dividends or other payments to us, engage in transactions withaffiliates, and merge or consolidate with other companies or sell substantiallyall of our assets.

 

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 thefour-fiscal quarter period ended December 31, 2008, the fixed charge coverageratio equaled 4.28 to 1. This covenant is a material term of the indenturegoverning the 2014 Notes.

 

Because the indenturegoverning the 2014 Notes defines an event of default to include, among otherthings, a default under any other debt obligation in excess of $35.0 millionthat could cause the acceleration of such obligation, any acceleration underthe senior secured credit agreement or other debt agreement would also resultin a default under the indenture governing these 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.

 

*TitaniumDioxide Pigments venture term loans, revolving credit facility and assumeddebt.*   During June 2008, as amended in August 2008,the Titanium Dioxide Pigments venture entered into a facility agreement thatprovides for a term loan facility in an aggregate amount of €250.0 million ($349.3million) and a revolving credit facility in an aggregate amount of €30.0million ($41.9 million), both maturing on June 17, 2013. The TitaniumDioxide Pigments venture borrowed €250.0 million under the term loanfacility.  In addition, the Titanium Dioxide Pigments venture has assumeddebt of €24.2 million ($33.8 million) at December 31, 2008 from Kemira,primarily due to a defined benefit plan, at interest rates ranging from 3.75%to 5.00%.  As of December 31, 2008,there were no outstanding borrowings under the revolving credit facility.

 

59

----

 

The loans are secured bythe assets of the venture. In the event that either Kemira’s or Rockwood’sownership interest changes, any lender may cancel its commitment and demandrepayment of its respective portion of the loans, including accrued and unpaidinterest.  The facility agreement contains customary events of default,subject to remedy periods, thresholds and exceptions. Upon the occurrenceof an event of default under the facility agreement, the lenders can terminatethe commitments and declare all amounts, including accrued and unpaid interest,to be due and payable.

 

The interest rate on theloans is EURIBOR (or LIBOR if the currency is in USD) plus 3%, subject to astep down determined by reference to a leverage ratio test. The term loan shallbe repaid in installments over a five-year period from the date of the facilityagreement, with payments commencing twelve months from such date; both loansmay be repaid in advance without penalty.

 

The facility agreementcontains affirmative and restrictive covenants, subject to certain thresholdsand exceptions. The restrictive covenants limit the venture’s ability toundertake certain actions, including but not limited to acquiring or disposingof assets, creating liens on assets, entering into a merger or corporaterestructuring, and incurring additional indebtedness. These covenants arecalculated in accordance with International Financial Reporting Standards andare based solely on the results of the venture. In addition, the facilityagreement requires the venture to meet certain financial covenants, including:

 

·                  A leverage coverage ratio: for thetwelve-month period ended December 31, 2008, net debt to EBITDA, subjectto certain adjustments, (which is substantially similar to the definition ofAdjusted EBITDA in our senior secured credit agreement) must be less than 4.00to 1: for such period, our ratio equaled 3.38 to 1;

 

·                  An interest coverage ratio: EBITDA,subject to certain adjustments, (which is substantially similar to thedefinition of Adjusted EBITDA in our senior secured credit agreement) to cashinterest expense (net of interest income), must be greater than 2.75 to 1: forsuch period, our ratio equaled 3.46 to 1; and

 

·                  Cash flow coverage ratio: cashgenerated for financing activities (EBITDA, subject to certain adjustments,less working capital changes, capital expenditures and interest) to debtservice (interest expense and amortization of debt) must be greater than 1.00:for such period, our ratio equaled 1.58 to 1.

 

As discussed above, theleverage ratio under the facility agreement must be less than 4.00 to 1.  We may use available cash to pay down debt atany time in order to reduce this leverage ratio.  

 

We were in compliancewith the above covenants as of December 31, 2008.

 

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:

 
| ** **                                                                                                             | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                                                                          | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                                          | 284.6      |   | $ | 330.2 |   | $ | 246.2 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 96.8                                       |       | 50.8 |   | 20.6 |   |
| Current portion  of income tax provision                                                                               |       | 40.6                                       |       | 33.3 |   | 24.9 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 164.0                                      |       | 166.4 |   | 195.1 |   |
| Restructuring  and other severance costs (a)                                                                           |       | 35.3                                       |       | 12.0 |   | 5.3 |   |
| Systems/organization  establishment expenses                                                                           |       | 12.9                                       |       | 4.2 |   | 10.7 |   |
| Acquisition and  disposal costs                                                                                        |       | 1.7                                        |       | 2.3 |   | 1.9 |   |
| Inventory  write-up charges                                                                                            |       | 6.9                                        |       | 5.7 |   | 1.1 |   |
| Refinancing  expenses                                                                                                  |       | —                                     |       | 0.9 |   | — |   |
| Bad debt  provision                                                                                                    |       | (3.4                                       | )          | 1.3 |   | 0.1 |   |
| Gain on sale of  assets and other                                                                                      |       | (2.4                                       | )          | (4.7 | ) | (0.3 | ) |
| Other                                                                                                                  |       | 1.9                                        |       | — |   | 0.3 |   |
| Total Adjusted  EBITDA (b)                                                                                             |       | $                                          | 638.9      |   | $ | 602.4 |   | $ | 505.9 |   |

 

----

(a)                Includes inventorywrite-downs of $0.4 million recorded in cost of products sold for the yearended December 31, 2006.

 

(b)               This amount doesnot include $1.8 million and $68.3 million for the years ended December 31,2007 and 2006, respectively, of Adjusted EBITDA from the former Groupe Novasepsegment which was sold in January 2007; $37.6 million and $35.3 million 

 

60

----

 

for the years ended December 31,2007 and 2006, respectively, of Adjusted EBITDA from the Electronics segmentsold in December 2007; and $5.4 million, $12.0 million and $12.0 millionfor the years ended December 31, 2008, 2007 and 2006, respectively, ofAdjusted EBITDA from the pool and spa chemicals business sold in October 2008.

 

***Contractual Obligations***

 

The following tabledetails Rockwood’s fixed contractual cash obligations as of December 31,2008:

 
| ** **                           | ** ** | ** ** | ** ** | **Less than** | ** ** | **2-3**   | ** ** | **4-5**   | ** ** | **After**        | ** ** |
|--------------------------------------|------------|------------|------------|--------------------|------------|-----------|------------|-----------|------------|------------------|------------|
| **($ in millions)**        | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **Years** | ** ** | **Years** | ** ** | **5 years** | ** ** |
| Debt, including  current portion (a) |       | $          | 3,489.6    |               | $          | 242.6     |       | $         | 525.5      |             | $          | 1,890.6 |   | $ | 830.9 |   |
| Operating leases                     |       | 64.0       |       | 17.3               |       | 23.5      |       | 11.7      |       | 11.5             |       |
| Purchase  obligations (b)            |       | 498.2      |       | 227.2              |       | 153.4     |       | 33.7      |       | 83.9             |       |
| Total (c) (d)                        |       | $          | 4,051.8    |               | $          | 487.1     |       | $         | 702.4      |             | $          | 1,936.0 |   | $ | 926.3 |   |

 

----

(a)                Amounts representthe expected principal payments of our long-term debt, including capitalleases, and do not include any fair value adjustments or bond premiums ordiscounts. This amount also includes estimated scheduled cash interest paymentstotaling $678.4 million. A portion of the debt balance outstanding as of December 31,2008 contained a variable interest rate component. Therefore, interest wascalculated on this portion based upon the average of the rates in effect as of December 31,2008. See Note 9, “Long-Term Debt.”

 

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

 

(c)                Statutory minimumfunding requirements for 2008 for defined benefit pension plans are notincluded as such amounts have not been determined. For 2009, the Company expectsto make contributions of approximately $9.5 million to pension trusts and$18.4 million directly to plan participants as benefit payments. Futurecontributions, including additional payments that may be required as a resultof investment performance of pension assets, are not included, as they are notfixed either as to timing or amount. See Note 13, “Employee Benefit Plans,” forfurther details.

 

(d)               Obligationsrelating to eventual settlement of derivative contracts are not included as thetiming and amounts are not fixed. These contracts are marked to market with therelated liabilities or assets depending on the mark to market position. At December 31,2008, the mark to market position of obligations relating to derivativecontracts was a liability and was recorded in “Other Liabilities” in theConsolidated Balance Sheet.

 

Liabilities forunrecognized tax benefits in the amount of $29.8 million related to FinancialAccounting Standards Board (“FASB”) Interpretation (“FIN”) 48,*Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109,* are excluded from theContractual Obligations table as we are unable to make a reasonably reliableestimate of the period of cash settlement with the respective taxingauthorities. Liabilities for these unrecognized tax benefits are classified asnon-current income tax liabilities (other liabilities) unless expected to bepaid in one year.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures in 2008 consisted primarily of replacements of worn, obsolete ordamaged equipment as well as investments in new equipment.  For the yearended December 31, 2008, capital expenditures, excluding capital leases,were $224.0 million. For 2009, we expect capital expenditures to be below2008 levels. For the years ended December 31, 2007 and 2006, our capitalexpenditures, excluding capital leases, amounted to $193.2 million and$165.1 million, respectively.

 

We may incur future costsfor capital improvements and general compliance under Safety, Health and Environmental(“SHE”) laws. For the year ended December 31, 2008, our capitalexpenditures for SHE matters totaled approximately $28.1 million,excluding costs to maintain and repair pollution control equipment. For 2009,we estimate capital expenditures for compliance with SHE laws to be at similarlevels; however, because capital expenditures for these matters are subject tochanges in and new SHE laws, we cannot provide assurance that our recentexpenditures will be indicative of future amounts required to comply with theselaws including the EU’s Registration, Evaluation and Authorization of Chemicals(“REACH”) legislation. See Note 19, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH. We are applying our capital discipline and stringent controls to reduceour future capital expenditures.

 

61

----

 

***Foreign currency related transactions***

 

As of December 31,2008, $1,493.8 million of the debt outstanding is denominated in euros. SeeItem 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

 

**Off-Balance Sheet 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 December 31, 2008, theCompany had approximately $58.2 million of letters of credit and other bankguarantees, of which $25.8 million will expire in 2009 through 2012. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $24.8 million that reduced our availabilityunder the senior secured credit facility. In the opinion of management, suchobligations will not significantly affect the Company’s financial position,results of operations or cash flows as the Company anticipates fulfilling itsperformance obligations.

 

***Commitments and Contingencies***

 

See Note 19, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments andContingencies.

 

**Critical Accounting Policies and Estimates**

 

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

 

·                  the fair values of assets acquiredand liabilities assumed in business combinations;

 

·                  the use and recoverability of inventory;

 

·                  the valuation of deferred tax assets;

 

·                  the amount of unrecognized taxbenefits in accordance with FIN 48;

 

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

 

·                  the useful lives of tangible andintangible 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.

 

See Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” for a summary ofour significant accounting policies. We believe the following to be the mostcritical accounting policies and estimates affecting preparation of ourconsolidated financial statements:

 

*RevenueRecognition.*   We recognize revenue when the earningsprocess is complete. Product sales are recognized when products are shipped tothe customer in accordance with the terms of the contract of sale, title andrisk of loss have been transferred and collectibility is reasonably assured. Webelieve that we have adequate credit granting procedures in place and operatingeffectively so that collectibility is reasonably assured. We have a lowincidence of uncollectible accounts. Additionally, credit insurance ispurchased at times by certain of our businesses, particularly in Europe, toprotect against collection risk. Accruals are made for sales returns based onour experience and for other allowances based on the terms of allowanceprograms put in place. Although we believe that sufficient experience and historyexists to make reasonable estimates as to such accruals and allowances, actualresults can differ depending on market conditions.

 

*ImpairmentAccounting.*   The recoverability of goodwill isreviewed on an annual basis during the fourth quarter. Additionally, therecoverability of goodwill, long-lived tangible, and other intangible assets isreviewed when events or changes in circumstances occur indicating that thecarrying value of the assets may not be recoverable.  In accordance with paragraph 30 of Statementof Financial Accounting Standards (“SFAS”) No. 142, *Goodwill andOther Intangible Assets*, we have determined that our reporting unitsfor our goodwill impairment review are our operating segments or components ofan operating segment that constitute a business for which discrete financialinformation is available and for which segment management regularly reviews theoperating results.  Based on thisanalysis, we have 

 

62

----

 

identified nine reportingunits within our reportable segments.

 

SFAS No. 142prescribes a two-step method for determining goodwill impairment.  In the first step, we determine the fairvalue of each reporting unit (as discussed in the following sentence) andcompare that fair value to the carrying value of such reporting unit.  This begins with our estimating the fairvalue of each reporting unit, which we derive from peer multiples.  Specifically, we base our estimate of thefair value of such reporting unit on an industry metric that is the ratio ofenterprise value (“EV”, which is commonly defined as market capitalization,plus long-term debt, less cash) to Adjusted EBITDA of the relevant benchmarkpeer companies and groups; we refer to this as the peer multiple approach.  The peer companies are typically based uponthe competitors disclosed in Item 1, “Business” for each of our reportingunits.  We use EV multiples to the lasttwelve months Adjusted EBITDA and to the next fiscal year Adjusted EBITDA. Wethen multiply this ratio by the Adjusted EBITDA for the recently completed yearand the budgeted Adjusted EBITDA for the upcoming year of such reporting unitand compare it to the carrying value of such reporting unit.  If the product of such peer multiple andreporting unit’s Adjusted EBITDA is less than such carrying value, it may be anindication of an impairment. If our initial review indicates there may be animpairment, we perform a review based on expected future cash flows; we referto this as the discounted cash flow approach. For the discounted cash flow approach, the Company makes certainassumptions about, among other things, estimates of future cash flows,including growth rates, price increases, capital expenditures, the benefits ofrecent acquisitions and expected synergies, and an appropriate discountrate.  If the results of the peermultiple approach and the discounted cash flow approach differ materially, wewould review the relevant facts and circumstances and make a qualitativeassessment to determine the proper weighting. If the results of the first step indicate the carrying amount of areporting unit is higher than its fair value, the second step must beperformed.  Specifically, SFAS No. 142prescribes that the Company determine the implied fair value of goodwill in thesame manner as if the Company had acquired those reporting units.  In the second step, the potential impairmentis computed by comparing the implied fair value of the reporting unit’sgoodwill with the carrying amount of goodwill. If the carrying amount of the reporting unit’s goodwill is greater thanthe implied fair value of its goodwill, an impairment loss must be recognizedfor the excess.  If necessary, we mayconsult with valuation specialists to assist with our goodwill impairmentreview.

 

In the fourth quarter of2008, we tested the recoverability of goodwill as part of our annualreview.  In connection with thedetermination of fair value of the reporting units, we made significantestimates and assumptions with respect to those reporting units and engagedindependent valuation specialists to assist with this review. The first step ofour review indicated that the fair values of our Color Pigments and Services,Timber Treatment Chemicals, Clay-based Additives, Titanium Dioxide Pigments, SpecialtyCompounds and Rubber Chemicals reporting units were less than their carryingvalues.  Accordingly, we were required tocomplete the second step of the impairment review.  To compute the amount of the impairment, SFASNo. 142 prescribes that the Company determine the implied fair value ofgoodwill in the same manner as if the Company had acquired those reportingunits.  Specifically, the Companyallocated the fair value of the reporting units to all of the assets, includingany unrecognized intangible assets, and liabilities of that unit, including anyunrecognized intangible assets, in a hypothetical calculation that would yieldthe implied fair value of goodwill.  Theimpairment loss is measured as the difference between the book value of thegoodwill and the implied fair value of the goodwill computed in step two.  Based on the results of the second step ofthe impairment review, we determined and recorded goodwill impairment chargesin our Color Pigments and Services business ($293.2 million), Timber TreatmentChemicals business ($88.3 million) and Clay-based Additives business ($75.1million) within our Performance Additives segment; Titanium Dioxide Pigmentssegment ($247.7 million); and Specialty Compounds segment, including our RubberChemicals business ($105.2 million).  Thegoodwill impairment charges were attributed to the significant drop in globalstock valuations, the substantial reduction in the market valuation of Rockwoodand comparable companies, and the continuing negative global economic andmarket outlook.  In particular, thedownturn in the construction industry has had a negative impact on a number ofour businesses.

 

These calculations arebased on inherent assumptions and estimates about future cash flows andappropriate benchmark peer companies or groups. Subsequent changes in theseassumptions could result in future impairment. Although we consistently use thesame methods in developing the assumptions and estimates underlying the fairvalue calculations, such estimates are uncertain by nature and can vary fromactual results.  For example, if theCompany had applied a 10% reduction in the peer multiples of the reportingunits that were not impaired in 2008, there may have been an additionalpotential goodwill impairment in two of our reporting units. If the Company hadapplied a 10% reduction in all peer multiples for all reporting units in 2007and 2006, no potential goodwill impairment would exist at any of our reportingunits, except for one reporting unit for which there may have been a potentialimpairment. As noted above, if we had discovered such a potential impairment,we might have expanded the review to prepare more detailed estimates of futurecash flows in subsequent years, which might have resulted in a different impairmentassessment.

 

Prior to completing theassessment of goodwill for impairment during the fourth quarter of 2008, weperformed a recoverability test of certain long-lived assets in accordance withSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets.*As a result, weconcluded that there was no impairment of those assets in the fourth quarter of2008.

 

During the fourth quarterof 2006, management performed an impairment review of a business within theFine Chemicals division of 

 

63

----

 

the Specialty Chemicalssegment due to poor profitability. Based on this review, an impairment chargeof $2.2 million was recorded to write-down the full value of machinery andequipment.

 

*BusinessCombinations.*   We account for businesscombinations using the purchase method of accounting as required by SFAS No. 141,*Business Combinations.* Under the purchasemethod of accounting, we are required to allocate the purchase price to theestimated fair value of assets acquired and liabilities assumed. Examples ofmaterial estimates from our previous acquisitions are:

 

·                  The fair values of work-in-processand finished goods inventories are estimated based on selling price lessselling profit. The calculation of selling profit requires a judgment on therelative margins derived from manufacturing vs. marketing efforts.

 

·                  The fair value of property, plant andequipment can be estimated by a variety of methods taking into account marketvalues, replacement cost, and remaining useful life. Although market value andreplacement cost is sometimes readily obtainable, often this requires judgment,as does determining the estimated remaining useful life. When we believe thatproperty, plant and equipment acquired will be material to our overall balancesheet, or that fair value might represent a significant difference from thehistorical cost (net of accumulated depreciation) of such assets, we haveengaged an independent appraiser to assist us on such estimates, as we havedone in our recent acquisitions. However, it is not uncommon for appraisers todiffer on the valuation of items (such as manufacturing equipment) where aready secondary market does not exist.

 

·                  The fair value of identifiableintangible assets such as patents and other intellectual property, customerlists, and trademarks, can be estimated by discounted cash flow and return onroyalties. The process utilized to identify intangible assets is consistentwith the requirements of SFAS No. 141. When considered material, wehave engaged an independent appraiser to assist us in the identification ofintangible assets acquired, valuation of such assets and determination of theestimated useful life. An independent appraiser, with management’s oversightand input, is required to make judgments and estimates that could cause suchappraisals to differ from those of other appraisal experts.

 

·                  In order to determine the fair valueof intangible assets and other long term assets, a discount rate and royaltyrate is determined in conjunction with our independent appraiser. The royaltyrate is based on professional judgment taking into consideration the type ofproduct, market and perceived strength. The discount rate and royalty rate hasa material impact on the determination of the fair value.

 

·                  Purchase accounting often involvesthe same critical estimates that are required in our ordinary course ofbusiness including estimates of deferred tax assets or liabilities, pensionliabilities, restructuring liabilities and legal and environmental reserves.

 

Goodwill is an intangibleasset that represents the excess of the purchase price over the fair value ofidentifiable assets acquired and liabilities assumed. While goodwill itselfdoes not represent an estimate, under SFAS No. 141 we must assign goodwillto one or more reporting units. Allocation of goodwill to reporting unitsrequires judgments about the relative fair values of reporting units includingthe fair value of their identifiable assets and estimates as to the presentvalue of future cash flows expected from the reporting units as adjusted byweighted average and or risk-adjusted costs of capital. Goodwill is assessedfor impairment at least annually.

 

Some of our businesscombinations have complex terms that may result in conflicting claims betweenbuyer and seller concerning the purchase price itself. Management is requiredto assess the probability and amount (or range of amounts) of such claims, and,where possible, determine the most likely amount due.

 

*LegalMatters.*   We are involved in various legalproceedings, including commercial, product liability, intellectual property andenvironmental matters, of a nature that can be expected in our business. It isour policy to accrue for amounts related to these matters in accordance withSFAS No. 5,*Accounting forContingencies*, if it is probable that a liability has been incurredand an amount can be reasonably estimated. The probability that a contingentliability has been incurred is regularly assessed by our legal staff, based onperiodic reviews of available facts and circumstances for our legal matters,with senior operating and finance management both at the business accountablefor the potential liability and at our corporate offices. This is supplementedwhere applicable by consultation with outside counsel. We do not believe it isinformative to quantify past experience at assessing probability or estimatingexposure since material matters of this nature at Rockwood often representunique situations with little applicability to the assessment of probability orestimation of potential liability regarding other legal matters. It is ourpolicy to disclose such matters when there is at least a reasonable possibilitythat a loss may have been incurred.

 

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

 

64

----

 

recoveries from insurancecarriers or other third parties in our accruals for environmental liabilities.

 

We have estimated andestablished financial reserves relating to anticipated environmental cleanupobligations, site reclamation and remediation and closure costs. On aconsolidated basis, we have accrued approximately $55.1 million for knownenvironmental liabilities as of December 31, 2008. Given that theseobligations may be paid/relieved over extended time periods (30 years insome cases), charges or credits to operations may be required as information isgathered and estimates refined.

 

We have evaluated ourtotal environmental exposure based on currently available data and believe thatsuch environmental matters will not have a material adverse impact on ourfinancial position or results of operations. If matters previously identifiedby management are resolved in a manner different from original estimates, thereis the potential for a material adverse effect on operating results or cashflows in any one accounting period. See Note 19, “Commitments andContingencies.”

 

*Restructuring.*  We record restructuring charges from time to time that represent expensesincurred in connection with consolidations and cessations of certain of ouroperations as well as headcount reduction programs. These charges consistprimarily of write-offs of surplus assets and severance costs. These chargesare based on various factors including the employee’s length of service,contract provisions, salary levels and local governmental legislation. At thetime a related charge is recorded, we calculate our best estimate based upondetailed analysis. Although significant changes are not expected, actual costsmay differ from these estimates.

 

For example, we haveaccrued liabilities of $18.9 million as of December 31, 2008 to coverrestructuring liabilities for employee severance, facility closure andrelocation costs. The portion of this accrued liability that was recorded aspart of purchase accounting is not charged to operations, but was recorded aspart of goodwill. In the event that our estimates of such costs are too low, anadditional charge to operations would be required.

 

*IncomeTaxes.*

 

*ValuationAllowance**-*** Werecord valuation allowances to reduce our deferred tax assets to the amountthat is more likely than not to be realized based on available evidenceweighted toward evidence that is objectively verifiable. If we were todetermine that we would be able to realize deferred tax assets in the future inexcess of our net recorded amount, an adjustment to the net deferred tax assetwould increase income in the period such determination was made. Likewise,should we determine that we would not be able to realize all or part of ourrecorded net deferred tax assets in the future, an adjustment to the deferred taxasset would decrease income in the period such determination was made.

 

We have cumulative netoperating loss carry forwards in the U.S., China and other jurisdictions forwhich we have reserved. The valuation allowance also includes certain states inthe U.S. as we have concluded realizability of these net operating loss carryforwards is not more likely than not. We have not recorded valuation allowanceson a significant portion of our German net operating loss carry forwards as wehave considered positive evidence such as forecasted future taxable incomebased on historical taxable income adjusted for charges which are notindicative of future operations and as the carry forward period is indefinite.

 

SFAS No. 109,*Accounting for Income Taxes,* paragraph 105,“requires consideration of future taxable income and other available evidencewhen assessing the need for a valuation allowance.” Various assumptions andstrategies (including elections for tax purposes) are implicit in estimates offorecasted future taxable income.

 

We believe that, insituations in which future realization of deferred tax assets is dependent ontaxable income from future operations, SFAS No. 109 requires therelative significance of cumulative losses be addressed within the guidanceprovided in paragraphs 24 and 103. Accordingly, in assessing therealization of U.S. jurisdiction net operating loss carry forwards for theyears ended December 31, 2008, 2007 and 2006, and, considering futuretaxable income, we have identified the key elements of both positive andnegative evidence and evaluated such evidence by applying the guidance providedby paragraphs 24 and 103 of SFAS No. 109.

 

The worldwide valuationallowance decreased by $15.2 million to $84.7 million at December 31,2008. Of this amount, $42.1 million was a charge to income tax expense, $16.3million represents a decrease to other comprehensive income, $35.4 million wasreversed primarily as a result of the reduction in U.S. deferred tax assets dueto the sale of the pool and spa chemicals business and $2.8 million representsa decrease recorded to goodwill. The remainder related to foreign currencytranslation adjustments and other balance sheet items.

 

As of December 31,2008, we had three years of net cumulative losses in the U.K.  As such, we evaluated the realizability ofthe net deferred tax assets of $13.4 million related to our U.K. entities.For any specific jurisdiction where a history of three years of cumulativelosses has occurred or where there has been a substantial change in thebusiness (e.g., a major acquisition or divestiture), the Company’s policy is todetermine its need for a valuation allowance on deferred tax assets, if any, bycalculating an average steady-state normalized taxable income amount over thelast three years, adjusted for acquisitions or divestitures if necessary. Thesteady-state calculation includes management assumptions that relate to theappropriateness of certain items, such as, including permanent cost savingswhich have been/are being implemented and excluding one-time items.

 

65

----

 

In accordance with thispolicy, we calculated the average annual income before taxes in the U.K. on asteady-state normalized basis.  Wecontinue to be profitable on a normalized basis. We additionally considered thenature of the U.K. net deferred tax assets which includes unused taxdepreciation (“capital allowances” in the U.K.). Under U.K. law, this taxattribute can be utilized indefinitely. Accordingly, we concluded that giventhe level of profitability and given their unlimited life, these assets shouldmore likely than not be realizable as of December 31, 2008 in the U.K. andtherefore no valuation allowance was recorded as of such date.

 

We are committed tobuying and selling businesses within our portfolio of businesses asopportunities arise to enhance our overall results. We are committed to sellingassets which are non-core and which would generate a taxable gain in the eventof expiring U.S. Federal NOL’s.

 

During the first quarterof 2007, the Company adopted FIN 48,*Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109.* FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements andprescribes a recognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a taxreturn.  Under FIN 48, the impact of an uncertain income tax provision onthe income tax return must be recognized as the largest amount that ismore-likely-than-not to be sustained upon audit by the relevant taxauthority.  An uncertain income tax provision will not be recognized if ithas less than a 50% likelihood of being sustained.

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. As part of theadoption of FIN 48, we evaluated all tax positions taken including the existingtax liabilities recorded in accordance with SFAS No. 5,*Accounting for Contingencies,* andevaluated whether such tax positions would more-likely-than-not be sustained uponexamination, based on the technical merits of the position.  If theposition met the more-likely-than-not threshold test, we estimated the amountof the benefit that would be more than 50% likely to be sustained upon ultimatesettlement.  The estimate includes management’s judgment of the amountsand probabilities of outcomes that could be realized upon ultimate settlement,taking into account all facts, circumstances, and information available at thereporting date.

 

Although we have a fullvaluation allowance on the U.S. net deferred tax assets and certain U.S.states, in accordance with FIN 48, we have evaluated the U.S. positions as wellas foreign positions. Liabilities associated with positions taken as part ofpurchase accounting have been recorded as part of goodwill. Based on ouryear-end analysis, we have recorded unrecognized tax benefits of $48.0 millionon a gross basis.  The ultimate settlement of this liability is subject totax audits or the expiration of the statute of limitations.  As such,actual results will differ from our estimates.

 

In accordance with ourpolicy, we have offset the gross FIN 48 liability in respect of our uncertaintax positions against deferred taxes where settlement of such liability wouldreduce tax loss carry forwards. On a net basis, we have recorded unrecognizedtax benefits of $29.8 million as of December 31, 2008.

 

To the extent that theprovision for income taxes increases/decreases by 1% of income before taxes,consolidated net income would have declined/improved by $7.4 million in2008.

 

*Stock-BasedCompensation.*  We have a stock-based compensationplan which includes stock options, restricted stock and other stock-basedawards. See Note 1, “Description of Business and Summary of SignificantAccounting Policies,” and Note 12, “Stock-Based Compensation,” for a completediscussion of our stock-based compensation programs. In accordance withSFAS No. 123R,*Share-Based Payment*,we record stock-compensation expense associated with our equityawards. The accounting for stock compensation is a critical accountingestimate, which requires judgments and assumptions that have an impact on ourfinancial statements.

 

The fair value of ourstock options are estimated on the date of grant using the Black-Scholes optionpricing model, which includes assumptions of expected term, expected volatilityand risk-free rates. Changes in these assumptions can affect the fairvalue estimate. The fair value of our performance restricted stock units isestimated on the date of grant based on the closing market price of ourstock. These performance-based equity awards require management to makeassumptions regarding the likelihood of achieving company-performance goals,which in turn impacts our compensation expense. In addition, SFAS No. 123R requires the recognition of expense onlyfor awards that will eventually vest. This requires pre-vesting forfeitures to be estimated at the time ofgrant and modified, if necessary, if actual forfeitures differ from estimatedforfeitures.  Our forfeiture rates arebased upon historical share-based equity award cancellations.

 

We do not believe thereis a reasonable likelihood there will be a material change in the futureestimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates andassumptions, we may be exposed to changes in stock-based compensationexpense. A 10% change in our stock-based compensation expense for the yearended December 31, 2008, would have affected net income by approximately$0.4 million for the year ended December 31, 2008.

 

*Pensions,Postemployment and Postretirement Costs.* In connection withprior year acquisitions, particularly the KKR and Dynamit Nobel acquisition,Rockwood assumed responsibility for the pension and postretirement benefits forsubstantially all of the employees of the businesses acquired that were activeas of the date of the acquisition. For the KKR acquisition, obligations relatedto retired and 

 

66

----

 

terminated vestedemployees as of such date remained the responsibility of the seller, andaccordingly, these obligations are not reflected in our consolidated financialstatements. Defined benefit costs and liabilities have been determined inaccordance with SFAS No. 87,*Employers’Accounting for Pensions*  andSFAS No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106, and 132 (R).* Postretirement benefitcosts and liabilities have been determined in accordance with SFAS No. 106,*Employers’ Accounting for Postretirement BenefitsOther Than Pensions* and SFAS No. 158,*Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and132 (R).* Postemployment benefit costs and liabilities have beendetermined in accordance with SFAS No. 112,*Employers’ Accounting for Postemployment Benefits.*

 

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

 

Estimated sensitivity ofour pension funded status and stockholders’ equity and annual pension expenseto a 0.25% increase/decrease in the discount rate assumption is shown below asof and for the year ended December 31, 2008. The estimates were based oninquiries of the actuaries of plans representing approximately 85% of ourglobal pension obligations as of December 31, 2008. Remaining plans areassumed to have similar sensitivities. The December 31, 2008 funded statusand stockholders’ equity are affected by assumptions as of December 31,2008 while 2008 annual pension expense is affected by December 31, 2007assumptions:

 
| ** **                                                            | ** ** | **As of December 31, 2008** | ** ** | ** **              | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|
| **($ in millions)**                                              | ** ** | **U.S. Plans**                             | ** ** | **Non-U.S. Plans** | ** ** | ** ** | ** ** | **2008 Pension** | ** ** |
| **Impact of a Change in Discount Rate** | ** ** | **Funded Status**                          | ** ** | **Funded Status**  | ** ** | **Equity** | ** ** | **Expense** | ** ** |
| +25 basis points                                                      |       | $                                               | 1.1        |                    | $          | 17.4 |   | $ | (18.5 | ) | $ | (0.3 | ) |
| -25 basis points                                                      |       | (1.1                                            | )          | (18.3                   | )          | 19.4 |   | 0.1 |   |
|                                                                       |            |                                                 |            |                         |            |  |  |  |  |  |  |  |  |

 

As shown above, changesin the discount rate can have a significant effect on the funded status of ourpension plans and stockholders’ equity. As noted above, the funded status andstockholders’ equity of our funded plans might also be significantly affectedby assumptions concerning expected return of plan assets. However, given that mostof our pension obligations do not require funding, such sensitivity would besignificantly less.

 

*Usefullives of Plant and Equipment*. We determine the estimateduseful lives and related depreciation charges for our plant and equipment.Depreciation is determined using the straight-line method over the variousasset classes. Estimated lives range from 20-30 years for buildings andimprovements (including land improvements), 7-12 years for machinery andequipment, 3-5 years for furniture and fixtures and 14-50 years for miningrights. To the extent actual lives are less than previously estimated lives, wewill increase our depreciation charge or will write-off or write-down obsoleteassets.

 

To the extent that ourplant and equipment actual useful lives differ from management’s estimates by10%, consolidated net income would be an estimated $17.9 million higher/lowerbased upon 2008 results, depending upon whether the actual lives werelonger/shorter, respectively, than the estimates.

 

*Usefullives of Other Intangible Assets.* We determine the estimateduseful lives and related amortization charges for our other intangible assets.Other intangible assets primarily consist of patents and other intellectualproperty, trade names and trademarks, and customer relationships. Patents andother intellectual property are recorded at their estimated fair values at thetime of acquisition and are being amortized over their estimated remaininguseful lives, ranging from 4-20 years. Trade names and trademarks are being amortizedfrom 18-25 years, customer relationships are amortized from 7-15 years andsupply agreements are being amortized from 10-15 years. To the extent actuallives are less than previously estimated lives, we will increase ouramortization charge or will write-off or write-down obsolete other intangibleassets.

 

To the extent that theactual useful lives of our other intangible assets differ from management’sestimates by 10%, consolidated net income would be an estimated $8.0 millionhigher/lower based upon 2008 results, depending upon whether the actual liveswere longer/shorter, respectively, than the estimates.

 

67

----

 

**RecentAccounting Pronouncements**

 

See “Recent AccountingPronouncements” section in Note 1, “Description of Business and Summary ofSignificant Accounting Policies,” for discussion of recent accountingpronouncements.

 

**QuarterlyFinancial Information (Unaudited)**

 

The following informationhas been reclassified to reflect the sale of our Groupe Novasep segment in January 2007,the sale of the Electronics business, excluding the European wafer reclaimbusiness, in December 2007 and the sale of the pool and spa chemicalsbusiness in October 2008, that have been reported as discontinuedoperations for all periods presented.

 
| ** **                                                                  | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**           | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| **($ in millions, except per share amounts)** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter (a)** | ** ** |
| **2008**                                                                    |       |        |       |        |       |        |       |                 |       |   |   |   |   |
| Net sales                                                                   |       | $           | 843.8      |        | $          | 923.2       |       | $                    | 880.8      |   | $ | 732.3 |   |
| Gross profit                                                                |       | 272.5       |       | 283.3       |       | 257.5       |       | 201.0                |       |
|                                                                        |       |        |       |        |       |        |       |                 |       |
| Net income  (loss) from continuing operations                               |       | $           | 28.1       |        | $          | 76.2        |       | $                    | (4.8       | ) | $ | (734.1 | ) |
| (Loss) income  from discontinued operations, net of tax                     |       | (0.4        | )          | 1.8         |       | 1.5         |       | 0.4                  |       |
| Gain on sale of  discontinued operations, net of tax                        |       | —      |       | —      |       | —      |       | 42.9                 |       |
| Net income  (loss)                                                          |       | $           | 27.7       |        | $          | 78.0        |       | $                    | (3.3       | ) | $ | (690.8 | ) |
|                                                                        |       |        |       |        |       |        |       |                 |       |
| Basic earnings  (loss) from continuing operations                           |       | $           | 0.38       |        | $          | 1.03        |       | $                    | (0.06      | ) | $ | (9.91 | ) |
| Basic (loss)  earnings from discontinued operations                         |       | (0.01       | )          | 0.03        |       | 0.02        |       | 0.58                 |       |
| Basic earnings  (loss) per share                                            |       | $           | 0.37       |        | $          | 1.06        |       | $                    | (0.04      | ) | $ | (9.33 | ) |
|                                                                        |       |        |       |        |       |        |       |                 |       |
| Diluted earnings  (loss) from continuing operations                         |       | $           | 0.37       |        | $          | 0.99        |       | $                    | (0.06      | ) | $ | (9.91 | ) |
| Diluted (loss)  earnings from discontinued operations                       |       | (0.01       | )          | 0.02        |       | 0.02        |       | 0.58                 |       |
| Diluted earnings  (loss) per share                                          |       | $           | 0.36       |        | $          | 1.01        |       | $                    | (0.04      | ) | $ | (9.33 | ) |

 
| ** **                                           | ** ** | **First**            | ** ** | **Second**           | ** ** | **Third**   | ** ** | **Fourth**           | ** ** |
|------------------------------------------------------|------------|----------------------|------------|----------------------|------------|-------------|------------|----------------------|------------|
| ** **                                           | ** ** | **Quarter (b)** | ** ** | **Quarter (c)** | ** ** | **Quarter** | ** ** | **Quarter (d)** | ** ** |
| **2007**                                             |       |                 |       |                 |       |        |       |                 |       |
| Net sales                                            |       | $                    | 735.5      |                 | $          | 782.5       |       | $                    | 763.1      |   | $ | 784.1 |   |
| Gross profit                                         |       | 240.6                |       | 254.0                |       | 237.3       |       | 244.2                |       |
|                                                 |       |                 |       |                 |       |        |       |                 |       |
| Net income from  continuing operations               |       | $                    | 25.2       |                 | $          | 22.4        |       | $                    | 19.2       |   | $ | 14.7 |   |
| Income from  discontinued operations, net of tax     |       | 4.5                  |       | 5.6                  |       | 5.5         |       | 9.7                  |       |
| Gain on sale of  discontinued operations, net of tax |       | 115.7                |       | —               |       | —      |       | 94.7                 |       |
| Minority  interest in discontinued operations        |       | (0.1                 | )          | —               |       | —      |       | —               |       |
| Net income                                           |       | $                    | 145.3      |                 | $          | 28.0        |       | $                    | 24.7       |   | $ | 119.1 |   |
|                                                 |       |                 |       |                 |       |        |       |                 |       |
| Basic earnings  from continuing operations           |       | $                    | 0.34       |                 | $          | 0.30        |       | $                    | 0.26       |   | $ | 0.20 |   |
| Basic earnings  from discontinued operations         |       | 1.63                 |       | 0.08                 |       | 0.07        |       | 1.41                 |       |
| Basic earnings  per share                            |       | $                    | 1.97       |                 | $          | 0.38        |       | $                    | 0.33       |   | $ | 1.61 |   |
|                                                 |       |                 |       |                 |       |        |       |                 |       |
| Diluted earnings  from continuing operations         |       | $                    | 0.33       |                 | $          | 0.29        |       | $                    | 0.25       |   | $ | 0.19 |   |
| Diluted earnings  from discontinued operations       |       | 1.60                 |       | 0.08                 |       | 0.07        |       | 1.37                 |       |
| Diluted earnings  per share                          |       | $                    | 1.93       |                 | $          | 0.37        |       | $                    | 0.32       |   | $ | 1.56 |   |

 

----

(a)         Results in the fourthquarter of 2008 include a goodwill impairment charge of $809.5 million ($675.7million net of tax and minority interest) and a gain of $42.9 million (net oftax) primarily related to the sale of the pool and spa chemicals business on October 10,2008.

 

(b)        Results in the firstquarter of 2007 include a gain of $115.7 million (net of tax) related to thesale of Group Novasep on January 9, 2007.

 

68

----

 

(c)         Results in the secondquarter of 2007 include a redemption premium of $14.5 million and the write offof $4.1 million of deferred financing costs associated with the redemption ofthe 2011 Notes on May 15, 2007.

 

(d)        Results in the fourthquarter of 2007 include a gain of $94.8 million (net of tax) related to thesale of the Electronics business, excluding the European wafer reclaimbusiness, on December 31, 2007.

 

The basic and dilutedearnings (loss) per common share amounts are calculated independently for eachof the quarters presented. The sum of the quarters may not equal the full yearamounts.

 

**Item7A. 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.

 

**InterestRate Risk**

 

We had $699.5 million and$425.1 million of variable rate debt (after hedging) outstanding as of December 31,2008 and 2007, respectively, at the then applicable exchange rate. Any borrowingsunder our revolving credit facility will also be at a variable rate. Althoughwe are not required under the terms of any of our long-term debt facilities tohedge, or otherwise protect against interest rate fluctuation in our variablerate debt, we have entered into interest rate swaps to manage our exposure tochanges in interest rates related to variable-rate debt. As of December 31,2008, these contracts cover notional amounts of $610.0 million (at interestrates ranging from 4.864% to 5.038%) and €499.9 million (at interest ratesranging from 2.995% to 4.416%). As of December 31, 2007, these contractscover notional amounts of $725.0 million (at a rate of 4.499%) and €410.9million (at rates ranging from 2.498% to 4.529%). The derivative contracts asof December 31, 2008 effectively convert the senior secured credit obligations andthe obligations under the Titanium Dioxide Pigments term loan facility to fixedrate obligations. These hedges will 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 Consolidated Statements of Operations. We may in thefuture consider adjusting the amounts covered by these derivative contracts tobetter suit our capital structure. Each 0.125% increase or decrease in theassumed weighted average interest rate would change the annual interest expenseby $0.9 million and $0.5 million in 2008 and 2007, respectively.

 

**ForeignCurrency Risk**

 

We conduct operations inmany countries around the world. Our results of operations are subject to bothcurrency transaction risk and currency translation risk. We operate ageographically diverse business, with 54% of our net sales in 2008 generatedfrom customers in Europe, 29% in North America (predominantly in the UnitedStates) and 17% from the rest of the world based upon customer ship tolocations. For a geographic description of the origin of our net sales and locationof our long-lived assets, see Note 3, “Segment Information.” Our diverse andextensive customer base is served by 96 manufacturing facilities in 26countries. Although we sell and manufacture our products in many countries, oursales and production costs are mainly denominated in U.S. dollars and euros.Our results of operations and financial condition are therefore impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar.Approximately 54% of our 2008 net sales were derived from subsidiaries whoselocal currency is the euro. This increases the impact of the fluctuation of theeuro against the U.S. dollar.

 

We incur currencytransaction risk whenever we enter into either a purchase or sale transactionusing a currency other than the local currency of the transacting entity. Gainsand losses on currency transactions are included in operating income and doimpact our operating margins. With respect to currency translation risk, ourfinancial condition and results of operations are measured and recorded in therelevant domestic currency and then translated into U.S. dollars for inclusionin our consolidated financial statements. Gains and losses on currencytranslations are recorded in our consolidated financial statements as acomponent of “other comprehensive income (loss)” and do not impact ouroperating margins. Exchange rates between these currencies and U.S. dollars inrecent years have fluctuated significantly and may do so in the future.

 

In December 2008, weentered into foreign currency forward contracts to manage our exposure tofluctuations in currency rates on third-party sales denominated in a currencyother than the functional currency of the legal entity.  We hedged such exposures with foreigncurrency forward contracts denominated in the same currency and with similarterms as the underlying exposure. Therefore, the instruments were designated asforeign exchange cash flow hedges and are effective at generating offsettingchanges in the fair value or cash flows of the hedged item or transaction. As aresult, any foreign currency gains or losses related to changes in the fairvalue of the derivative is accounted for as a component of accumulated othercomprehensive income for as long as the hedge remains effective.  See discussion of derivative contracts underNote 9, “Long-Term Debt” for further details.

 

Our financial results aresubject to the effect of currency fluctuations on the translation of oureuro-denominated debt. As of December 31, 2008 and 2007, our totaleuro-denominated debt equaled €1,069.2 million ($1,493.8 million) and €841.5million

 

69

----

 

($1,227.7 million basedon the December 31, 2007 exchange rate of €1.00 = $1.4590), respectively.A weakening or strengthening of the euro against the U.S. dollar by $0.01 woulddecrease or increase, respectively, by $10.7 million and $8.4 million in 2008and 2007, respectively, the U.S. dollar equivalent of our totaleuro-denominated debt. Gains and losses on the translation of debt denominatedin a currency other than the functional currency of the borrower are includedas a separate component of “other income (expenses)” in our statement ofoperations and “accumulated other comprehensive income” in our balance sheet.

 

In connection with theoffering of the 2014 Notes, we entered into a cross-currency interest rate swapin November 2004 with a notional amount of €155.6 million that effectivelyconverts the U.S. dollar fixed rate debt in respect of the 2014dollar-denominated notes sold into euro fixed rate debt. We designated thiscontract as a hedge of the foreign currency exposure of our net investment inour euro-denominated operations. In addition, we designated the remainingportion of our euro-denominated debt that is recorded on our U.S. books as anet investment hedge of our euro-denominated investments as of October 1,2005 (euro debt of €652.0 million at December 31, 2008; $910.9 million).As a result, any foreign currency gains and losses resulting from theeuro-denominated debt discussed above is accounted for as a component ofaccumulated other comprehensive income.

 

**CommodityPrice Risk**

 

We are subject tocommodity price risk for certain of our raw materials, such as copper and zinc.We have not materially hedged this commodity price exposure to date.  In March 2008, we entered intoderivative contracts in our Titanium Dioxide Pigments segment to protect aportion of its exposure to movements in certain raw materials prices.  These contracts expired in November 2008.  We elected not to apply hedge accounting forthese derivative contracts and recorded the mark-to-market of these contractsin cost of products sold in our Consolidated Statements of Operations.

 

70

----

 

**Item8. Financial Statements and Supplementary Data.**

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of 

Rockwood Holdings, Inc.**Princeton, New Jersey

 

We have audited the accompanying consolidated balance sheets ofRockwood Holdings, Inc.**andsubsidiaries (the “Company”) as of December 31, 2008 and 2007, and the relatedconsolidated statements of operations, changes in stockholders’ equity, andcash flows for each of the three years in the period ended December 31,2008.  Our audits also included the financial statement schedule listed inthe Index at Item 15.  These financial statements and financial statementschedule are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on the financial statements andfinancial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of RockwoodHoldings, Inc.**and subsidiariesat December 31, 2008 and 2007, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2008, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion, such financial statementschedule, when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

 

As discussed in Note 1 to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standard No. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans* as ofDecember 31, 2006, Financial Accounting Standards Board InterpretationNo. 48, *Accounting for Uncertainty inIncome Taxes – an interpretation of FASB Statement No. 109* onJanuary 1, 2007, and Statement of Financial Accounting StandardNo. 157, *Fair Value Measurements*on January 1, 2008.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of December 31, 2008, based on thecriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 2,2009 expressed an unqualified opinion on the Company’s internal control overfinancial reporting.

 

 
| /s/ Deloitte &  Touche LLP |   |
|-------------------------------------|--------|
| Parsippany, New Jersey              |   |
| March 2, 2009                  |   |

 

71

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin millions, except per share amounts; shares in thousands)**

 
| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                                                    |       | $                                          | 3,380.1    |   | $ | 3,065.2 |   | $ | 2,714.7 |   |
| Cost of products  sold                                                       |       | 2,365.8                                    |       | 2,089.1 |   | 1,859.0 |   |
| Gross profit                                                                 |       | 1,014.3                                    |       | 976.1 |   | 855.7 |   |
| Selling, general  and administrative expenses                                |       | 661.3                                      |       | 597.6 |   | 540.4 |   |
| Impairment  charges                                                          |       | 809.5                                      |       | — |   | 2.2 |   |
| Restructuring and other severance costs                                      |       | 35.3                                       |       | 12.0 |   | 4.9 |   |
| Gain on sale of  assets and other                                            |       | (2.4                                       | )          | (4.7 | ) | (0.3 | ) |
| Operating (loss)  income                                                     |       | (489.4                                     | )          | 371.2 |   | 308.5 |   |
| Other expenses,  net:                                                        |       |                                       |       |   |   |   |   |
| Interest expense  (a)                                                        |       | (231.1                                     | )          | (219.3 | ) | (199.9 | ) |
| Interest income                                                              |       | 6.0                                        |       | 11.5 |   | 2.4 |   |
| Gain (loss) on  early extinguishment of debt                                 |       | 4.0                                        |       | (18.6 | ) | — |   |
| Refinancing  expenses                                                        |       | —                                     |       | (0.9 | ) | — |   |
| Foreign exchange  (loss) gain, net                                           |       | (32.3                                      | )          | 7.8 |   | 8.6 |   |
| Other, net                                                                   |       | 0.7                                        |       | — |   | 1.8 |   |
| Other expenses,  net                                                         |       | (252.7                                     | )          | (219.5 | ) | (187.1 | ) |
| (Loss) income  from continuing operations before taxes and minority interest |       | (742.1                                     | )          | 151.7 |   | 121.4 |   |
| Income tax  (benefit) provision                                              |       | (23.9                                      | )          | 62.3 |   | 61.3 |   |
| (Loss) income  from continuing operations before minority interest           |       | (718.2                                     | )          | 89.4 |   | 60.1 |   |
| Minority  interest in continuing operations, net of tax                      |       | 83.6                                       |       | (7.9 | ) | — |   |
| Net (loss)  income from continuing operations                                |       | (634.6                                     | )          | 81.5 |   | 60.1 |   |
| Income from  discontinued operations, net of tax                             |       | 3.3                                        |       | 25.3 |   | 48.1 |   |
| Gain on sale of  discontinued operations, net of tax                         |       | 42.9                                       |       | 210.4 |   | — |   |
| Minority interest  in discontinued operations, net of tax                    |       | —                                     |       | (0.1 | ) | (5.2 | ) |
| Net (loss)  income                                                           |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Basic (loss)  earnings per share:                                            |       |                                       |       |   |   |   |   |
| (Loss) earnings  from continuing operations                                  |       | $                                          | (8.58      | ) | $ | 1.10 |   | $ | 0.81 |   |
| Earnings from  discontinued operations, net of tax                           |       | 0.63                                       |       | 3.20 |   | 0.59 |   |
| Basic (loss)  earnings per share                                             |       | $                                          | (7.95      | ) | $ | 4.30 |   | $ | 1.40 |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Diluted (loss)  earnings per share:                                          |       |                                       |       |   |   |   |   |
| (Loss) earnings  from continuing operations                                  |       | $                                          | (8.58      | ) | $ | 1.07 |   | $ | 0.80 |   |
| Earnings from  discontinued operations, net of tax                           |       | 0.63                                       |       | 3.09 |   | 0.57 |   |
| Diluted (loss)  earnings per share                                           |       | $                                          | (7.95      | ) | $ | 4.16 |   | $ | 1.37 |   |
|                                                                         |       |                                       |       |   |   |   |   |
| Weighted average  number of basic shares outstanding                         |       | 73,983                                     |       | 73,817 |   | 73,782 |   |
| Weighted average  number of diluted shares outstanding                       |       | 73,983                                     |       | 76,279 |   | 75,044 |   |

 

----

| (a) Interest  expense includes:                       |   |   |   |   |   |   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Interest expense  on debt                             |   | $      | (170.0 | )      | $      | (177.9 | )      | $ | (197.6 | ) |
| Mark-to-market (losses)  gains on interest rate swaps |   | (51.5  | )      | (32.2  | )      | 7.2    |   |
| Deferred financing  costs                             |   | (9.6   | )      | (9.2   | )      | (9.5   | )      |
| Total                                                 |   | $      | (231.1 | )      | $      | (219.3 | )      | $ | (199.9 | ) |

 

See accompanyingnotes to consolidated financial statements.

 

72

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts; shares in thousands)**

 
| ** **                                                                                                                                                                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                           |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                |       | $                     | 468.7      |   | $ | 350.1 |   |
| Accounts  receivable, net                                                                                                                                                                                                                 |       | 464.6                 |       | 460.3 |   |
| Inventories                                                                                                                                                                                                                               |       | 641.0                 |       | 526.9 |   |
| Deferred income  taxes                                                                                                                                                                                                                    |       | 22.1                  |       | 22.6 |   |
| Prepaid expenses  and other current assets                                                                                                                                                                                                |       | 65.9                  |       | 69.7 |   |
| Assets of  discontinued operations                                                                                                                                                                                                        |       | —                |       | 75.1 |   |
| Total current  assets                                                                                                                                                                                                                     |       | 1,662.3               |       | 1,504.7 |   |
| Property, plant  and equipment, net                                                                                                                                                                                                       |       | 1,752.2               |       | 1,508.5 |   |
| Goodwill                                                                                                                                                                                                                                  |       | 917.8                 |       | 1,730.0 |   |
| Other intangible  assets, net                                                                                                                                                                                                             |       | 754.8                 |       | 675.9 |   |
| Deferred debt  issuance costs, net of accumulated amortization of $39.2 and $31.2,  respectively                                                                                                                                          |       | 39.1                  |       | 41.1 |   |
| Deferred income  taxes                                                                                                                                                                                                                    |       | 11.6                  |       | 15.5 |   |
| Other assets                                                                                                                                                                                                                              |       | 39.5                  |       | 39.2 |   |
| Total assets                                                                                                                                                                                                                              |       | $                     | 5,177.3    |   | $ | 5,514.9 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                                                                     |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                          |       | $                     | 260.8      |   | $ | 285.5 |   |
| Income taxes  payable                                                                                                                                                                                                                     |       | 4.1                   |       | 9.5 |   |
| Accrued  compensation                                                                                                                                                                                                                     |       | 92.6                  |       | 81.5 |   |
| Restructuring  liability                                                                                                                                                                                                                  |       | 18.9                  |       | 14.0 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                           |       | 198.5                 |       | 164.3 |   |
| Deferred income  taxes                                                                                                                                                                                                                    |       | 9.0                   |       | 7.2 |   |
| Long-term debt,  current portion                                                                                                                                                                                                          |       | 90.9                  |       | 107.4 |   |
| Liabilities of  discontinued operations                                                                                                                                                                                                   |       | —                |       | 17.0 |   |
| Total current  liabilities                                                                                                                                                                                                                |       | 674.8                 |       | 686.4 |   |
| Long-term debt                                                                                                                                                                                                                            |       | 2,720.3               |       | 2,474.0 |   |
| Pension and  related liabilities                                                                                                                                                                                                          |       | 352.0                 |       | 327.5 |   |
| Deferred income  taxes                                                                                                                                                                                                                    |       | 97.6                  |       | 112.6 |   |
| Other  liabilities                                                                                                                                                                                                                        |       | 191.6                 |       | 165.7 |   |
| Total  liabilities                                                                                                                                                                                                                        |       | 4,036.3               |       | 3,766.2 |   |
| Minority  interest                                                                                                                                                                                                                        |       | 315.4                 |       | 175.3 |   |
| Restricted stock  units                                                                                                                                                                                                                   |       | 2.1                   |       | 1.8 |   |
|                                                                                                                                                                                                                                      |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                                                                                                                               |       |                  |       |   |   |
| Common stock  ($0.01 par value, 400,000 shares authorized, 74,155 shares issued and 74,061  shares outstanding at December 31, 2008; 400,000 shares authorized, 73,989  shares issued and 73,895 shares outstanding at December 31, 2007) |       | 0.7                   |       | 0.7 |   |
| Paid-in capital                                                                                                                                                                                                                           |       | 1,163.5               |       | 1,156.2 |   |
| Accumulated  other comprehensive income                                                                                                                                                                                                   |       | 204.0                 |       | 371.0 |   |
| Retained  (deficit) earnings                                                                                                                                                                                                              |       | (543.3                | )          | 45.1 |   |
| Treasury stock,  at cost                                                                                                                                                                                                                  |       | (1.4                  | )          | (1.4 | ) |
| Total  stockholders’ equity                                                                                                                                                                                                          |       | 823.5                 |       | 1,571.6 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                          |       | $                     | 5,177.3    |   | $ | 5,514.9 |   |

 

See accompanyingnotes to consolidated financial statements.

 

73

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

 
| ** **                                                                                                                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                        |       |                                       |       |   |   |   |   |
| Net (loss)  income                                                                                                                                                |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities:                                                                         |       |                                       |       |   |   |   |   |
| Income from  discontinued operations, net of tax                                                                                                                  |       | (3.3                                       | )          | (25.3 | ) | (48.1 | ) |
| Gain on sale of  discontinued operations, net of tax                                                                                                              |       | (42.9                                      | )          | (210.4 | ) | — |   |
| Minority  interest in discontinued operations, net of tax                                                                                                         |       | —                                     |       | 0.1 |   | 5.2 |   |
| Depreciation and  amortization                                                                                                                                    |       | 258.9                                      |       | 211.7 |   | 174.4 |   |
| Deferred  financing costs amortization                                                                                                                            |       | 9.6                                        |       | 9.2 |   | 9.5 |   |
| (Gain) loss on  early extinguishment of debt (including $4.1 of noncash write-offs on  deferred financing costs for the year ended December 31, 2007)             |       | (4.0                                       | )          | 18.6 |   | — |   |
| Foreign exchange  loss (gain)                                                                                                                                     |       | 32.3                                       |       | (7.8 | ) | (8.6 | ) |
| Fair value  adjustment of derivatives                                                                                                                             |       | 51.5                                       |       | 32.2 |   | (7.2 | ) |
| Bad debt  provision                                                                                                                                               |       | 3.4                                        |       | (1.3 | ) | (0.1 | ) |
| Acquired  in-process research and development                                                                                                                     |       | 2.9                                        |       | — |   | — |   |
| Stock-based  compensation                                                                                                                                         |       | 4.1                                        |       | 3.9 |   | — |   |
| Deferred income  taxes                                                                                                                                            |       | (64.5                                      | )          | 29.0 |   | 36.4 |   |
| Impairment  charges                                                                                                                                               |       | 809.5                                      |       | — |   | 2.2 |   |
| Loss (gain) on  sale of assets and other                                                                                                                          |       | 0.7                                        |       | (4.7 | ) | (0.2 | ) |
| Minority  interest in continuing operations                                                                                                                       |       | (83.6                                      | )          | 7.9 |   | — |   |
| Changes in assets  and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                          |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                                                                                                              |       | 36.8                                       |       | 7.1 |   | (22.1 | ) |
| Inventories                                                                                                                                                       |       | (66.8                                      | )          | (34.5 | ) | (26.3 | ) |
| Prepaid expenses  and other assets                                                                                                                                |       | 10.5                                       |       | (18.5 | ) | 20.7 |   |
| Accounts payable                                                                                                                                                  |       | (52.1                                      | )          | 1.6 |   | 10.1 |   |
| Income taxes  payable                                                                                                                                             |       | (1.4                                       | )          | (6.4 | ) | (4.8 | ) |
| Accrued expenses  and other liabilities                                                                                                                           |       | (28.6                                      | )          | 0.7 |   | 2.1 |   |
| Net cash  provided by operating activities of continuing operations                                                                                               |       | 284.6                                      |       | 330.2 |   | 246.2 |   |
| Net cash  provided by operating activities of discontinued operations                                                                                             |       | 12.0                                       |       | 38.3 |   | 56.4 |   |
| **Net  cash provided by operating activities**                                                                                                                    |       | 296.6                                      |       | 368.5 |   | 302.6 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                        |       |                                       |       |   |   |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                                                              |       | (226.7                                     | )          | (240.1 | ) | (45.7 | ) |
| Post closing  purchase price consideration                                                                                                                        |       | 29.8                                       |       | — |   | — |   |
| Capital  expenditures, excluding capital leases                                                                                                                   |       | (224.0                                     | )          | (193.2 | ) | (165.1 | ) |
| Proceeds from  formation of Viance joint venture, net                                                                                                             |       | —                                     |       | 73.0 |   | — |   |
| Proceeds on sale  of assets                                                                                                                                       |       | 9.1                                        |       | 14.2 |   | 4.3 |   |
| Net cash used in  investing activities of continuing operations                                                                                                   |       | (411.8                                     | )          | (346.1 | ) | (206.5 | ) |
| Net cash  provided by (used in) investing activities of discontinued operations,  including net sale proceeds of $122.0 and $731.7 in 2008 and 2007, respectively |       | 116.3                                      |       | 723.7 |   | (42.3 | ) |
| **Net  cash (used in) provided by investing activities**                                                                                                          |       | (295.5                                     | )          | 377.6 |   | (248.8 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                        |       |                                       |       |   |   |   |   |
| Issuance of  common stock, net of fees                                                                                                                            |       | 2.3                                        |       | 1.5 |   | 0.1 |   |
| Titanium Dioxide  Pigments venture financing                                                                                                                      |       | 362.5                                      |       | — |   | — |   |
| Payment of  assumed debt to Titanium Dioxide Pigments venture minority shareholder                                                                                |       | (141.4                                     | )          | — |   | — |   |
| Proceeds from  senior secured credit facilities                                                                                                                   |       | —                                     |       | — |   | 239.1 |   |
| Repayment of  2011 Notes                                                                                                                                          |       | —                                     |       | (273.4 | ) | — |   |
| Repayment of  2014 Notes                                                                                                                                          |       | (10.2                                      | )          | — |   | — |   |
| Repayment of  senior secured credit facilities                                                                                                                    |       | (68.7                                      | )          | (57.1 | ) | (275.6 | ) |
| Repayment of  senior secured credit facilities revolver                                                                                                           |       | —                                     |       | (37.0 | ) | — |   |
| Payments on  other long-term debt                                                                                                                                 |       | (30.9                                      | )          | (24.1 | ) | (20.1 | ) |
| Deferred  financing costs                                                                                                                                         |       | (5.0                                       | )          | — |   | — |   |
| Payments related  to early extinguishment of debt                                                                                                                 |       | —                                     |       | (14.5 | ) | — |   |
| Distribution to  minority shareholder                                                                                                                             |       | (3.9                                       | )          | (7.2 | ) | — |   |
| Net cash  provided by (used in) financing activities of continuing operations                                                                                     |       | 104.7                                      |       | (411.8 | ) | (56.5 | ) |
| Net cash used in  financing activities of discontinued operations                                                                                                 |       | —                                     |       | — |   | (46.2 | ) |
| **Net  cash provided by (used in) financing activities**                                                                                                          |       | 104.7                                      |       | (411.8 | ) | (102.7 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                                                                                                     |       | 12.8                                       |       | (10.3 | ) | (13.8 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                                                                             |       | 118.6                                      |       | 324.0 |   | (62.7 | ) |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                                                                                 |       | —                                     |       | (1.6 | ) | (10.1 | ) |
| Increase  (decrease) in cash and cash equivalents from continuing operations                                                                                      |       | 118.6                                      |       | 322.4 |   | (72.8 | ) |
| Cash and cash  equivalents of continuing operations, beginning of period                                                                                          |       | 350.1                                      |       | 27.7 |   | 100.5 |   |
| Cash and cash  equivalents of continuing operations, end of period                                                                                                |       | $                                          | 468.7      |   | $ | 350.1 |   | $ | 27.7 |   |

 

----

(a) - Excludes net saleproceeds of $122.0 and intercompany transfers of $6.3 for the year endedDecember 31, 2008. Excludes net sale proceeds of $731.7 in 2007 andintercompany transfers of $28.7 and $(42.2) for the years ended December 31,2007 and 2006, respectively.

 
| Supplemental  disclosures of cash flow information: |   |   |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Interest paid                                       |   | $      | 167.3  |   | $      | 174.4  |   | $ | 147.8 |   |
| Income taxes  paid, net of refunds                  |   | $      | 41.9   |   | $      | 39.8   |   | $ | 31.3 |   |
| Non-cash  investing activities:                     |   |   |   |   |   |   |   |
| Titanium Dioxide  Pigments venture formation, net   |   | $      | 246.0  |   | $      | — |   | $ | — |   |
| Acquisition of  capital equipment                   |   | $      | 22.7   |   | $      | 24.7   |   | $ | 24.6 |   |

 

See accompanyingnotes to consolidated financial statements.

 

74

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

**(Dollarsin millions; shares in thousands)**
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | ** **             | ** ** | ** **        | ** ** | ** **             | ** ** | ** **   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|--------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **        | ** ** | ** **             | ** ** | ** **   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Other**              | ** ** | **Retained**      | ** ** | ** **             | ** ** | **Treasury** | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Earnings**           | ** ** | **Comprehensive** | ** ** | **Stock**              | ** ** | ** **   | ** ** | **Stockholders’** | ** ** |
| ** **                                                                | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **(Deficit)**     | ** ** | **Income (Loss)** | ** ** | **Shares**   | ** ** | **Amount**             | ** ** | **Other**  | ** ** | **Equity** | ** ** |
| Balance, January  1, 2006                                                 |       | 73,779                |       | $           | 0.7        |              | $          | 1,151.7                |       | $                 | 52.0       |                   | $          | (367.6       | )          |                   |       | 94         |       | $          | (1.4       | ) | $ | (0.7 | ) | $ | 834.7 |   |
| Issuance of  common stock                                                 |       | 6                     |       | —      |       | 0.1               |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —     |       | 0.1        |       |
| Deferred  compensation                                                    |       | —                |       | —      |       | —            |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | 0.7        |       | 0.7        |       |
| Minimum pension  liability, net of tax                                    |       | —                |       | —      |       | —            |       | 20.7                   |       | —            |       | $                      | 20.7       |         | —     |                   | —     |       | —     |       | 20.7       |   |
| Effect of  adoption of SFAS No. 158, net of tax                           |       | —                |       | —      |       | —            |       | (11.3                  | )          | —            |       | —                 |       | —       |       | —                 |       | —     |       | (11.3      | )          |
| Foreign currency  translation                                             |       | —                |       | —      |       | —            |       | 147.4                  |       | —            |       | 147.4                  |       | —       |       | —                 |       | —     |       | 147.4      |       |
| Intercompany  foreign currency loans                                      |       | —                |       | —      |       | —            |       | 131.7                  |       | —            |       | 131.7                  |       | —       |       | —                 |       | —     |       | 131.7      |       |
| Net investment  hedges, net of tax                                        |       | —                |       | —      |       | —            |       | (107.1                 | )          | —            |       | (107.1                 | )          | —       |       | —                 |       | —     |       | (107.1     | )          |
| Cash flow hedges,  net of tax                                             |       | —                |       | —      |       | —            |       | 0.6                    |       | —            |       | 0.6                    |       | —       |       | —                 |       | —     |       | 0.6        |       |
| Net income                                                                |       | —                |       | —      |       | —            |       | —                 |       | 103.0             |       | 103.0                  |       | —       |       | —                 |       | —     |       | 103.0      |       |
| Comprehensive income                                                      |       |                  |       |        |       |              |       |                   |       |              |       | $                      | 296.3      |         |       |                   |       |       |       |       |       |   |
| Balance, December  31, 2006                                               |       | 73,785                |       | 0.7         |       | 1,151.8           |       | 234.0                  |       | (264.6            | )          |                   |       | 94           |       | (1.4                   | )          | —     |       | 1,120.5    |       |
| Issuance of  common stock                                                 |       | 110                   |       | —      |       | 1.5               |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —     |       | 1.5        |       |
| Deferred  compensation                                                    |       | —                |       | —      |       | 4.7               |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —     |       | 4.7        |       |
| Restricted stock  units                                                   |       | —                |       | —      |       | (1.8              | )          | —                 |       | —            |       |                   |       | —       |       | —                 |       | —     |       | (1.8       | )          |
| Pension related  adjustments, net of tax                                  |       | —                |       | —      |       | —            |       | 36.7                   |       | —            |       | 36.7                   |       | —       |       | —                 |       | —     |       | 36.7       |       |
| Effect of  adoption of FIN No. 48                                         |       | —                |       | —      |       | —            |       | —                 |       | (7.4              | )          | —                 |       | —       |       | —                 |       | —     |       | (7.4       | )          |
| Foreign currency  translation                                             |       | —                |       | —      |       | —            |       | 177.6                  |       | —            |       | 177.6                  |       | —       |       | —                 |       | —     |       | 177.6      |       |
| Sales of  investments in foreign entities, primarily Electronics business |       | —                |       | —      |       | —            |       | (35.8                  | )          | —            |       | (35.8                  | )          | —       |       | —                 |       | —     |       | (35.8      | )          |
| Intercompany  foreign currency loans                                      |       | —                |       | —      |       | —            |       | 66.8                   |       | —            |       | 66.8                   |       | —       |       | —                 |       | —     |       | 66.8       |       |
| Net investment  hedges, net of tax                                        |       | —                |       | —      |       | —            |       | (108.3                 | )          | —            |       | (108.3                 | )          | —       |       | —                 |       | —     |       | (108.3     | )          |
| Net income                                                                |       | —                |       | —      |       | —            |       | —                 |       | 317.1             |       | 317.1                  |       | —       |       | —                 |       | —     |       | 317.1      |       |
| Comprehensive  income                                                     |       |                  |       |        |       |              |       |                   |       |              |       | $                      | 454.1      |         |       |                   |       |       |       |       |       |   |
| Balance, December  31, 2007                                               |       | 73,895                |       | 0.7         |       | 1,156.2           |       | 371.0                  |       | 45.1              |       |                   |       | 94           |       | (1.4                   | )          | —     |       | 1,571.6    |       |
| Issuance of  common stock                                                 |       | 166                   |       | —      |       | 2.3               |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —     |       | 2.3        |       |
| Deferred  compensation                                                    |       | —                |       | —      |       | 5.3               |       | —                 |       | —            |       |                   |       | —       |       | —                 |       | —     |       | 5.3        |       |
| Restricted stock  units                                                   |       | —                |       | —      |       | (0.3              | )          | —                 |       | —            |       |                   |       | —       |       | —                 |       | —     |       | (0.3       | )          |
| Pension related  adjustments, net of tax                                  |       | —                |       | —      |       | —            |       | (27.9                  | )          | —            |       | (27.9                  | )          | —       |       | —                 |       | —     |       | (27.9      | )          |
| Foreign currency  translation                                             |       | —                |       | —      |       | —            |       | (146.0                 | )          | —            |       | (146.0                 | )          | —       |       | —                 |       | —     |       | (146.0     | )          |
| Intercompany  foreign currency loans                                      |       | —                |       | —      |       | —            |       | (32.2                  | )          | —            |       | (32.2                  | )          | —       |       | —                 |       | —     |       | (32.2      | )          |
| Net investment  hedges, net of tax                                        |       | —                |       | —      |       | —            |       | 38.9                   |       | —            |       | 38.9                   |       | —       |       | —                 |       | —     |       | 38.9       |       |
| Cash flow hedges,  net of tax                                             |       | —                |       | —      |       | —            |       | 0.2                    |       | —            |       | 0.2                    |       | —       |       | —                 |       | —     |       | 0.2        |       |
| Net loss                                                                  |       | —                |       | —      |       | —            |       | —                 |       | (588.4            | )          | (588.4                 | )          | —       |       | —                 |       | —     |       | (588.4     | )          |
| Comprehensive loss                                                        |       |                  |       |        |       |              |       |                   |       |              |       | $                      | (755.4     | )            |       |                   |       |       |       |       |       |   |
| Balance, December  31, 2008                                               |       | 74,061                |       | $           | 0.7        |              | $          | 1,163.5                |       | $                 | 204.0      |                   | $          | (543.3       | )          |                   |       | 94         |       | $          | (1.4       | ) | $ | — |   | $ | 823.5 |   |

 

See accompanyingnotes to consolidated financial statements.

 

75

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**Notes To Consolidated FinancialStatements**

 

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

 

***Business Description, Background***—RockwoodHoldings, Inc. and Subsidiaries (“Rockwood” or the “Company”) is a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials used for industrial and commercial purposes.

 

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 chemicals, iron-oxide pigments,timber-treatment chemicals, clay-based additives, pool and spa chemicals, andelectronic chemicals in semiconductors and printed circuit boards.

 

On July 31, 2004,the Company completed the acquisition of certain businesses of Dynamit Nobelfrom mg technologies ag, now known as GEA Group Aktiengesellschaft (the “DynamitNobel Acquisition”). The businesses acquired are focused on highly specializedmarkets and consist of: surface treatment and lithium chemicals; advancedceramics and titanium dioxide pigments.

 

On November 16,2007, funds affiliated with KKR and DLJ Merchant Banking Partners III, L.P. (“DLJMB”)and certain management stockholders sold an aggregate of 10 million shares ofthe Company’s common stock. On December 7, 2007, these stockholders soldan additional aggregate amount of 125,915 shares of common stock as a result ofthe underwriters’ partial exercise of the over-allotment option. Prior to thisoffering, affiliates of KKR owned approximately 50.9% of the Company’s commonstock on an undiluted basis. As a result of this offering, effective November 16,2007, affiliates of KKR control less than a majority of the voting power of theCompany’s outstanding common stock and as a result, the Company is no longerconsidered a “controlled company” under NYSE rules. On June 17, 2008, fundsaffiliated with KKR, DLJMB and certain management stockholders sold anaggregate of 10 million shares of the Company’s common stock.

 

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. These businesses have been reported asdiscontinued operations for all periods presented.

 

On September 1,2008, the Company completed the formation of a venture with Kemira Oyj (“Kemira”)that focuses on specialty titanium dioxide pigments (See Note 4, “Acquisitions,”for further details).

 

On October 10, 2008,the Company completed the sale of its pool and spa chemicals business in thePerformance Additives segment.

 

***Basis of Presentation***—The accompanyingfinancial statements of Rockwood are presented on a consolidated basis. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation. Certain prior period amounts related to reporting the sale ofthe pool and spa chemicals business as discontinued operations, have beenreclassified to conform to current-year classification. See Note 2, “DiscontinuedOperations,” for further details. In the opinion of management, thisinformation contains all adjustments necessary for a fair presentation of theresults for the periods presented.

 

The Company’s minorityinterest in continuing operations represents the total of the minority party’sinterest in certain investments (principally the Viance, LLC joint venture andthe Titanium Dioxide Pigments venture) that are consolidated but less than 100%owned. On January 2, 2007, Chemical Specialties, Inc. (“CSI”), awholly-owned subsidiary of the Company within the Timber Treatment Chemicalsbusiness 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. In accordance with the consolidationprinciples of Financial Accounting Standards Board (“FASB”) Interpretation (“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.  At December 31, 2008 and 2007, the Viance,LLC joint venture had no third party debt outstanding, no consolidated assetsof the Company were pledged as collateral for any joint venture obligations andthe general creditors of the joint venture had no recourse to the generalcredit of the Company.  The net assets ofthe Viance, LLC joint venture included in the Consolidated Balance Sheets ofthe Company were $87.5 million and $99.0 million at December 31, 2008 and 2007,respectively, and were primarily related to identifiable intangible assets. Allintercompany accounts, balances and transactions have been eliminated.

 

As noted above, theCompany completed a Titanium Dioxide Pigments venture with Kemira in September 2008. The Company has consolidated this venture and has reported Kemira’s interest asminority interest in the consolidated financial statements. This entity did notmeet the definition of a variable interest entity under FIN 46 (R) and was thusconsolidated in accordance with ARB No. 51, *Consolidated Financial Statements*.The water treatment business formerly within the Titanium Dioxide Pigmentssegment was not part of the transaction and is now being reported within theClay-based Additives business in the Performance Additives segment. As aresult, the Company’s financial statements have been reclassified to reflectthe water treatment business as part of the Performance Additives segment forthe periods presented. See Note 4, “Acquisitions,” for further details.

 

Unless otherwise noted,all balances which are denominated in euros are converted at the December 31,2008 exchange rate of €1.00 = $1.3971.

 

***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-added

 

76

----

 

specialty chemicals andadvanced materials. The Company currently operates in various business lineswithin 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 and clay-based additives, (3) Titanium Dioxide Pigments, whichconsists of titanium dioxide pigments, and zinc- and barium-based compounds, (4) AdvancedCeramics, which includes ceramic-on-ceramic ball head and liner components usedin hip-joint prostheses systems, ceramic cutting tools and a range of otherceramic components and (5) Specialty Compounds, which consists of plasticand rubber compounds. As discussed above, the Company sold its Electronicsbusiness, excluding its European wafer reclaim business, in December 2007.As a result, the European wafer reclaim business is included within “Corporateand other” for all periods presented (See Note 3, “Segment Information,” forfurther 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 andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and revenue and expenses during the periods reported.These estimates include, among other things, assessing the collectability ofaccounts receivable, the use and recoverability of inventory, the valuation ofdeferred tax assets, the measurement of the accrual for uncertain tax benefits,impairment of goodwill as well as property, plant and equipment and otherintangible assets, the accrual of environmental and legal reserves and theuseful lives of tangible and intangible assets, among others. Actual resultscould differ from those estimates. Such estimates also include the fairvalue of assets acquired and liabilities assumed allocated to the purchaseprice of business combinations consummated.

 

***Major Customers and Concentration of Credit***—TheCompany has a number of major end-user, retail and OEM customers, with the largestconcentration in Europe, and the United States. No single customer accountedfor more than 2% of net sales during any of the periods presented. The Companydoes not believe a material part of its business is dependent upon any singlecustomer, the loss of which would have a material long-term impact on thebusiness of the Company. However, the loss of one or more of the Company’slargest customers would most likely have a negative short-term impact on theCompany’s results of operations. Financial instruments which potentiallysubject the Company to concentrations of credit risk consist primarily ofaccounts receivable and derivative contracts. See Note 9, “Long-Term Debt,” and“Critical Accounting Policies and Estimates” in Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations” for furtherdiscussion of estimates used.

 

***Accounts Receivable***—The allowance fordoubtful accounts is estimated at each reporting date based on factors such asreceivable age, customer liquidity status and previous write-off history. TheCompany performs ongoing credit evaluations of customers and generally does notrequire collateral. Credit insurance is maintained by certain of the Company’sbusinesses. Allowance is maintained for aggregate expected credit losses.Write-offs are charged to the allowance when taken, net of recoveries.Allowance for doubtful account activity is as follows:

 
|                           |   | **Year Ended December 31,** |       |
|--------------------------------|--------|--------------------------------------------|------------|
| **($ in millions)**  |   | **2008**                                   | ** ** | **2007** | ** ** | **2006** |   |
| Balance, January  1            |   | $                                          | 8.6        |   | $ | 8.6 |   | 8.6 |   |
| Additions  charged to expense  |   | 4.5                                        |       | 0.5 |   | 0.8 |   |
| Write-offs, net  of recoveries |   | (1.1                                       | )          | (1.8 | ) | (0.9 | ) |
| Other (a)                      |   | (1.2                                       | )          | 1.3 |   | 0.1 |   |
| Balance,  December 31          |   | $                                          | 10.8       |   | $ | 8.6 |   | $ | 8.6 |   |
|                                |        |                                            |            |  |  |  |  |  |  |  |

 

----

(a)  Primarily the impact of currencychanges.

 

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

 

***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 2008, is

 

77

----

 

realized when the serviceis performed. Liabilities for product warranties are less than 1% ofconsolidated net sales as of December 31, 2008 and 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 December 31, 2008, intercompany debt arrangementsdeemed to be of a long-term investment nature for which settlement is not plannedor anticipated in the foreseeable future is predominantly related to €519.4million ($725.7 million) of intercompany loans.

 

***Advertising***—The Company expensesadvertising costs as incurred.

 

***Research and Development***—Research anddevelopment costs are charged to expense, as incurred. Such costs were $51.7million, $44.0 million and $39.1 million for the years ended December 31,2008, 2007 and 2006, respectively.

 

***Accounting for Shipping and Handling Costs***—TheCompany records shipping and handling costs in cost of products sold andrecords shipping and handling costs billed to customers in net sales.

 

***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.

 

***Inventories***—Inventories are stated atthe lower of cost or market. Cost is determined primarily on average cost orthe first-in, first-out method. Inventory quantities on hand are regularlyreviewed, and where necessary, provisions for excess and obsolete inventory arerecorded based primarily on either the Company’s estimated forecast of productdemand and production requirements or historical usage. See Note 5, “Inventories.”

 

***Property, Plant and Equipment***—Property,plant and equipment are stated at cost less accumulated depreciation.Depreciation is determined using the straight-line method over the variousasset classes. Estimated lives range from 20-30 years for buildings andimprovements (including land improvements), 7-12 years for machinery andequipment, 3-5 years for furniture and fixtures and 14-50 years for miningrights. See Note 6, “Property, Plant and Equipment.”

 

The estimated useful livesof leasehold improvements are the lesser of the estimated life of theimprovement or the term of the lease.

 

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

 

The Company classifiesdepreciation and amortization in its Consolidated Statements of Operationsconsistent with the utilization of the underlying assets as follows:

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of products  sold                            |       | $                                          | 161.9      |   | $ | 129.5 |   | $ | 108.6 |   |
| Selling, general  and administrative expenses (a) |       | 97.0                                       |       | 82.2 |   | 65.8 |   |
| Total  depreciation and amortization              |       | $                                          | 258.9      |   | $ | 211.7 |   | $ | 174.4 |   |

 

----

(a)  Primarily consists of amortization costs.

 

***Gain/Loss on Early Extinguishment of Debt***—In the fourth quarter of 2008, the Company redeemed €11.0 million of its 2014Notes at a discount and recorded a gain of $4.0 million. In the second quarterof 2007, the Company paid a redemption premium of $14.5 million and wrote off$4.1 million of deferred financing costs associated with the redemption of the2011 Notes.

 

***Goodwill***—Goodwill represents the costin excess of fair value of net assets acquired for transactions accounted forusing the purchase method of accounting. See Note 7, “Goodwill,” for details ofgoodwill activity by segment.

 

***Other Intangible Assets***—Otherintangible assets primarily consists of patents and other intellectualproperty, trade names and

 

78

----

 

trademarks, and customerrelationships. Patents and other intellectual property are recorded at theirestimated fair values at the time of acquisition and are being amortized overtheir estimated remaining useful lives, ranging from 4-20 years. Trade namesand trademarks are being amortized from 18-25 years, customer relationships arebeing amortized over periods ranging from 7-15 years and supply agreements arebeing amortized over periods ranging from 10-15 years. See Note 8, “OtherIntangible Assets.”

 

***Impairment Accounting***— The recoverabilityof goodwill is reviewed on an annual basis during the fourth quarter.Additionally, the recoverability of goodwill, long-lived tangible, and other intangibleassets is reviewed when events or changes in circumstances occur indicatingthat the carrying value of the assets may not be recoverable.  In accordance with paragraph 30 of Statementof Financial Accounting Standards (“SFAS”) No. 142, *Goodwill andOther Intangible Assets*, the Company determined that its reportingunits for its goodwill impairment review are its operating segments orcomponents of an operating segment that constitute a business for whichdiscrete financial information is available and for which segment managementregularly reviews the operating results. Based on this analysis, the Company has identified nine reporting unitswithin its reportable segments.

 

SFAS No. 142prescribes a two-step method for determining goodwill impairment.  In the first step, the Company determines thefair value of each reporting unit (as discussed in the following sentence) andcompares that fair value to the carrying value of such reporting unit.  This begins with estimating the fair value ofeach reporting unit, which is derived from peer multiples.  Specifically, the estimate of the fair valueof such reporting unit is based on an industry metric that is the ratio ofenterprise value (“EV”, which is commonly defined as market capitalization,plus long-term debt, less cash) to Adjusted EBITDA of the relevant benchmarkpeer companies and groups; this is the peer multiple approach.  The Company uses EV multiples to the lasttwelve months Adjusted EBITDA and to the next fiscal year Adjusted EBITDA.  The peer companies are typically based uponthe competitors disclosed in Item 1, “Business” for each of the reportingunits.  The Company then multiplies thisratio by the Adjusted EBITDA for the recently completed year and the budgetedAdjusted EBITDA for the upcoming year of such reporting unit and compares it tothe carrying value of such reporting unit.  If the product of such peer multiple andreporting unit’s Adjusted EBITDA is less than such carrying value, it may be anindication of an impairment. If the initial review indicates there may be animpairment, a review based on expected future cash flows is performed; this isthe discounted cash flow approach.  Forthe discounted cash flow approach, the Company makes certain assumptions about,among other things, estimates of future cash flows, including growth rates,price increases, capital expenditures, the benefits of recent acquisitions andexpected synergies, and an appropriate discount rate.  If the results of the peer multiple approachand the discounted cash flow approach differ materially, the relevant facts andcircumstances are reviewed and a qualitative assessment is made to determinethe proper weighting.  If the results ofthe first step indicate the carrying amount of a reporting unit is higher thanits fair value, the second step must be performed. Specifically, SFASNo. 142 prescribes that the Company determine the implied fair value ofgoodwill in the same manner as if the Company had required those reportingunits.  In the second step, the potentialimpairment is computed by comparing the implied fair value of the reportingunit’s goodwill with the carrying amount of goodwill.  If the carrying amount of the reporting unit’sgoodwill is greater than the implied fair value of its goodwill, an impairmentloss must be recognized for the excess. If necessary, the Company may consult with valuation specialists toassist with its goodwill impairment review.

 

These calculations arebased on inherent assumptions and estimates about future cash flows andappropriate benchmark peer companies or groups. Subsequent changes in theseassumptions could result in future impairment. Although the Companyconsistently uses the same methods in developing the assumptions and estimatesunderlying the fair value calculations, such estimates are uncertain by natureand can vary from actual results.

 

In the fourth quarter of2008, the Company recorded a non-cash goodwill impairment charge of $809.5million. See Note 7, “Goodwill,” for further details.

 

***Financial Instruments***—Managementbelieves the carrying amount of financial instruments, including accountsreceivable, accounts payable and debt, approximates fair value, except asdescribed in Note 9, “Long-Term Debt.”

 

***Derivatives***— The Company accounts forderivatives based on SFAS No. 133,*Accounting for Derivative Instruments and Hedging Activities*, asamended and interpreted. SFAS No. 133 requires that all derivatives berecognized as either assets or liabilities at fair value. Changes in the fairvalue of derivatives not designated as hedging instruments are recognizedcurrently in earnings while changes in the fair value of derivatives that aredesignated as hedging instruments are recognized as a component ofcomprehensive income. The Company uses derivative instruments to manage itsexposure to market risks associated with fluctuations in interest rates andforeign currency exchange rates. See “Comprehensive Income” section of Note 1and Note 18, “Accumulated Other Comprehensive Income,” for the impact of theCompany’s net investment and cash flow hedges. The Company does not enter intoderivative contracts for trading purposes nor does it use leveraged or complexinstruments.

 

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS No. 87,*Employers’ Accounting for Pensions* andSFAS No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R)*. Other postretirementbenefit costs and liabilities have been determined in accordance with SFAS No. 106,*Employers’ Accounting for Postretirement BenefitsOther Than*

 

79

----

 

*Pensions*and SFAS No. 158,*Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans, an amendment ofFASB Statements No. 87, 88, 106 and 132 (R).* Postemploymentbenefit costs and liabilities have been determined in accordance with SFAS No. 112,*Employers’ Accounting for Postemployment Benefits.*

 

***Related Party Transactions***—In theordinary course of business, Rockwood has engaged in transactions with certainrelated parties including KKR and DLJMB and affiliates of each.

 

Credit Suisse Securities(USA) LLC (“Credit Suisse”), an affiliate of DLJMB, served as an underwriter inthe secondary offering of the Company’s common stock by certain sellingstockholders in November 2007 and June 2008. The Company did notreceive any proceeds in these offerings or pay any commissions.  Also, from time to time, Credit Suisseprovides the Company with advisory services in connection with acquisitions anddivestitures. For example, the Company paid fees of $0.5 million in 2008primarily in connection with the Titanium Dioxide Pigments venture completed inSeptember 2008 and $3.2 million in 2007 for advice primarily related tothe sale of the Electronics business.

 

As part of the TitaniumDioxide Pigments venture with Kemira that was completed in September 2008,the venture has a long-term agreement expiring in August 2018 to purchasesteam and electricity (“energy”) from Kemira. The venture purchased $13.4 million of energy from Kemira during theventure’s four months of operation in 2008. As of December 31, 2008, $9.4 million was due to Kemira, as well anadditional one-time payment of $13.9 million in connection with the energysupply agreement.  Minimum annualpayments under the energy agreement are approximately $17.0 million.  In connection with this arrangement, theventure has approximately $30.2 million of non-interest bearing notesreceivable from Kemira that are due in August 2028.  The carrying value of the notes receivablewere $4.5 million at December 31, 2008. Interest is imputed at aneffective rate of 8.96%.

 

As part of the TitaniumDioxide Pigments venture with Kemira, the venture has a supply agreement forthe sale of certain raw materials to Kemira that are manufactured by theventure.  The term of this contractexpires in December 2015. Transactions between the Titanium Dioxide Pigments venture and Kemiraamounted to: sales to Kemira of $0.5 million in 2008 and amounts due from Kemiraof $0.2 million at December 31, 2008. In addition, there were sales from the Titanium Dioxide Pigments ventureto companies owned by Kemira of $5.8 million during the venture’s four monthsof operation in 2008, of which $1.7 million was due to the venture at December 31,2008.

 

As part of the Viance,LLC joint venture formed in January 2007 between the CSI subsidiary withinthe Timber Treatment Chemicals business and Rohm and Haas, the joint ventureentered into certain related party transactions with Rohm and Haas.  Viance, LLC does not own manufacturingfacilities, and as a result, relies on the members of the joint venture toprovide substantially all product and distribution requirements. In addition,the members sell products to Viance, LLC. Transactions between Viance, LLC and Rohm and Haas amounted to:purchases from Rohm and Haas of $9.2 million and $8.2 million in 2008 and 2007,respectively, and sales to Rohm and Haas of $0.5 million and $2.7 million in2008 and 2007, respectively.  Amounts dueto Rohm and Haas totaled $3.0 million and $2.1 million at December 31,2008 and 2007, respectively.

 

***Income Taxes***—Income taxes aredetermined in accordance with SFAS No. 109,*Accounting for Income Taxes* and FIN 48,*Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109.* Deferred tax assetsand liabilities are recognized for future tax consequences attributable todifferences between the financial statement carrying amounts and thecorresponding tax carrying amounts of assets and liabilities. Deferred taxassets are also recognized for tax loss and tax credit carryforwards. Avaluation allowance is recorded to reduce deferred tax assets when it is morelikely than not that a tax benefit will not be realized based on availableevidence weighted toward evidence that is objectively verifiable. Deferredtaxes are not provided on the undistributed earnings of subsidiaries as suchamounts are considered to be permanently invested.

 

FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with SFAS No. 109,*Accounting for Income Taxes* and prescribes a recognitionthreshold and measurement attribute for financial statement disclosure of taxpositions taken or expected to be taken on a tax return. Under FIN 48, theimpact of an uncertain income tax position on the income tax return must berecognized at the largest amount that is more-likely-than-not to not besustained upon audit by the relevant authority. An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained. Additionally, with regard to uncertain tax liabilities, FIN 48provides guidance on derecognizing, classification, interest and penalties,accounting in interim periods, disclosure and transition.

 

The Company adopted theprovisions of FIN 48 on January 1, 2007. The total amount of unrecognizedtax benefits as of the date of adoption was $44.1 million. In conjunction withthe adoption of FIN 48, the Company has classified uncertain tax positions asnon-current income tax liabilities (other liabilities) unless expected to bepaid within one year. Previously, accrued income tax liabilities wereclassified as current liabilities. As a result of the initial implementation ofFIN 48, the Company recognized a $1.0 million increase in the liabilityfor unrecognized tax benefits which was accounted for as follows:

 

80

----

 
| **($ in millions)**                        | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Increase in  accumulated deficit (cumulative effect) |       | $          | 7.4        |   |
| Additional  deferred tax assets                      |       | 3.5        |       |
| Reduction in  goodwill                               |       | (9.9       | )          |
| Increase in  liability                               |       | $          | 1.0        |   |

 

In accordance with FIN48, the Company records liabilities for uncertain tax benefits net of deferredtax assets associated with tax loss carryforwards for liabilities arising inthe same year as the asset and for liabilities arising in different years fromthe asset, provided that the related tax loss can be carried back or forward tooffset the liability.

 

In accordance with SFAS No. 109,Paragraph 140, the Company has allocated a tax benefit to the extent of its U.S.loss from continuing operations, offset by a tax provision charged todiscontinued operations and separately to other comprehensive income. When a tax jurisdiction has a loss from continuing operations and incomefrom other items on a net basis, the Company’s policy is to allocate a taxbenefit to continuing operations from the other items of income on a pro-ratabasis.

 

Future realization of thetax benefit of an existing deductible temporary difference or carryforwardultimately depends on the existence of sufficient taxable income of theappropriate character (for example, ordinary income or capital gain) within thecarryforward period available under the tax law. The Company’s policy is toconsider the following sources of taxable income, which may be available underthe tax law to realize a tax benefit for deductible temporary differences andcarryforwards:

 

·                 Future reversals of existing taxabletemporary differences.

 

·                 Future taxable income exclusive ofreversing temporary differences and carryforwards.

 

·                 Taxable income in prior carry backyear (s) if carry back is permitted under the tax law.

 

·                 Tax planning strategies that would, ifnecessary, be implemented to:

 

(1)             Accelerate taxableamounts to utilize expiring carryforwards.

 

(2)             Change the characterof taxable or deductible amounts from ordinary income or loss to capital gainor loss.

 

(3)             Switch fromtax-exempt to taxable investments.

 

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

 

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

 

·                    Existing contracts or firm salesbacklog that will produce more than enough taxable income to realize thedeferred tax asset based on existing sales prices and cost structures.

 

·                    An excess of appreciated assetvalue over the tax basis of the entity’s net assets in an amount sufficient torealize the deferred tax asset.

 

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature,pension-related adjustments that are recorded directly into a separate sectionof stockholders’ equity in the balance sheets and net investment and cash flow hedges.Foreign currency translation amounts are not adjusted for income taxes sincethey relate to indefinite length investments in non-U.S. subsidiaries andcertain intercompany debt. See Note 18, “Accumulated Other ComprehensiveIncome.”

 

***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 

 

81

----

 

the amount and timing ofthe cash payments for a site are fixed or reliably determinable, the liabilityis discounted. Expenditures that extend the life of the related property ormitigate or prevent future environmental contamination are capitalized andexpenditures related to existing conditions resulting from past or presentoperations and from which no current or future benefit is discernible areimmediately expensed. The quantification of environmental exposures requires anassessment of many factors, including changing laws and regulations,advancements in environmental technologies, the quality of informationavailable related to specific sites, the assessment stage of each siteinvestigation and the length of time involved in remediation or settlement. Insome matters, Rockwood may share costs with other parties. Rockwood does notinclude anticipated recoveries from insurance carriers or other third partiesin its accruals for environmental liabilities.

 

***Stock-Based Compensation***— The Companyhas in place the 2008 Amended and Restated Stock Purchase and Option Plan ofRockwood Holdings, Inc. and Subsidiaries (the “Plan”). Under the Plan, theCompany may grant stock options, restricted stock and other stock-based awardsto the Company’s employees and directors and allow employees and directors topurchase shares of its common stock. There are 10,000,000 authorized sharesavailable for grant under the Plan.  The Companyhas issued and expects to continue to issue new registered shares under the Planto satisfy stock option exercises and the vesting of restricted stockunits.  Effective January 1, 2006,the Company adopted SFAS No. 123R,*Share-Based Payment*, and related interpretations and began expensingthe grant-date fair value of stock options.

 

The Company adopted SFAS No. 123Rusing the modified prospective approach and therefore has not restated priorperiods. In accordance with SFAS No. 123R, beginning in the first quarterof 2006, the Company recorded compensation cost for the unvested portion ofawards issued after February 2005, which is the date it first filed itsregistration statement with the SEC. The aggregate compensation cost for stockoptions, restricted stock units and Board of Director stock grants recordedunder the Plan, as discussed below, caused income from continuing operationsbefore taxes and minority interest to decrease by $4.1 million, $3.9 millionand less than $0.1 million for the years ended December 31, 2008, 2007 and2006, respectively.

 

The Company grantedadditional stock options and restricted stock units in 2008 and 2007 to certainemployees of Rockwood Corporate Headquarters and its business units. Therestricted stock units contain a provision in which the units shall immediatelyvest and become converted into the right to receive a cash payment upon achange in control as defined in the equity agreement. As the provisionsfor redemption are outside the control of the Company, the fair value of theseunits as of December 31, 2008 and 2007 have been recorded as mezzanineequity (outside of permanent equity) in the Consolidated Balance Sheets.

 

***Recent Accounting Pronouncements***—TheCompany adopted the following 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 are disclosedin Note 17, “Fair Value Measurements.” The adoption of SFAS No. 157 didnot have a material impact on the Company’s financial statements.

 

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 Company adopted the recognition provisions ofSFAS No. 158 and initially applied them to the funded status of itsdefined benefit postretirement plans as of December 31, 2006. Thisstatement also requires an employer to measure the funded status of a plan asof the date of its year-end statement of financial position, with limitedexceptions. The requirement to measure plan assets and benefit obligations asof the date of the employer’s fiscal year-end statement of financial positionis effective for the Company for the 2008 fiscal year end. This requirement didnot have a material impact on the Company’s financial statements in 2008.

 

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 permitsan entity to choose to measure many financial instruments and certain otheritems at fair value and permits all entities to choose to measure eligibleitems at fair value at specified election dates. This statement is effectivefor the Company as of January 1, 2008. The Company adopted thisstandard on January 1, 2008. However, the Company has elected not tomeasure any additional instruments at fair value under SFAS No. 159.

 

In December 2007,SFAS No. 141 (revised 2007),*BusinessCombinations* (“FAS 141R”) was issued, which replaces FASB Statement No. 141,*Business Combinations.* FAS 141Restablishes principles and requirements for how the acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and thegoodwill acquired. This statement also establishes disclosure requirements toenable users of financial statements to evaluate the nature and financialeffects of the business combination. This statement is effective foracquisitions completed on or after January 1, 2009.

 

In December 2007,SFAS No. 160,*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51,*was issued. Per this statement, the accounting and reporting for minorityinterests will be recharacterized as noncontrolling interests and classified asa component of equity (but separate from parent’s equity). This statement alsoestablishes reporting requirements that provide sufficient disclosures thatclearly identify and distinguish between the interests of the parent and theinterests of the 

 

82

----

 

noncontrollingowners. This statement is effective for the Company as of January 1,2009 and primarily relates to its Viance, LLC joint venture and its TitaniumDioxide Pigments venture, as discussed above. The Company does not expect this statement to have a material impact onits financial statements.

 

In December 2007,the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, which providedinterpretive guidance regarding the use of a “simplified” method, as discussedin SAB No. 107, in developing an estimate of expected term of “plainvanilla” share options in accordance with SFAS No. 123R,*Share-Based Payment.*  SAB 110 is effective for share optionsgranted as of January 1, 2008. SAB 110 extended the use of the simplifiedmethod beyond December 31, 2007, under certain circumstances, whichincluded not having sufficient historical exercise data to provide a reasonablebasis upon which to estimate expected term due to the limited period of time acompany’s equity shares have been publicly traded. As Rockwood became a publiccompany in August 2005, there is not sufficient historical exercise dataavailable to estimate expected term. As a result, the Company will continue touse the “simplified” method to estimate expected term for share option grantsuntil more relevant detailed information becomes widely available.

 

In February 2008,the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS)157-1,  *Application of FASB Statement No. 157 to FASB Statement No. 13and Its Related Interpretive Accounting Pronouncements That Address LeasingTransactions*, and FSP FAS 157-2,  *Effective Date of FASB Statement No. 157*.FSP FAS 157-1 removes leasing from the scope of SFAS No. 157. FSP FAS157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for allnonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). The Company will apply the provisionsof FSP 157-2 on January 1, 2009 and does not expect this FSP to have amaterial impact on its financial statements.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133* was issued. Thisstatement changes the disclosure requirements for derivative instruments andhedging activities, including enhanced disclosures about (a) how and whyan entity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133,*  Accountingfor Derivative Instruments and Hedging Activities* and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS No. 161 is effective for the Company as of January 1,2009. The Company does not expect this statement to have a material impact onits financial statements.

 

In April 2008, theFASB issued FSP No. 142-3,*Determination of the Useful Life of Intangible Assets*. This FSPamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142,*Goodwilland Other Intangible Assets*. The intent of this FSP is to improvethe consistency between the useful life of a recognized intangible asset underStatement 142 and the period of expected cash flows used to measure the fairvalue of the asset under FASB Statement No. 141 (revised 2007),*Business Combinations*, and other U.S.GAAP. This FSP is effective for recognized intangible assets acquired after January 1,2009.  The Company does not expect thisFSP to have a material impact on its financial statements.

 

In October 2008, theFASB issued FSP FAS 157-3,*Determining theFair Value of a Financial Asset When the Market for That Asset Is Not Active.*This FSP clarifies the application of SFAS No. 157 in a market that is notactive and provides an example to illustrate key considerations in determiningthe fair value of a financial asset when the market for that financial asset isnot active. This FSP is effective upon issuance, including prior periods forwhich financial statements have not been issued. This FSP did not have animpact on the Company’s consolidated financial statements.

 

**2.DISCONTINUED OPERATIONS:**

 

On October 10, 2008,the Company completed the sale of its pool and spa chemicals business andreceived net proceeds of $122.0 million in cash. On January 9, 2007, theCompany completed the sale of its Groupe Novasep segment. The transaction wasvalued at approximately €425.0 million, which included the repayment of thirdparty and intercompany indebtedness. On December 31, 2007, the Companycompleted the sale of its Electronics business, excluding its European waferreclaim business, for $315.6 million.

 

83

----

 

In connection with SFAS No. 144,the Company’s financial statements have been reclassified to reflect the pooland spa chemicals business, the Groupe Novasep segment and the Electronicsbusiness sold as discontinued operations for all periods presented.

 

Operating results of thediscontinued operations of the pool and spa chemicals business for the yearended December 31, 2008 are as follows:

 
| **($ in millions)**                      | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-----------|------------|
| Net sales                                     |       | $         | 54.9       |   |
| Cost of products  sold                        |       | 39.4      |       |
| Gross profit                                  |       | 15.5      |       |
| Selling, general  and administrative expenses |       | 10.9      |       |
| Gain on sale of  business/assets              |       | (66.3     | )          |
| Operating income                              |       | 70.9      |       |
| Other expenses:                               |       |      |       |
| Interest expense                              |       | (0.2      | )          |
| Other expenses                                |       | (0.2      | )          |
| Income before  taxes                          |       | 70.7      |       |
| Income tax  provision                         |       | 26.9      |       |
| Net income                                    |       | $         | 43.8       |   |

 

The Company also recordeda tax gain of $2.4 million related to the sale of Groupe Novasep for the yearended December 31, 2008.

 

Operating results of thediscontinued operations for the year ended December 31, 2007 are asfollows:

 
| **($ in millions)**                      | ** ** | **Pool and Spa  Chemicals  Business** | ** ** | **Electronics  Business** | ** ** | **Groupe  Novasep** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|---------------------------|------------|---------------------|------------|-----------|------------|
| Net sales                                     |       | $                                     | 71.2       |                      | $          | 201.9               |       | $         | 8.9        |   | $ | 282.0 |   |
| Cost of products  sold                        |       | 46.1                                  |       | 149.4                     |       | 7.0                 |       | 202.5     |       |
| Gross profit                                  |       | 25.1                                  |       | 52.5                      |       | 1.9                 |       | 79.5      |       |
| Selling, general  and administrative expenses |       | 14.1                                  |       | 28.8                      |       | 1.1                 |       | 44.0      |       |
| Gain on sale of  business/assets              |       | —                                |       | (106.8                    | )          | (117.7              | )          | (224.5    | )          |
| Operating income                              |       | 11.0                                  |       | 130.5                     |       | 118.5               |       | 260.0     |       |
| Other expenses,  net:                         |       |                                  |       |                      |       |                |       |      |       |
| Interest expense                              |       | —                                |       | —                    |       | (0.3                | )          | (0.3      | )          |
| Interest income                               |       | (0.3                                  | )          | 0.8                       |       | —              |       | 0.5       |       |
| Loss on early  extinguishment of debt         |       | (0.5                                  | )          | (0.3                      | )          | —              |       | (0.8      | )          |
| Foreign exchange  loss, net                   |       | —                                |       | (0.5                      | )          | —              |       | (0.5      | )          |
| Other expenses,  net                          |       | (0.8                                  | )          | —                    |       | (0.3                | )          | (1.1      | )          |
| Income before  taxes and minority interest    |       | 10.2                                  |       | 130.5                     |       | 118.2               |       | 258.9     |       |
| Income tax  provision                         |       | 4.0                                   |       | 17.1                      |       | 2.1                 |       | 23.2      |       |
| Net income  before minority interest          |       | 6.2                                   |       | 113.4                     |       | 116.1               |       | 235.7     |       |
| Minority  interest, net of tax                |       | —                                |       | —                    |       | (0.1                | )          | (0.1      | )          |
| Net income                                    |       | $                                     | 6.2        |                      | $          | 113.4               |       | $         | 116.0      |   | $ | 235.6 |   |

 

84

----

 

Operating results of thediscontinued operations for the year ended December 31, 2006 are asfollows:

 
| **($ in millions)**                      | ** ** | **Pool and Spa  Chemicals  Business** | ** ** | **Electronics  Business** | ** ** | **Groupe  Novasep** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|---------------------------|------------|---------------------|------------|-----------|------------|
| Net sales                                     |       | $                                     | 73.5       |                      | $          | 187.0               |       | $         | 355.7      |   | $ | 616.2 |   |
| Cost of products  sold                        |       | 48.8                                  |       | 137.4                     |       | 266.0               |       | 452.2     |       |
| Gross profit                                  |       | 24.7                                  |       | 49.6                      |       | 89.7                |       | 164.0     |       |
| Selling, general  and administrative expenses |       | 13.7                                  |       | 30.5                      |       | 54.3                |       | 98.5      |       |
| Restructuring  and other severance costs      |       | —                                |       | 0.3                       |       | —              |       | 0.3       |       |
| Loss on sale of  business/assets              |       | —                                |       | 0.1                       |       | 11.3                |       | 11.4      |       |
| Operating income                              |       | 11.0                                  |       | 18.7                      |       | 24.1                |       | 53.8      |       |
| Other income  (expenses):                     |       |                                  |       |                      |       |                |       |      |       |
| Interest expense                              |       | (0.2                                  | )          | —                    |       | (4.1                | )          | (4.3      | )          |
| Interest income                               |       | —                                |       | 2.0                       |       | —              |       | 2.0       |       |
| Foreign exchange  gain, net                   |       | —                                |       | —                    |       | 0.7                 |       | 0.7       |       |
| Other                                         |       | —                                |       | —                    |       | (4.9                | )          | (4.9      | )          |
| Other income  (expenses), net                 |       | (0.2                                  | )          | 2.0                       |       | (8.3                | )          | (6.5      | )          |
| Income before  taxes and minority interest    |       | 10.8                                  |       | 20.7                      |       | 15.8                |       | 47.3      |       |
| Income tax  provision (benefit)               |       | 4.4                                   |       | 6.9                       |       | (12.1               | )          | (0.8      | )          |
| Net income  before minority interest          |       | 6.4                                   |       | 13.8                      |       | 27.9                |       | 48.1      |       |
| Minority  interest, net of tax                |       | —                                |       | —                    |       | (5.2                | )          | (5.2      | )          |
| Net income                                    |       | $                                     | 6.4        |                      | $          | 13.8                |       | $         | 22.7       |   | $ | 42.9 |   |

 

The carrying values ofthe assets and liabilities of the pool and spa chemicals business included inthe Consolidated Balance Sheets at December 31, 2007 are as follows:

 
| **($ in millions)**                        | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| **ASSETS**                                      | ** ** | ** **             | ** ** |
| Accounts receivable,  net                       |       | $                      | 23.4       |   |
| Inventories                                     |       | 8.5                    |       |
| Prepaid expenses  and other current assets      |       | 1.0                    |       |
| Property, plant  and equipment, net             |       | 4.3                    |       |
| Goodwill                                        |       | 37.0                   |       |
| Other intangible  assets, net                   |       | 0.9                    |       |
| Total assets  disposed                          |       | $                      | 75.1       |   |
| **LIABILITIES**                                 | ** ** | ** **             | ** ** |
| Accounts payable                                |       | $                      | 7.7        |   |
| Income taxes  payable                           |       | 3.2                    |       |
| Accrued  compensation                           |       | 1.6                    |       |
| Accrued expenses  and other current liabilities |       | 1.5                    |       |
| Deferred income  taxes                          |       | (0.1                   | )          |
| Other  liabilities                              |       | 3.1                    |       |
| Total  liabilities disposed                     |       | $                      | 17.0       |   |

 

The Company received netcash proceeds of $122.0 million in 2008 from the sale of the pool and spachemicals business. These proceeds were reported as net cash provided byinvesting activities of discontinued operations for the year ended December 31,2008 in the Company’s Consolidated Statements of Cash Flows. The net gain onthe pool and spa chemicals business sale recorded in the fourth quarter of 2008was $40.5 million (net of $25.7 million of taxes)

 

The Company received netcash proceeds of $420.7 million and $311.0 million in 2007 from the sale of GroupeNovasep and the Electronics business, excluding the European wafer reclaimbusiness, respectively. These proceeds were reported as net cash provided byinvesting activities of discontinued operations for the year ended December 31,2007 in the Company’s Consolidated Statements of Cash Flows. The net gain onthe Groupe Novasep sale recorded in the first quarter of 2007 was $115.6million (net of $2.1 million of German taxes) and the net gain on the saleof the Electronics business, excluding the European wafer reclaim business,recorded in the 

 

85

----

 

fourth quarter of 2007was $94.8 million (net of $12.0 million of taxes).

 

In connection with thesale of Rohner AG, a subsidiary in the Company’s former Groupe Novasep segment,the Company recorded a pre-tax loss of $11.5 million in 2006, representingconsideration given less the remaining net liabilities of Rohner, which weretransferred to the purchaser.

 

**3.SEGMENT INFORMATION:**

 

Rockwood operates in fivereportable segments according to the nature and economic characteristics of itsproducts and services as well as the manner in which the information is usedinternally by the Company’s key decision maker, who is the Company’s ChiefExecutive Officer. The five segments are: (1) Specialty Chemicals, whichconsists of the surface treatment and fine chemicals business lines; (2) PerformanceAdditives, which consists of color pigments and services, timber treatmentchemicals and clay-based additives; (3) Titanium Dioxide Pigments; (4) AdvancedCeramics; and (5) Specialty Compounds.

 

Items that cannot bereadily attributed to individual segments have been classified as “Corporateand other.” Corporate and other operating loss primarily represents payroll,professional fees and other operating expenses of centralized functions such astreasury, tax, legal, internal audit and consolidation accounting as well asthe cost of operating the Company’s central offices (including some costsmaintained based on legal or tax considerations). The primary components ofCorporate and other loss, in addition to operating loss, are interest expenseon external debt (including the amortization of deferred financing costs),foreign exchange losses or gains, and mark-to-market gains or losses onderivatives. Major components within the reconciliation of income before taxes(described more fully below) include systems/organization establishmentexpenses, interest expense on external debt, foreign exchange losses or gains,and refinancing expenses related to external debt. Corporate and otheridentifiable assets primarily represent deferred financing costs that have beencapitalized in connection with corporate external debt financing, deferredincome tax assets and cash balances maintained in accordance with centralizedcash management techniques. The Corporate and other classification alsoincludes the results of operations, assets (primarily real estate) andliabilities (including pension and environmental) of legacy businesses formerlybelonging to Dynamit Nobel and the wafer reclaim business. The European waferreclaim business line provides semiconductor wafer reclaim services, waferthinning/grinding services and wafer supply services. This business workswith semiconductor manufacturers to refurbish used test wafers and return themto the manufacturer for reuse in test and process monitor applications. InFebruary 2007, the Company completed the sale of its U.S. wafer reclaimbusiness.

 

In September 2008,the Company completed the formation of its Titanium Dioxide Pigments venture.The water treatment business, formerly part of the Titanium Dioxide Pigmentssegment, is being reported within the Clay-based Additives business in thePerformance Additives segment. As a result, the Company’s financial statementshave been reclassified to reflect the water treatment business as part of thePerformance Additives segment for the periods presented.

 

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

 
| **($ in millions)**          | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other** | ** ** | **Consolidated (a)** | ** ** |
|-----------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|----------------------|------------|
| **Year  ended December 31, 2008** | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **           | ** ** |
| Net sales                         |       | $                        | 1,232.6    |                       | $          | 835.6                           |       | $                      | 534.8      |                     | $          | 505.9                    |       | $                    | 261.5      |   | $ | 9.7 |   | $ | 3,380.1 |   |
| Total Adjusted  EBITDA            |       | 313.0                    |       | 107.1                      |       | 83.1                            |       | 150.2                  |       | 34.0                     |       | (48.5                    | )          | 638.9                |       |
| Capital  expenditures             |       | 74.5                     |       | 45.6                       |       | 42.5                            |       | 46.1                   |       | 9.6                      |       | 5.7                      |       | 224.0                |       |
| **Year  ended December 31, 2007** | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **           | ** ** |
| Net sales                         |       | $                        | 1,082.9    |                       | $          | 798.5                           |       | $                      | 442.9      |                     | $          | 452.5                    |       | $                    | 276.6      |   | $ | 11.8 |   | $ | 3,065.2 |   |
| Total Adjusted  EBITDA            |       | 262.2                    |       | 150.7                      |       | 82.7                            |       | 128.1                  |       | 34.3                     |       | (55.6                    | )          | 602.4                |       |
| Capital  expenditures             |       | 63.5                     |       | 37.0                       |       | 39.2                            |       | 31.2                   |       | 17.6                     |       | 4.7                      |       | 193.2                |       |
| **Year  ended December 31, 2006** | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **           | ** ** |
| Net sales                         |       | $                        | 918.3      |                       | $          | 724.8                           |       | $                      | 409.1      |                     | $          | 389.6                    |       | $                    | 251.0      |   | $ | 21.9 |   | $ | 2,714.7 |   |
| Total Adjusted  EBITDA            |       | 206.6                    |       | 128.7                      |       | 81.9                            |       | 104.8                  |       | 31.7                     |       | (47.8                    | )          | 505.9                |       |
| Capital  expenditures             |       | 52.7                     |       | 27.6                       |       | 34.6                            |       | 32.5                   |       | 3.8                      |       | 13.9                     |       | 165.1                |       |

 
| ** **                  | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other (b)** | ** ** | **Eliminations  (c)** | ** ** | **Consolidated  (d)** | ** ** |
|-----------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Identifiable  assets as of: |       |                     |       |                       |       |                            |       |                   |       |                     |       |                         |       |                  |       |                  |       |
| December 31, 2008           |       | $                        | 2,030.9    |                       | $          | 829.8                           |       | $                      | 990.0      |                     | $          | 879.9                        |       | $                     | 130.2      |                  | $          | 541.4 |   | $ | (224.9 | ) | $ | 5,177.3 |   |
| December 31, 2007           |       | $                        | 1,900.1    |                       | $          | 1,344.3                         |       | $                      | 764.8      |                     | $          | 843.6                        |       | $                     | 281.8      |                  | $          | 464.3 |   | $ | (159.1 | ) | $ | 5,439.8 |   |

 

----

(a)                This amount does not include $1.8 million and $68.3million for the years ended December 31, 2007 and 2006, respectively, ofAdjusted EBITDA from the former Groupe Novasep segment which was sold on January 9,2007; $37.6 million and $35.3 million for the years ended December 31,2007 and 2006, respectively, of Adjusted EBITDA from the Electronics segmentsold on December 31, 2007; and $5.4 million, $12.0 million and $12.0million for the years ended December 31, 2008, 2007 and

 

86

----

 

2006,respectively, of Adjusted EBITDA from the pool and spa chemicals business soldon October 10, 2008.

 

(b)               This includes $50.7 million and $47.4 million ofassets from legacy businesses at December 31, 2008 and 2007, respectively.These businesses were formerly owned primarily by Dynamit Nobel.

 

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

 

(d)               This amount does not include $75.1 million ofidentifiable assets at December 31, 2007 from the pool and spa chemicalsbusiness sold in October 2008. Total identifiable assets including theseamounts were $5,514.9 million at December 31, 2007.

 

The following tablerepresents summarized geographic information with net sales based on seller’slocation:

 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| **($ in millions)** | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  sales:**          | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Germany                  |       | $                           | 1,371.0    |   | $ | 1,298.6 |   | $ | 1,140.6 |   |
| United States            |       | 890.2                       |       | 852.5 |   | 842.1 |   |
| Rest of Europe           |       | 799.3                       |       | 655.1 |   | 515.1 |   |
| Rest of World            |       | 319.6                       |       | 259.0 |   | 216.9 |   |
|                     |       | $                           | 3,380.1    |   | $ | 3,065.2 |   | $ | 2,714.7 |   |

 

The following tablepresents the Company’s long-lived assets located in the regions indicated:

 
| ** **               | ** ** | **December 31,** |       |
|--------------------------|------------|------------------|------------|
| **($ in millions)** | ** ** | **2008**         | ** ** | **2007** |   |
| **Long-lived  assets:**  | ** ** | ** **       | ** ** | ** ** |   |
| Germany                  |       | $                | 791.5      |   | $ | 798.7 |   |
| Rest of Europe           |       | 456.9            |       | 261.5 |   |
| United States            |       | 293.4            |       | 239.1 |   |
| Rest of World            |       | 210.4            |       | 209.2 |   |
|                     |       | $                | 1,752.2    |   | $ | 1,508.5 |   |

 

The increase in long-livedassets is due to acquisitions completed in 2008.

 

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 Notesand the facility agreement related to the Titanium Dioxide Pigments ventureexcludes 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) before taxes to Adjusted EBITDA on asegment GAAP basis:

 

87

----

 
| **($ in  millions)**                                                    | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Year  ended December 31, 2008**                                            | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **       | ** ** |
| Income (loss)  from continuing operations before taxes and minority interest |       | $                        | 166.5      |                       | $          | (470.6                          | )          | $                      | (266.3     | )                        | $          | 61.3                     |       | $                | (92.8      | ) | $ | (140.2 | ) | $ | (742.1 | ) |
| Interest expense  (a)                                                        |       | 56.2                     |       | 30.4                       |       | 37.9                            |       | 34.2                   |       | 9.3                      |       | 63.1                     |       | 231.1            |       |
| Interest income                                                              |       | (1.2                     | )          | 1.3                        |       | (0.2                            | )          | (0.2                   | )          | (0.5                     | )          | (5.2                     | )          | (6.0             | )          |
| Depreciation and  amortization                                               |       | 69.7                     |       | 67.2                       |       | 56.3                            |       | 47.0                   |       | 11.3                     |       | 7.4                      |       | 258.9            |       |
| Impairment  charges                                                          |       | —                   |       | 456.6                      |       | 247.7                           |       | —                 |       | 105.2                    |       | —                   |       | 809.5            |       |
| Restructuring  and other severance costs                                     |       | 17.2                     |       | 10.3                       |       | 0.2                             |       | 4.5                    |       | 0.7                      |       | 2.4                      |       | 35.3             |       |
| Systems/organization  establishment expenses                                 |       | 2.7                      |       | 5.1                        |       | 3.4                             |       | 0.3                    |       | 0.4                      |       | 1.0                      |       | 12.9             |       |
| Acquisition and  disposal costs                                              |       | —                   |       | 0.9                        |       | —                          |       | —                 |       | 0.4                      |       | 0.4                      |       | 1.7              |       |
| Inventory write-up  charges                                                  |       | 0.8                      |       | 1.5                        |       | 3.3                             |       | 1.3                    |       | —                   |       | —                   |       | 6.9              |       |
| Gain on early  extinguishment of debt                                        |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | (4.0                     | )          | (4.0             | )          |
| (Gain) loss on  sale of assets and other                                     |       | (1.3                     | )          | —                     |       | 1.1                             |       | 0.1                    |       | —                   |       | (2.3                     | )          | (2.4             | )          |
| Acquired in-process  research and development                                |       | —                   |       | 2.6                        |       | —                          |       | 0.3                    |       | —                   |       | —                   |       | 2.9              |       |
| Foreign exchange  loss (gain), net                                           |       | 2.9                      |       | 0.3                        |       | (0.3                            | )          | 1.4                    |       | —                   |       | 28.0                     |       | 32.3             |       |
| Other                                                                        |       | (0.5                     | )          | 1.5                        |       | —                          |       | —                 |       | —                   |       | 0.9                      |       | 1.9              |       |
| Total Adjusted  EBITDA (b)                                                   |       | $                        | 313.0      |                       | $          | 107.1                           |       | $                      | 83.1       |                     | $          | 150.2                    |       | $                | 34.0       |   | $ | (48.5 | ) | $ | 638.9 |   |
| **Year  ended December 31, 2007**                                            | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **       | ** ** |
| Income (loss)  from continuing operations before taxes and minority interest |       | $                        | 165.4      |                       | $          | 62.5                            |       | $                      | 6.0        |                     | $          | 50.9                     |       | $                | 11.8       |   | $ | (144.9 | ) | $ | 151.7 |   |
| Interest expense  (a)                                                        |       | 42.0                     |       | 19.5                       |       | 32.4                            |       | 33.8                   |       | 9.4                      |       | 82.2                     |       | 219.3            |       |
| Interest income                                                              |       | —                   |       | (1.6                       | )          | (0.2                            | )          | 0.3                    |       | (0.3                     | )          | (9.7                     | )          | (11.5            | )          |
| Depreciation and  amortization                                               |       | 54.4                     |       | 57.6                       |       | 42.4                            |       | 40.5                   |       | 11.2                     |       | 5.6                      |       | 211.7            |       |
| Restructuring  and other severance costs                                     |       | 2.6                      |       | 2.2                        |       | —                          |       | 2.5                    |       | —                   |       | 4.7                      |       | 12.0             |       |
| Systems/organization  establishment expenses                                 |       | (0.4                     | )          | 2.8                        |       | —                          |       | 1.1                    |       | 0.6                      |       | 0.1                      |       | 4.2              |       |
| Acquisition and  disposal costs                                              |       | 0.1                      |       | 0.1                        |       | 1.6                             |       | —                 |       | 0.5                      |       | —                   |       | 2.3              |       |
| Inventory write-up  charges                                                  |       | 0.1                      |       | 5.5                        |       | —                          |       | 0.1                    |       | —                   |       | —                   |       | 5.7              |       |
| Loss on early  extinguishment of debt                                        |       | —                   |       | 1.4                        |       | —                          |       | —                 |       | 1.1                      |       | 16.1                     |       | 18.6             |       |
| Refinancing  expenses                                                        |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | 0.9                      |       | 0.9              |       |
| (Gain) loss on  sale of assets and other                                     |       | (0.2                     | )          | 0.2                        |       | 0.5                             |       | —                 |       | —                   |       | (5.2                     | )          | (4.7             | )          |
| Foreign exchange  gain, net                                                  |       | (0.6                     | )          | (0.2                       | )          | —                          |       | (1.2                   | )          | —                   |       | (5.8                     | )          | (7.8             | )          |
| Other                                                                        |       | (1.2                     | )          | 0.7                        |       | —                          |       | 0.1                    |       | —                   |       | 0.4                      |       | —           |       |
| Total Adjusted  EBITDA (b)                                                   |       | $                        | 262.2      |                       | $          | 150.7                           |       | $                      | 82.7       |                     | $          | 128.1                    |       | $                | 34.3       |   | $ | (55.6 | ) | $ | 602.4 |   |
| **Year  ended December 31, 2006**                                            | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **       | ** ** |
| Income (loss)  from continuing operations before taxes and minority interest |       | $                        | 110.1      |                       | $          | 70.0                            |       | $                      | 18.5       |                     | $          | 36.4                     |       | $                | 12.5       |   | $ | (126.1 | ) | $ | 121.4 |   |
| Interest expense  (a)                                                        |       | 49.3                     |       | 11.4                       |       | 29.2                            |       | 31.6                   |       | 9.6                      |       | 68.8                     |       | 199.9            |       |
| Interest income                                                              |       | (4.6                     | )          | (1.6                       | )          | (0.3                            | )          | (0.1                   | )          | (0.2                     | )          | 4.4                      |       | (2.4             | )          |
| Depreciation and  amortization                                               |       | 47.5                     |       | 43.6                       |       | 36.1                            |       | 33.1                   |       | 8.7                      |       | 5.4                      |       | 174.4            |       |
| Impairment  charges                                                          |       | 2.2                      |       | —                     |       | —                          |       | —                 |       | —                   |       | —                   |       | 2.2              |       |
| Restructuring  and other severance costs (c)                                 |       | 2.0                      |       | 1.2                        |       | —                          |       | 1.1                    |       | —                   |       | 1.0                      |       | 5.3              |       |
| Systems/organization  establishment expenses                                 |       | 0.1                      |       | 1.3                        |       | —                          |       | 1.3                    |       | 0.9                      |       | 7.1                      |       | 10.7             |       |
| Acquisition and  disposal costs                                              |       | 1.0                      |       | 0.1                        |       | —                          |       | —                 |       | —                   |       | 0.8                      |       | 1.9              |       |
| Inventory write-up  charges                                                  |       | —                   |       | 0.8                        |       | —                          |       | 0.1                    |       | 0.2                      |       | —                   |       | 1.1              |       |
| Loss (gain) on  sale of assets and other                                     |       | 0.3                      |       | 0.4                        |       | 0.1                             |       | 0.1                    |       | —                   |       | (1.2                     | )          | (0.3             | )          |
| Foreign exchange  loss (gain), net                                           |       | 0.4                      |       | 0.1                        |       | —                          |       | —                 |       | —                   |       | (9.1                     | )          | (8.6             | )          |
| Other                                                                        |       | (1.7                     | )          | 1.4                        |       | (1.7                            | )          | 1.2                    |       | —                   |       | 1.1                      |       | 0.3              |       |
| Total Adjusted  EBITDA (b)                                                   |       | $                        | 206.6      |                       | $          | 128.7                           |       | $                      | 81.9       |                     | $          | 104.8                    |       | $                | 31.7       |   | $ | (47.8 | ) | $ | 505.9 |   |

 

----

| (a)    | Includes (losses) gains  of $(51.5) million, $(32.2) million and $7.2 million for the years ended  December 31, 2008, 2007 and 2006, respectively, representing the  movement in the mark-to-market valuation of the Company’s interest rate and  cross-currency hedging instruments.                                                                                                                                                                                                                                                                                                                                                    |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (b)    | This amount does not  include $1.8 million and $68.3 million for the years ended December 31,  2007 and 2006, respectively, of Adjusted EBITDA from the former Groupe  Novasep segment which was sold on January 9, 2007; $37.6 million and  $35.3 million for the years ended December 31, 2007 and 2006,  respectively, of Adjusted EBITDA from the Electronics segment sold on  December 31, 2007; and $5.4 million, $12.0 million and $12.0 million for  the years ended December 31, 2008, 2007 and 2006, respectively, of  Adjusted EBITDA from the pool and spa chemicals business sold on  October 10, 2008. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (c)    | Includes inventory write-downs  of $0.4 million recorded in cost of products sold for the year ended  December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

The summary of segmentinformation above includes “Adjusted EBITDA,” a financial measure used by theCompany’s chief decision 

 

88

----

 

maker and seniormanagement to evaluate the operating performance of each segment.

 

*Itemsexcluded from Adjusted EBITDA*

 

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

 

·                *Impairment charges*:  In the fourth quarter of 2008,the Company recorded goodwill impairment charges of $809.5 million in severalbusinesses (see Note 7, “Goodwill,” for further details).  In 2006, the Company recorded an impairmentcharge of $2.2 million related to the write-down of property, plant andequipment within the Fine Chemicals business of the Specialty Chemicalssegment.

 

·                *Restructuring and other severancecosts*: Charges of $35.3 million, $12.0 million and $5.3 million (including $0.4million of charges recorded in cost of products sold in the ConsolidatedStatements of Operations in 2006) were recorded in 2008, 2007 and 2006,respectively, for miscellaneous restructuring activities, including facilityclosures, headcount reductions and severance costs (see Note 16, “RestructuringAnd Other Severance Costs,” for further details).

 

·                *Systems/organization establishmentexpenses*: In 2008, expenses of $12.9 million were recorded primarily related to theintegration of businesses acquired in the Specialty Chemicals, PerformanceAdditives and Titanium Dioxide Pigments segments. In 2007, expenses of $4.2million were recorded primarily related to the integration of businessesacquired in the Performance Additives and Advanced Ceramics segments. For 2006,expenses of $10.7 million were recorded related to professional fees incurredregarding systems and internal control documentation in connection with theSarbanes-Oxley Act of 2002 and fees relating to the implementation of a newconsolidation software system.

 

·                *Acquisition and disposal costs*:  Costs of $1.7 million, $2.3million and $1.9 million were recorded in 2008, 2007 and 2006, respectively, inconnection with potential and actual acquisitions and dispositions.

 

·                *Inventory write-up charges*:  Under SFAS No. 141, *Business Combinations*, all inventories acquired in anacquisition must be revalued to “fair value.” This resulted in a consequentialreduction in gross profit of $6.9 million, $5.7 million and $1.1 millionfor the years ended December 31, 2008, 2007 and 2006, respectively, as theinventory was sold in the normal course of business. The reduction in grossprofit in 2008 was primarily related to the acquisition of Holliday Pigments inthe Performance Additives segment and the completion of the Titanium DioxidePigments venture.  The reduction in grossprofit in 2007 was primarily related to the acquisition of the Elementis plcbusiness. In 2006, the reduction in gross profit was primarily due toacquisitions made in 2006 and the end of 2005 in the Performance Additives,Advanced Ceramics and Specialty Compounds segments.

 

·                *(Gain) l**oss on earlyextinguishment of debt*:  In the fourth quarter of 2008, the Company redeemed €11.0million of the 2014 Notes at a discount and recorded a gain of $4.0 million. Inthe second quarter of 2007, the Company paid a redemption premium of $14.5million to redeem long-term debt and wrote off $4.1 million of deferredfinancing costs associated with the redemption of the 2011 Notes.

 

·                *Refinancing expenses*:  In March 2007, the Companyexpensed $0.9 million related to the fourth amendment of the senior securedcredit agreement to refinance all outstanding borrowings under the tranche Fterm loans with new tranche G term loans.

 

·                *Gain on sale of assets and other*:  The Company recorded gains, netof $2.4 million, $4.7 million and $0.3 million in 2008, 2007 and 2006,respectively, related to asset sales. The gain recorded in 2008 primarilyrelates to the sale of land that was acquired as part of the acquisition ofDynamit Nobel in 2004.  The gain reportedin 2007 primarily relates to the sale of the U.S. wafer reclaim business.

 

·                *Acquired in-process research anddevelopment*: Under SFAS No. 141, *Business Combinations*,acquired in-process research and development costs are charged to expense as ofthe acquisition date. For the year ended December 31, 2008, the Companyexpensed $2.9 million primarily related to the acquisition of Holliday Pigmentsin August 2008 in the Performance Additives segment. These acquiredin-process research and development costs are included in selling, general andadministrative expenses in the Consolidated Statements of Operations.

 

·                *Foreign exchange loss (gain)*:  For 2008, foreign exchange lossesof $32.3 million were recorded primarily due to the impact of the weaker pound sterlingas of December 31, 2008 versus December 31, 2007 related to non-operatingeuro-denominated transactions. For the year ended December 31, 2007 and2006, foreign exchange gains of $7.8 million and $8.6 million, respectively,were recorded primarily related to euro-denominated debt, cash and inter-companyloans.

 

·     *Other:*  In 2008, the company recorded expenses of $1.9million which includes fees incurred in connection with the secondary offeringof the Company’s common stock in June 2008.

 

89

----

 

**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,  *Goodwill and Other Intangible Assets*,any goodwill resulting from acquisitions is tested for impairment at leastannually.

 

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.  This acquisition includes facilities in NorthAmerica, Europe and China and is included in the Color Pigments and Servicesbusiness, which is part of the Performance Additives segment. The results ofthis acquired business prior to the acquisition date of August 31, 2007are not included in the consolidated financial statements for the year ended December31, 2007.

 

On August 11, 2008,the Company completed the acquisition of Holliday Pigments, the leading globalmanufacturer of technical grade ultramarine blue and manganese violet pigments,from Yule Catto & Co. plc for a purchase price of approximately €46.0million ($68.6 million using an August 11, 2008 exchange rate of €1.00 =$1.4909). Holliday Pigments manufactures inorganic ultramarine pigments for awide range of applications, including plastics, cosmetics, coatings and inks.Holliday Pigments was incorporated into the Color Pigments and Servicesbusiness, which is part of the Performance Additives segment. The results of HollidayPigments prior to the acquisition date of August 11, 2008 are not includedin the consolidated financial statements for the year ended December 31,2008.  The allocation of the purchaseprice to the identifiable assets acquired is preliminary and is subject tochange, with estimated completion during the first half of 2009.

 

On September 1, 2008,the Company completed the formation of a venture with Kemira that focuses onspecialty titanium dioxide pigments. The venture combines the Company’stitanium dioxide pigments and functional additives businesses, which are partof the Titanium Dioxide Pigments segment, including its production facility inDuisburg, Germany, and Kemira’s titanium dioxide business, including Kemira’stitanium dioxide plant in Pori, Finland.  The Company has consolidatedthis venture and has reported Kemira’s interest as minority interest in theconsolidated financial statements. The Company owns 61% of the venture withKemira owning the remaining portion.  The venture’s acquisition of theshares of the Rockwood and Kemira entities was facilitated by the borrowingsunder a term loan of €250.0 million on September 3, 2008 ($362.5 millionusing a September 3, 2008 exchange rate of €1.00 =  $1.4498).  The venture made a payment of€97.5 million ($141.4 million using a September 3, 2008 exchange rate) tothe venture’s minority shareholder. In addition, the venture obtained a €30.0million ($41.9 million) revolving credit facility to finance its operations andthe venture has assumed debt of €24.2 million ($33.8 million) from Kemira,primarily due to a defined benefit pension plan. The Company estimates that thepotential exposure range for assumed environmental liabilities is from $14.0million to $25.3 million. At December 31, 2008, $14.0 million of relatedreserves are recorded.  The results of Kemira’stitanium dioxide business prior to the formation of the venture on September 1,2008 are not included in the consolidated financial statements for the yearended December 31, 2008.  Thepurchase accounting allocation is preliminary and is subject to change, withestimated completion during 2009.

 

On September 4,2008, the Company completed the acquisition of Nalco Holdings, Inc.’s (“Nalco”)Finishing Technologies business for a purchase price of approximately $75.0million. Nalco’s Finishing Technologies business provides chemicals andservices for pre-treating of metal and is part of the Surface Treatmentbusiness within the Specialty Chemicals segment.  The results of Nalco’s Finishing Technologiesbusiness prior to the acquisition date of September 4, 2008 are notincluded in the consolidated financial statements for the year ended December 31,2008.  The allocation of the purchaseprice to the identifiable assets acquired is preliminary and is subject tochange, with estimated completion during the first half of 2009.

 

In addition to theacquisitions described above, the Company has completed other smalleracquisitions in 2008, 2007 and 2006. Depending on the timing and complexityinvolved, the purchase price allocation to the net assets acquired for certainacquisitions completed within the last year was preliminary as of December 31,2008.

 

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

 

**5.INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|------------------|------------|
| **($ in millions)** | ** ** | **2008 (a)**     | ** ** | **2007** | ** ** |
| Raw materials            |       | $                | 203.8      |   | $ | 184.6 |   |
| Work-in-process          |       | 74.2             |       | 60.7 |   |
| Finished goods           |       | 355.3            |       | 275.5 |   |
| Packaging  materials     |       | 7.7              |       | 6.1 |   |
| Total                    |       | $                | 641.0      |   | $ | 526.9 |   |

 

90

----

 

----

(a)                The increase from December 31, 2007 is primarilyrelated to the Titanium Dioxide Pigment venture and other acquisitions, net ofthe impact of currency changes.

 

**6.PROPERTY, PLANT AND EQUIPMENT:**

 

Property, plant andequipment, net is comprised of the following:

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|
| **($ in millions)**                                 | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Land                                                     |       | $                | 155.6      |   | $ | 157.0 |   |
| Buildings and  improvements, including land improvements |       | 594.6            |       | 491.7 |   |
| Machinery and  equipment                                 |       | 1,394.7          |       | 1,128.1 |   |
| Furniture and  fixtures                                  |       | 117.9            |       | 100.8 |   |
| Mining rights                                            |       | 86.3             |       | 86.3 |   |
| Construction-in-progress                                 |       | 95.7             |       | 112.2 |   |
| Property, plant  and equipment, at cost                  |       | 2,444.8          |       | 2,076.1 |   |
| Less accumulated  depreciation and amortization          |       | (692.6           | )          | (567.6 | ) |
| Property, plant  and equipment, net                      |       | $                | 1,752.2    |   | $ | 1,508.5 |   |

 

Depreciation expense was$179.1 million, $144.8 million and $123.0 million for the years ended December 31,2008, 2007 and 2006, respectively.

 

In addition, property,plant and equipment at December 31, 2008 and 2007 includes items recordedunder capital leases as follows:

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|
| **($ in millions)**                                 | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Buildings and  improvements, including land improvements |       | $                | 49.5       |   | $ | 53.2 |   |
| Machinery and  equipment                                 |       | 3.0              |       | 0.3 |   |
| Furniture and  fixtures                                  |       | 6.0              |       | 5.7 |   |
|                                                     |       | 58.5             |       | 59.2 |   |
| Accumulated  depreciation                                |       | (9.2             | )          | (8.1 | ) |
| Total                                                    |       | $                | 49.3       |   | $ | 51.1 |   |

 

At December 31,2008, minimum payments due under capital leases are as follows:

 
| **($ in millions)**  | ** ** | ** ** |   |
|---------------------------|------------|------------|--------|
| Years ended  December 31: |       |       |   |
| 2009                      |       | $          | 6.5    |   |
| 2010                      |       | 6.2        |   |
| 2011                      |       | 5.5        |   |
| 2012                      |       | 5.2        |   |
| 2013                      |       | 4.8        |   |
| Thereafter                |       | 40.8       |   |
| Total                     |       | $          | 69.0   |   |

 

During the fourth quarterof 2006, management performed an impairment review of a business within theFine Chemicals division of the Specialty Chemicals segment due to poorprofitability and recorded an impairment charge of $2.2 million to write-downthe full value of machinery and equipment.

 

**7.  GOODWILL:**

 

In the fourth quarter of2008, the Company tested the recoverability of goodwill as part of its annualreview.  In connection with thedetermination of fair value of the reporting units, the Company madesignificant estimates and assumptions with respect to those reporting units andengaged independent valuation specialists to assist with this review. The firststep of the review indicated that the fair values of the Color Pigments andServices, Timber Treatment Chemicals, Clay-based Additives, Titanium DioxidePigments, Specialty Compounds and Rubber Chemicals reporting units were lessthan their carrying values, thus requiring the Company to complete the secondstep of the impairment review. To compute the amount of the impairment understep two, SFAS No. 142 prescribes that the Company determine the impliedfair value of goodwill in the same manner as if the Company had acquired thosereporting units.  Specifically, theCompany allocated the fair value of the reporting 

 

91

----

 

units to all of theassets, including any unrecognized intangible assets and liabilities of thatunit, in a hypothetical calculation that would yield the implied fair value ofgoodwill.  The impairment loss is measuredas the difference between the book value of the goodwill and the implied fairvalue of the goodwill.  Based on theseresults, the Company recorded goodwill impairment charges in the Color Pigmentsand Services business ($293.2 million), Timber Treatment Chemicals business ($88.3million) and Clay-based Additives business ($75.1 million) within thePerformance Additives segment; Titanium Dioxide Pigments segment ($247.7million); and Specialty Compounds segment, including the Rubber Chemicalsbusiness ($105.2 million).  The goodwill impairmentcharges were attributed to the significant drop in global stock valuations, thesubstantial reduction in the market valuation of Rockwood and comparablecompanies, and the continuing negative global economic and market outlook.  In particular, the downturn in theconstruction industry has had a negative impact on a number of the Company’sbusinesses.

 

Prior to completing theassessment of goodwill for impairment during the fourth quarter of 2008, theCompany performed a recoverability test of certain long-lived assets inaccordance with SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets.*As a result, theCompany concluded that there was no impairment of those assets in the fourthquarter of 2008.

 

Below are goodwillbalances and activity by segment:

 
| **($ in millions)**                       | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-----------|------------|
| Balance,  December 31, 2006                    |       | $                        | 597.6      |                       | $          | 457.8                           |       | $                      | 158.6      |                     | $          | 223.2     |       | $ | 118.5 |   | $ | 1,555.7 |   |
| Acquisitions                                   |       | 34.9                     |       | 23.3                       |       | —                          |       | 13.3                   |       | —                   |       | 71.5      |       |
| FIN 48 tax  adjustments (a)                    |       | (6.1                     | )          | —                     |       | (1.6                            | )          | (2.2                   | )          | —                   |       | (9.9      | )          |
| Other tax  adjustments (b)                     |       | (4.5                     | )          | —                     |       | (1.2                            | )          | (1.6                   | )          | (1.7                     | )          | (9.0      | )          |
| Foreign exchange  and other (c)                |       | 62.2                     |       | 12.8                       |       | 16.5                            |       | 25.8                   |       | 4.4                      |       | 121.7     |       |
| Balance, December  31, 2007                    |       | 684.1                    |       | 493.9                      |       | 172.3                           |       | 258.5                  |       | 121.2                    |       | 1,730.0   |       |
| Post closing  purchase price consideration (d) |       | (18.8                    | )          | —                     |       | (6.0                            | )          | (5.0                   | )          | —                   |       | (29.8     | )          |
| Goodwill impairment  charges                   |       | —                   |       | (456.6                     | )          | (247.7                          | )          | —                 |       | (105.2                   | )          | (809.5    | )          |
| Acquisitions                                   |       | 9.7                      |       | 34.9                       |       | 114.8                           |       | 25.3                   |       | —                   |       | 184.7     |       |
| Foreign exchange  and other (c)                |       | (27.0                    | )          | (72.2                      | )          | (33.4                           | )          | (9.0                   | )          | (16.0                    | )          | (157.6    | )          |
| Balance,  December 31, 2008                    |       | $                        | 648.0      |                       | $          | —                          |       | $                      | —     |                     | $          | 269.8     |       | $ | — |   | $ | 917.8 |   |

 

----

(a)                See Note 10, “Income Taxes,” for details regarding theadoption of FIN 48.

 

(b)               As disclosed in Note 10, “Income Taxes,” adjustmentswere recorded in the fourth quarter of 2007 related to prior year taxcomputations within Specialty Chemicals ($4.5 million), Titanium DioxidePigments ($1.2 million), Advanced Ceramics ($1.6 million) and SpecialtyCompounds ($1.5 million).

 

(c)                Consists primarily of foreign currency changes.

 

(d)               In March 2008, the Company entered into anagreement with GEA Group and GEA North America to settle all existing andfuture environmental claims in consideration of payment to the Company of €18.8million ($29.1 million) which was received on March 28, 2008. This paymentwas considered an adjustment to the purchase price per the claims settlementagreement between the Company and GEA Group and its subsidiary. As a result,the Company has reported this as an adjustment to the purchase price with acredit to goodwill in the first quarter of 2008. See Note 19, “Commitmentsand Contingencies,” for further details.

 

**8. OTHERINTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of December 31, 2008**     | ** ** | **As of December 31, 2007**   | ** ** |
|------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **($ in millions)**                 | ** ** | **Gross  Carrying  Amount (a)** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                               | 411.9      |                          | $          | (142.0 | ) | $ | 269.9 |   | $ | 395.6 |   | $ | (116.7 | ) | $ | 278.9 |   |
| Trade names and  trademarks              |       | 141.5                           |       | (27.1                         | )          | 114.4 |   | 146.6 |   | (23.0 | ) | 123.6 |   |
| Customer  relationships                  |       | 372.2                           |       | (79.1                         | )          | 293.1 |   | 273.0 |   | (57.3 | ) | 215.7 |   |
| Supply  agreements                       |       | 57.3                            |       | (6.3                          | )          | 51.0 |   | 29.6 |   | (2.9 | ) | 26.7 |   |
| Other                                    |       | 61.7                            |       | (35.3                         | )          | 26.4 |   | 57.7 |   | (26.7 | ) | 31.0 |   |
| Total                                    |       | $                               | 1,044.6    |                          | $          | (289.8 | ) | $ | 754.8 |   | $ | 902.5 |   | $ | (226.6 | ) | $ | 675.9 |   |

 

92

----

 

----

(a)         The increase from December 31, 2007 is primarilyrelated to the impact of acquisitions, net of the impact of currency changes.

 

Amortization of otherintangible assets was $79.8 million, $66.9 million and $51.4 million for theyears ended December 31, 2008, 2007 and 2006, respectively.

 

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

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2009                     |       | $                | 77.0       |   |
| 2010                     |       | 75.4             |       |
| 2011                     |       | 71.1             |       |
| 2012                     |       | 65.4             |       |
| 2013                     |       | 63.9             |       |
|                          |            |                  |            |  |

** **

**9. LONG-TERMDEBT:**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                          | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------|------------|
| **($, € and £ in millions)**                                              | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Senior secured  credit facilities:                                                  |       |             |       |   |   |
| Tranche A-1 term  loans (€22.8 and €29.3, respectively)                   |       | $                | 31.9       |   | $ | 42.8 |   |
| Tranche A-2 term  loans (€99.4 and €127.8, respectively)                  |       | 138.9            |       | 186.5 |   |
| Tranche E term  loans                                                               |       | 1,104.9          |       | 1,116.4 |   |
| Tranche G term  loans (€265.2 and €267.9, respectively)                   |       | 370.5            |       | 390.9 |   |
| 2014 Notes  (€364.0 and $200.0 and €375.0 and $200.0, respectively)       |       | 708.5            |       | 747.1 |   |
| Titanium Dioxide  Pigments venture term loans (€250.0 as of December 31, 2008) |       | 349.3            |       | — |   |
| Capitalized  lease obligations (€34.3 and €34.1, respectively)            |       | 47.9             |       | 49.7 |   |
| Other loans                                                                         |       | 59.3             |       | 24.2 |   |
| Preferred stock  of subsidiary (£12.0 as of December 31, 2007)                 |       | —           |       | 23.8 |   |
|                                                                                |       | 2,811.2          |       | 2,581.4 |   |
| Less current  maturities                                                            |       | (90.9            | )          | (107.4 | ) |
|                                                                                |       | $                | 2,720.3    |   | $ | 2,474.0 |   |

 

Maturities of long-termdebt are as follows:

 
| **($ in millions)** | ** ** | ** ** |    |
|--------------------------|------------|------------|---------|
| 2009                     |       | $          | 90.9    |   |
| 2010                     |       | 113.5      |    |
| 2011                     |       | 122.1      |    |
| 2012                     |       | 1,474.9    |    |
| 2013                     |       | 233.9      |    |
| Thereafter               |       | 775.9      |    |
|                     |       | $          | 2,811.2 |   |

 

Senior Secured CreditFacilities

 

*a)Structure*

 

In connection with theDynamit Nobel Acquisition, the Company entered into a senior secured creditagreement on July 30, 2004 (“Credit Agreement”).  See Long-Term Debttable above for senior secured credit facility balances as of December 31,2008 and 2007.

 

On March 23, 2007,the Company entered into the fourth amendment to the senior secured creditagreement, which among other things, (i) provided for approximately €269.3million of tranche G loans, the proceeds of which were used to repay in fullthe outstanding borrowings under the tranche F term loans, (ii) permittedthe Company to repay its outstanding 2011 Notes any time on or after May 15,2007 without a corresponding repayment of term loans under the CreditAgreement, and (iii) resets substantially all of the baskets contained inthe restrictive covenants and elsewhere in the Credit Agreement. Therefinancing of the tranche F loans with 

 

93

----

 

the tranche G loanseffectively reduced the interest rate on the tranche G term loans by 50 basispoints. The Company did not incur any additional borrowings under the fourthcredit amendment. In March 2007, the Company expensed $0.9 millionrelated to the fourth amendment of the senior secured credit agreement.

 

*b)Availability*

 

The senior secured creditfacilities consist of the term loan tranches listed above as well as a seniorsecured revolving credit facility in an aggregate principal amount of $250.0million made available in U.S. dollars, euros and/or pounds sterling. A portionof the revolving credit facility is available in the form of letters of creditand swingline loans. Under the terms of the amendments, the Company may, undercertain circumstances and subject to receipt of additional commitments fromexisting lenders or other eligible institutions, request that the tranche Eterm loans and/or the revolving credit commitments be increased by an aggregateamount of up to $250.0 million. As of December 31, 2008 the Company had nooutstanding borrowings under the revolving credit facility, and $24.8 millionof letters of credit issued on its behalf.

 

Amounts borrowed underthe term loan facilities, other than the revolving credit facility, that arerepaid or prepaid may not be reborrowed.

 

*c)Interest and Fees*

 

The interest rates peryear under the tranche A-1 and A-2 term loan facilities are EURIBOR plus 1.75%.EURIBOR is the euro inter-bank offered rate. The interest rate per year, at theCompany’s option, under the tranche E term loan facility is LIBOR plus 1.50% orABR plus 0.75% (for the year ended December 31, 2008, the Company electedoption (i)  LIBOR plus 1.50%).  LIBOR is the London inter-bankoffered rate. ABR is the alternate base rate, which is the higher of CreditSuisse’s prime rate and the federal funds effective rate plus 0.5%. Theinterest rate per year under the tranche G term loan facility is EURIBOR plus1.75%. The interest rates under the revolving credit facility are, at theCompany’s option, LIBOR plus 1.75% or, ABR plus 1.00%  (for the year endedDecember 31, 2008, the Company elected option (i) LIBOR plus 1.75%). Ineach case, the interest rates per year are subject to step-downs determined byreference to a performance test.

 

The Company may electinterest periods of one, two, three or six months (or in the case of revolvingcredit loans, nine or twelve months, to the extent available from all lendersunder the revolving credit facility) for LIBOR borrowings. Interest is payablequarterly in the case of ABR loans and at the end of each interest period and,in any event, at least every three months, in the case of LIBOR borrowings.

 

The senior secured creditfacilities require payment of customary commitment, letter of credit and otherfees.

 

*d)Guarantees; Security*

 

Obligations under thesenior secured credit facilities are guaranteed by Rockwood SpecialtiesInternational, Inc. and each of Rockwood Specialties Group Inc.’s existingand subsequently acquired or organized direct or indirect domesticsubsidiaries, subject to certain exceptions, and are secured by first-prioritysecurity interests in: substantially all the tangible and intangible assets ofthe Company and its direct or indirect domestic subsidiaries, subject toexceptions; all the capital stock of or other equity interest in the Companyand each of its direct or indirect domestic subsidiaries; a maximum of 65% ofthe capital stock of or other equity interests in each direct foreignsubsidiary of either Group or of any domestic subsidiary of the Company.

 

*e)Maturity, Amortization and Prepayments*

 

The tranche A-1 and A-2term loans will mature on July 30, 2011 and amortize at escalatingpercentages on a semi-annual basis. The tranche E term loans and tranche G termloans will mature on July 30, 2012 and amortize on a semi-annual basiswith each repayment amount prior to maturity to be equal to 0.5% of theprincipal amount of the former tranche C term loans and tranche D term loans,respectively. The revolving credit facility will mature on July 30, 2010.

 

In addition, the Companyis required to make the following mandatory prepayments of the term loans underthe senior secured credit facilities, in each case subject to certain exceptions,with:

 

·                  100% of the net cash proceeds of all sales or otherdispositions by the Company or any of its restricted subsidiaries under thesenior secured credit facilities of assets other than net cash proceeds (a) fromthe sale or other disposition of assets in the ordinary course of business, (b) ofcertain disposals permitted under the senior secured credit agreement(including the proceeds of sales or transfers of accounts receivable (includingpursuant to a securitization) in the amount of up to $200.0 million at anytime) or (c) that are reinvested in the Company and its restrictedsubsidiaries within twelve months of the sale or other disposition (subject toextension in certain circumstances).

 

·                  100% of the net cash proceeds of issuances of certaindebt obligations.

 

94

----

 

·                  50% of excess cash flows, as defined, in respect ofany fiscal year at the end of which the consolidated total debt to consolidatedEBITDA ratio is equal to or greater than 3.50 to 1.0, reduced by any amountsreinvested during the first six months of the year and voluntary prepayments.

 

*f)Financial Covenants*

 

The senior secured creditfacilities contain the following financial covenants:

 

·                  a consolidated total net debt to consolidated AdjustedEBITDA test;

 

·                  a consolidated Adjusted EBITDA to consolidated cashinterest expense test; and

 

·                  limitations on capital expenditures.

 

For purposes ofcalculating compliance with the financial covenants as of any date, foreigncurrency denominated indebtedness is to be converted to U.S. dollars based onaverage exchange rates for the twelve-month period ending on such date. Inaddition to the financial covenants described above, the Company’s seniorsecured credit facilities contain various affirmative and restrictivecovenants. The restrictive covenants limit the Company’s ability to, amongother things, incur indebtedness and other liabilities; create liens; merge orconsolidate; dispose of assets; make investments; pay dividends and makepayments to shareholders; make payments on certain indebtedness or to amenddocuments related to certain indebtedness and to enter into sale leasebacktransactions. In connection with the fourth amendment of the senior securedcredit agreement, substantially all of the baskets relating to the aboverestrictions were reset.

 

***2011 Notes***— On May 15, 2007, the Company redeemed itsoutstanding 10 5/8% Senior Subordinated Notes due 2011 in the aggregateprincipal amount of $273.4 million. In connection with this debt repayment, theCompany paid redemption premiums of $14.5 million and wrote off deferredfinancing costs of $4.1 million.

 

***2014 Notes***—In November 2004, the Company issued €375.0 million aggregate principal amount of 7.625% senior subordinatednotes and $200.0 million aggregate principal amount of 7.500% seniorsubordinated notes, both due in 2014 (“2014 Notes”). The 2014 Notes are*pari passu* to future senior subordinatedindebtedness and junior to all of the Company’s existing and future seniorindebtedness. The 2014 Notes are guaranteed on a senior subordinated unsecuredbasis by certain of the Company’s domestic subsidiaries. In the fourth quarterof 2008, the Company redeemed €11.0 million of its 2014 Notes at a discount andrecorded a gain of $4.0 million.

 

***TitaniumDioxide Pigments venture term loans, revolving credit facility and otherassumed debt***—DuringJune 2008, as amended in August 2008, the Titanium Dioxide Pigmentsventure entered into a facility agreement that provides for a term loanfacility in an aggregate amount of €250.0 million and a revolving creditfacility in an aggregate amount of €30.0 million ($41.9 million), both maturingon June 17, 2013. On September 3, 2008, the Titanium Dioxide Pigmentsventure borrowed €250.0 million ($349.3 million) under the term loan facility.As of December 31, 2008, there were no outstanding borrowings under therevolving credit facility. The interest rate on the loans is EURIBOR (or LIBORif the currency is in USD) plus 3%, subject to a step down determined byreference to a leverage ratio test. The term loan shall be repaid ininstallments over a five-year period from the date of the facility agreement,with payments commencing twelve months from such date; both loans may be repaidin advance without penalty. In addition, the Titanium Dioxide Pigments venturehas assumed debt of €24.2 million ($33.8 million) at December 31, 2008from Kemira, primarily due to a defined benefit plan, at interest rates rangingfrom 3.75% to 5.00%.

 

The facility agreementrequires the venture to meet the following financial covenants:

 

·                  a net debt to EBITDA (which issubstantially similar to the definition of Adjusted EBITDA in the Company’ssenior secured credit agreement) test;

 

·                  a EBITDA to cash interest expense test;and

 

·                  a cash generated for financing activitiesto debt service test.

 

The covenants arecalculated in accordance with International Financial Reporting Standards andare based solely on the results of the venture.

 

***Other term loan facilities***— The Company has euro-denominated termloan facilities that provide aggregate outstanding borrowings of approximately€9.2 million ($12.9 million) as of December 31, 2008. These term loansmature between 2009 and 2016 and bear annual interest rates ranging up to12.41%. In addition, the Company has a term loan facility denominated inChinese Renminbi, providing for borrowings of an aggregate U.S. dollarequivalent amount of $12.4 million as of December 31, 2008. This term loanmatures in 2010 and bears an annual interest rate of 7.56%. The term loanfacilities described above contain customary events of default and some of themare secured by mortgages or accounts receivable.

 

***Preferred stock of subsidiary***—Chemetall Plc., a Rockwood subsidiary,had previously issued 12.0 million shares of preferred stock, which wereredeemed at their par value (£1) on July 3, 2008.

 

***Fair Value***—The Company estimates that its debt under the seniorsecured credit facilities and Titanium Dioxide Pigments venture facilityagreement, based on current interest rates and terms, approximates fair value.Based on quoted market values at December 31, 2008, the Company estimatesthe fair value of its 2014 Notes approximated $501.0 million.

 

***Derivative Contracts***— The Company has historically entered into interestrate swaps to manage its exposure to changes in interest rates related to variablerate debt. As of December 31, 2008, these contracts cover notional amountsof $610.0 million (at interest rates 

 

95

----

 

ranging from 4.864% to5.038%) and €499.9 million (at interest rates ranging from 2.995% to 4.416%).These derivative contracts effectively convert a majority of the senior securedcredit obligations and the obligations under the Titanium Dioxide Pigments termloan facility to fixed rate obligations. These swaps will mature between November 2009and July 2012.

 

The Company has electednot to apply hedge accounting for these interest rate swaps and has recordedthe mark-to-market of these derivatives as a component of interest expense inthe Consolidated Statements of Operations. These transactions increasedinterest expense by $53.9 million and $16.3 million in 2008 and 2007,respectively and decreased interest expense by $15.7 million in 2006, of which(losses) gains of $(51.7) million, $(29.8) million and $9.4 million in 2008,2007 and 2006, respectively, represented mark-to-market adjustments. Therelated asset and liability on the contracts’ marked-to-market adjustments isreflected in “Other assets” and “Other liabilities,” respectively, in theConsolidated Balance Sheets.

 

During 2003, the Companyentered into cross-currency interest rate swaps with notional amountsaggregating $78.2 million that effectively converted $78.2 million U.S. dollarborrowings into euro-based obligations at an effective interest rate of EURIBORplus 4%. In connection with the July 2003 refinancing, the Company reducedthe notional amounts of this cross-currency hedge, with current notionalamounts of $19.3 million and €17.0 million. These contracts have final maturitydates of July 2010. These transactions increased interest expense by $0.7million, $2.6 million and $1.3 million in 2008, 2007 and 2006, respectively, ofwhich gains (losses) of $0.2 million $(2.4) million and $(2.2) million in 2008,2007 and 2006, respectively, represented mark-to-market adjustments.

 

In connection with theoffering of the 2014 Notes, the Company entered into cross-currency interestrate swaps with a five year term and a notional amount of €155.6 million thateffectively convert the U.S. dollar fixed rate debt in respect of the 2014dollar-denominated notes sold into euro fixed rate debt. The Company designatedthis contract as a hedge of the foreign currency exposure of its net investmentin its euro-denominated operations. There was no ineffective portion of the netinvestment hedge as of December 31, 2008. The Company does not expect anyof the loss on the net investment hedge residing in other comprehensive incomeat December 31, 2008 to be reclassified into earnings in 2009.

 

In addition, the Companyhas designated the remaining portion of its euro-denominated debt that isrecorded on its U.S. books as a net investment hedge of its euro-denominatedinvestments (euro debt of €652.0 million at December 31, 2008; $910.9million). As a result, any foreign currency gains and losses resulting from theeuro-denominated debt discussed above is accounted for as a component of accumulatedother comprehensive income for as long as the hedge remains effective. Therewas no ineffective portion of the net investment hedge as of December 31,2008. The Company does not expect any of the loss on the net investment hedgeresiding in other comprehensive income at December 31, 2008 to bereclassified into earnings in 2009.

 

In December 2008,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on third-party sales denominated ina currency other than the functional currency of the legal entity. Theinstruments were designated as foreign exchange cash flow hedges and areeffective at generating offsetting changes in the fair value or cash flows ofthe hedged item or transaction. For the year ended December 31, 2008, theCompany reported after-tax gains of $0.2 million in accumulated othercomprehensive income relating to the change in fair value of derivativesdesignated as foreign exchange cash flow hedges.  It is expected that cumulative gains of $0.2million as of December 31, 2008 will be reclassified into earnings withinthe next twelve months.  There was nogain or loss reclassified from accumulated other comprehensive income intoearnings as a result of the discontinuance of cash flow hedges due to theprobability of the original forecasted transaction not occurring.  As of December 31, 2008, the maximumlength of time over which the Company has hedged its exposure to movements inforeign exchange rates for forecasted transactions is twelve months.

 

As of December 31,2008, $1,493.8 million of the debt outstanding was denominated in euros.

 

**10.INCOME TAXES:**

 

Income (loss) fromcontinuing operations before income taxes and minority interest is as follows:

 
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| **($ in millions)** | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| United States            |       | $                           | (395.2     | ) | $ | (44.6 | ) | $ | (29.0 | ) |
| Foreign                  |       | (346.9                      | )          | 196.3 |   | 150.4 |   |
|                     |       | $                           | (742.1     | ) | $ | 151.7 |   | $ | 121.4 |   |

 

96

----

 

The provision (benefit)for taxes on income consisted of the following:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| **($ in millions)**                     | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current income  tax expense:                 |       |                        |       |   |   |   |   |
| Federal                                      |       | $                           | (0.4       | ) | $ | 2.7 |   | $ | — |   |
| State                                        |       | 1.6                         |       | 6.6 |   | 3.0 |   |
| Foreign                                      |       | 39.4                        |       | 35.1 |   | 28.0 |   |
|                                         |       | 40.6                        |       | 44.4 |   | 31.0 |   |
| Deferred income  tax expense:                |       |                        |       |   |   |   |   |
| Federal                                      |       | 3.2                         |       | 4.9 |   | 11.4 |   |
| State                                        |       | (0.1                        | )          | (1.3 | ) | 1.1 |   |
| Foreign                                      |       | (32.4                       | )          | 25.4 |   | 23.9 |   |
|                                         |       | (29.3                       | )          | 29.0 |   | 36.4 |   |
| Allocation from  discontinued operations:    |       |                        |       |   |   |   |   |
| Federal                                      |       | (23.7                       | )          | (9.3 | ) | (6.1 | ) |
| State                                        |       | —                      |       | (1.8 | ) | — |   |
|                                         |       | (23.7                       | )          | (11.1 | ) | (6.1 | ) |
| Allocation from other  comprehensive income: |       |                        |       |   |   |   |   |
| Federal                                      |       | (11.5                       | )          | — |   | — |   |
| State                                        |       | —                      |       | — |   | — |   |
|                                         |       | (11.5                       | )          | — |   | — |   |
| Total (benefit)  provision for taxes         |       | $                           | (23.9      | ) | $ | 62.3 |   | $ | 61.3 |   |

 

Amounts are reflected inthe preceding table based on the location of the taxing authorities. Changes inenacted rates impact the tax provision in the year a rate change is enacted.

 

The income tax provisionfrom continuing operations has been reduced by $35.2 million, $11.1 million and$6.1 million for the years ended December 31, 2008, 2007 and 2006,respectively, through allocations from discontinued operations and othercomprehensive income in accordance with the Company’s policy disclosed in Note1, “Description of Business and Summary of Significant Accounting Policies,” asthe Company had both a loss in continuing operations and a net profit in othercategories including discontinued operations and other comprehensive income inthe United States.

 

Deferred income taxes areprovided for the effects of temporary differences between the amounts of assetsand liabilities recognized for financial reporting purposes and the amountsrecognized for income tax purposes. The deferred tax assets and liabilities aredetermined by applying the enacted tax rate in the year in which the temporarydifference is expected to reverse.

 

97

----

 

The tax effects of themajor items recorded as deferred tax assets and liabilities are as follows:

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| **($ in millions)**                          | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Current deferred  income tax assets:              |       |             |       |   |   |
| Allowance for  doubtful accounts                  |       | $                | 1.8        |   | $ | 1.5 |   |
| Restructuring                                     |       | 2.8              |       | 3.8 |   |
| Derivative  instruments                           |       | 10.0             |       | 7.4 |   |
| Other current  reserves and accruals              |       | 5.6              |       | 7.2 |   |
| Valuation  allowance                              |       | (7.1             | )          | (4.5 | ) |
| Total current  deferred income tax assets         |       | 13.1             |       | 15.4 |   |
| Noncurrent  deferred income tax assets:           |       |             |       |   |   |
| Investment basis  difference                      |       | 57.1             |       | 57.7 |   |
| Pension and  postretirement benefits              |       | 37.3             |       | 30.9 |   |
| Tax loss  carryforwards and credits               |       | 43.9             |       | 59.6 |   |
| Other noncurrent  reserves and accruals           |       | 20.5             |       | 16.0 |   |
| Foreign exchange  on debt                         |       | 54.3             |       | 61.7 |   |
| Valuation  allowance                              |       | (77.6            | )          | (95.4 | ) |
| Total noncurrent  deferred income tax assets      |       | 135.5            |       | 130.5 |   |
| Noncurrent  deferred income tax liabilities:      |       |             |       |   |   |
| Derivative  instruments                           |       | 0.6              |       | (11.7 | ) |
| Goodwill and  other intangibles                   |       | (94.3            | )          | (123.1 | ) |
| Property, plant  and equipment                    |       | (127.8           | )          | (92.8 | ) |
| Total noncurrent  deferred income tax liabilities |       | (221.5           | )          | (227.6 | ) |
|                                              |       |             |       |   |   |
| Net deferred  income tax liability                |       | $                | (72.9      | ) | $ | (81.7 | ) |

 

Reconciliations of theU.S. statutory income tax rate to the effective tax rate are as follows:

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Federal  statutory rate                     |       | 35.0                        | %          | 35.0 | % | 35.0 | % |
| State taxes, net  of federal effect         |       | (0.1                        | )          | 1.5 |   | 2.2 |   |
| Foreign/U.S. tax  differential              |       | (1.3                        | )          | 1.2 |   | (2.4 | ) |
| Goodwill                                    |       | (26.4                       | )          | 0.3 |   | 1.2 |   |
| (Decrease)  increase in valuation allowance |       | (4.8                        | )          | 7.1 |   | 16.4 |   |
| Debt instruments                            |       | (3.5                        | )          | 15.4 |   | 2.3 |   |
| Allocation to  discontinued operations      |       | 4.7                         |       | (7.3 | ) | (5.0 | ) |
| Minority  interest                          |       | (0.1                        | )          | (1.9 | ) | — |   |
| Foreign tax rate  reductions                |       | 0.2                         |       | (7.3 | ) | — |   |
| Other                                       |       | (0.5                        | )          | (2.9 | ) | 0.8 |   |
| Effective tax  rate                         |       | 3.2                         | %          | 41.1 | % | 50.5 | % |

 

The effective income taxrate compared to the federal statutory rate was negatively impacted bynon-deductible book goodwill impairments.

 

The Company’s U.S.operations are included in a consolidated federal income tax return. The amountof current and deferred tax expense is computed on a separate entity basis foreach member of the group based on applying the principles of SFAS No. 109.

 

As of December 31,2008, the Company has U.S. federal and foreign corporate tax loss carryforwards(excluding state and local amounts) of approximately $197.6 million, ofwhich $43.5 million expire in years 2009 through 2028 and of which$154.1 million have no current expiration date. Included in the U.S. federaland foreign carryforwards are U.S. federal tax loss carryforwards of $24.1million that expire in years through 2027, of which $1.2 million aresubject to limitations. The Company also has state and local tax losscarryforwards of approximately $204.5 million expiring in years 2009through 2028.

 

The worldwide valuationallowance decreased by $15.2 million to $84.7 million at December 31,2008. Of this amount, $42.1 million was a charge to income tax expense, $16.3million represents a decrease to other comprehensive income, $35.4 million wasreversed primarily as a result of the reduction in U.S. deferred tax assets dueto the sale of the pool and spa chemicals business and $2.8 million representsa decrease recorded to goodwill. The remainder related to foreign currencytranslation adjustments and other balance sheet items.

 

98

----

 

The valuation allowanceas of December 31, 2008 and 2007 is attributable to deferred tax assetsrelated to certain items, such as tax loss carryforwards in the United States,including certain states, and foreign countries for which it is more likelythan not that the related tax benefits will not be realized. It is the Company’spolicy that the valuation allowance is decreased or increased in the yearmanagement determines that it is more likely than not that the deferred taxassets will be realized.

 

A table reflecting theactivity in the valuation allowance is as follows:

 
| **($ in millions)**              | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions  Charged to  Expense** | ** ** | **Reductions  Resulting from  Discontinued  Operations** | ** ** | **Additions  Acquired** | ** ** | **Other  Comprehensive  Income and  Other** | ** ** | **Balance at  End  of Period** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|--------------------------------|------------|
| Valuation  allowance                  |       |                                 |       |                               |       |                                                     |       |                    |       |                                        |       |                           |       |
| For the year  ended December 31, 2008 |       | $                                    | 99.9       |                               | $          | 42.1                                                     |       | $                       | (35.4      | )                                           | $          | (2.8                           | )          | $ | (19.1 | ) | $ | 84.7 |   |
| For the year  ended December 31, 2007 |       | 98.1                                 |       | 4.7                                |       | (47.3                                                    | )          | 1.6                     |       | 42.8                                        |       | 99.9                           |       |
| For the year  ended December 31, 2006 |       | 48.9                                 |       | 16.1                               |       | —                                                   |       | —                  |       | 33.1                                        |       | 98.1                           |       |
|                                       |            |                                      |            |                                    |            |                                                          |            |                         |            |                                             |            |                                |            |  |  |  |  |  |  |

 

At December 31, 2008and 2007, the Company had undistributed foreign earnings of $881.7 million and$840.4 million, respectively, which the Company intends to be permanentlyreinvested. The Company has determined that it is not practicable to compute adeferred tax liability for foreign withholding taxes or U.S. income taxes onthese earnings. The foreign currency gains recorded in other comprehensiveincome related to intercompany debt and foreign currency translation have notbeen tax affected in accordance with the indefinite reversal criteria.

 

The Company recordsliabilities for potential assessments in various tax jurisdictions. Theliabilities relate to tax return positions which, although supportable by theCompany, may be challenged by the tax authorities. The Company adjusts theseliabilities as a result of changes in tax legislation, interpretations of lawsby Courts, rulings by tax authorities, changes in estimates and the closing ofthe statute of limitations. The Company’s effective tax rate in any given yearincludes the impact of any changes to these liabilities. Favorable resolutionof an issue would generally be recognized as a reduction to the Company’sannual tax rate.

 

The Company adopted theprovisions of FIN 48 on January 1, 2007. The total amount of unrecognizedtax benefits as of the date of adoption was $44.1 million. In conjunction withthe adoption of FIN 48, the Company has classified uncertain tax positions asnon-current income tax liabilities (other liabilities) unless expected to bepaid within one year. Previously, accrued income tax liabilities wereclassified as current liabilities. As of December 31, 2008, the totalamount of unrecognized tax benefits was $29.8 million. A reconciliation of thebeginning and ending balances of the total amounts of unrecognized tax benefitsis as follows:

 
| **($ in millions)**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrecognized tax  benefits at January 1                            |       | $        | 41.2       |     | $          | 44.1 |   |
| Increases in tax  positions for prior years                        |       | 9.1      |       | 15.5     |       |
| Decreases in tax  positions for prior years                        |       | (2.9     | )          | (15.4    | )          |
| Increases in tax  positions for current year                       |       | 3.8      |       | 10.5     |       |
| Decreases due to  settlements with taxing authorities              |       | (2.6     | )          | (14.2    | )          |
| Lapse in statute  of limitations                                   |       | (0.1     | )          | (0.7     | )          |
| Foreign exchange                                                   |       | (0.5     | )          | 1.4      |       |
| Unrecognized tax  benefits at December 31, before reconciling item |       | 48.0     |       | 41.2     |       |
| Reconciling  item: Offset against deferred tax assets              |       | (18.2    | )          | (14.5    | )          |
| Unrecognized tax  benefits at December 31                          |       | $        | 29.8       |     | $          | 26.7 |   |

 

In accordance with bothFIN 48 and the Company’s policy, where tax losses can be carried back orforward to offset liabilities for uncertain tax benefits, then deferred taxassets associated with such tax losses are netted against both liabilities foruncertain tax benefits arising in the same year as the assets, and alsoliabilities for uncertain tax benefits arising in different years. This policyresults in an $18.2 million reduction in FIN 48 liabilities and deferred taxassets as of December 31, 2008.

 

Included in the balanceof unrecognized tax benefits at December 31, 2008 are $29.4 million of taxbenefits that, if recognized, would affect the effective tax rate and $0.4million that, if recognized, would result in an adjustment to other taxaccounts.

 

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 as ofDecember 31, 2007. During the year ended December 31, 2008, theaccrual for interest and penalties was increased by $2.8 million to $7.1million.

 

The Company is currentlyunder audit in certain jurisdictions and during the next twelve months, it isreasonably possible that resolution of these audits could result in a benefitof up to $1.3 million or a cost of up to $26.1 million. Audit outcomes and thetiming 

 

99

----

 

of audit settlements aresubject to significant 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 2007 and in Germany from2000.

 

Tax law changes wereenacted in Germany and the U.K. in the third quarter of 2007 and in Italy inthe fourth quarter of 2007. The change in law and tax rates had an impact onthe existing deferred tax assets and liabilities recorded in thosejurisdictions. The impact of the change in the law and tax rates was recordedas a discrete tax benefit in the income tax provision for the year ended December 31,2007. If the tax law changes had not occurred, the effective tax rate wouldhave been 47.9% for the year ended December 31, 2007.

 

**11.OPERATING LEASE OBLIGATIONS:**

 

The following is aschedule of minimum future rentals under the terms of noncancelable operatingleases as of December 31, 2008:

 
| **($ in millions)**  | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| Years ended  December 31: |       |       |       |
| 2009                      |       | $          | 17.3       |   |
| 2010                      |       | 13.8       |       |
| 2011                      |       | 9.7        |       |
| 2012                      |       | 7.0        |       |
| 2013                      |       | 4.7        |       |
| Thereafter                |       | 11.5       |       |
| Total                     |       | $          | 64.0       |   |

 

Rent expense under alloperating leases was $28.3 million, $24.7 million and $25.3 million for theyears ended December 31, 2008, 2007, 2006, respectively. Rent escalationsand other lease concessions are reflected on a straight-line basis over theminimum lease term. Minimum future rentals include the effect of any index orrate that was applicable at lease inception.

 

**12.STOCK-BASED COMPENSATION:**

 

The Company has in placethe 2008 Amended and Restated Stock Purchase and Option Plan of RockwoodHoldings, Inc. and Subsidiaries (the “Plan”). Under the Plan, the Companymay grant stock options, restricted stock and other stock-based awards to theCompany’s 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. The aggregate compensation cost for stock options,restricted stock units and Board of Director stock grants recorded under thePlan, as discussed below, caused income from continuing operations before taxesand minority interest to decrease by $4.1 million, $3.9 million and less than$0.1 million for the years ended December 31, 2008, 2007 and 2006,respectively.

 

***Restricted Stock***—Restricted stock of the Company can be granted withor without payment of consideration with restrictions on the recipient’s rightto transfer or sell the stock. In December 2007, the Company awarded167,951 performance restricted stock units to management and key employees,which will vest on December 31, 2010 as long as the employee continues tobe employed by the Company on such date and based upon the achievement ofcertain performance targets as approved by the Compensation Committee. Thenumber of shares of the Company’s common stock ultimately awarded upon vestingis determined based on the Company’s achievement of specified performancecriteria over the period January 1, 2008 - December 31,2010.  The performance measures for theseawards were set, and effectively granted, in February 2008 once the auditof the Company’s financial statements for 2007 was complete.

 

Certain employees have “company-wideperformance targets,” for which vesting is based on the achievement ofspecified annualized Adjusted EBITDA and earnings per share growth levels,while others have “divisional performance targets” for which vesting is basedon a particular division’s achievement of annualized Adjusted EBITDA growth.The Company granted a “target amount” of performance restricted stock units,whereby if the specified performance target is met, shares of the Company’scommon stock would be awarded upon vesting of these units. However, theseawards provide the employee with the possibility of earning from 0% to 200% ofthe share targeted units granted based upon performance versus the target.

 

In December 2008,the Company granted 320,867 time restricted stock units to management and keyemployees, which will vest on December 31, 2011 as long as the employeecontinues to be employed by the Company on such date.

 

The compensation costrelated to restricted stock units of the Company caused income from continuingoperations before taxes and minority interest to decrease by $0.2 million and$1.8 million for the years ended December 31, 2008 and 2007, respectively.The total tax benefit recognized related to restricted stock was $0.1 millionand $0.2 million for the year ended December 31, 2008 and 2007, 

 

100

----

 

respectively. Theweighted average grant date fair value of the restricted shares granted in 2008and 2007 were $16.57 and $31.94, respectively, per stock unit. As of December 31,2008, there was $5.4 million of unrecognized compensation cost related torestricted stock units determined in accordance with SFAS No. 123R, whichis expected to be recognized over a weighted-average period of approximately2.4 years.

 

A summary of the statusof the Company’s nonvested restricted stock granted pursuant to the Plan at December 31,2008 and 2007 and changes during the year ended December 31, 2008 ispresented below:

 
| ** **                      | ** ** | **Shares**      | ** ** | **Weighted  Average  Fair Value** | ** ** |
|---------------------------------|------------|-----------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **(‘000)** | ** ** | ** **                        | ** ** |
| Nonvested at  December 31, 2007 |       | 226             |       | $                                 | 31.89      |   |
| Granted                         |       | 489             |       | 16.57                             |       |
| Vested                          |       | (1              | )          | 20.70                             |       |
| Forfeited                       |       | (14             | )          | 32.03                             |       |
| Nonvested at  December 31, 2008 |       | 700             |       | $                                 | 21.56      |   |

 

In December 2008,the Company approved 606,256 performance restricted stock units to be awardedto management and key employees which will vest on December 31, 2011 as longas the employee continues to be employed by the Company on this date and uponthe achievement of certain performance targets approved by the CompensationCommittee. The number of shares of the Company’s common stock ultimatelyawarded upon vesting is determined based on the achievement of specifiedperformance criteria over the period January 1, 2009 - December 31,2009. However, in accordance with SFAS No. 123R, the Company did notrecognize any compensation cost in 2008 for this issuance because the performancemeasures that will form the basis for vesting of these restricted stock unitswere not known as of December 31, 2008. These performance measures will beset once the Company’s 2009 performance targets are approved by theCompensation Committee, at which point compensation cost for these awards willbe determined.

 

***Stock Purchase***—Eligible employees and directors can purchase sharesof the Company’s common stock at prices as determined by its board ofdirectors. There were no stock purchases by eligible employees and directors in2008 or 2007.

 

***Board of Directors Stock Grant***—The Company granted 9,167 shares of itscommon stock to its independent directors during the year ended December 31,2008. Compensation cost related to directors stock grant caused income fromcontinuing operations before taxes and minority interest and net income todecrease by $0.3 million and $0.1 million for the years ended December 31,2008 and 2007, respectively.

 

***Board of Directors Stock Options***—Stock options granted to directors underthis Plan shall have an exercise price at least equal to the fair market valueof the Company’s common stock on the date of grant. Options available for grantunder this Plan are time options which have a life of ten years from the dateof grant and vest in three equal annual installments on each of the first threeanniversaries of the grant date.  In the year ended December 31,2008, the Company granted 6,211 stock options to a new director under thisPlan.

 

***Stock Options***—Stock options granted to employees under the Planshall have an exercise price at least equal to the fair market value of theCompany’s common stock on the date of grant. The Company has granted two typesof options under the Plan (time and performance options).

 

·                 Time-Based Stock Options - Time options granted priorto 2004 have a life of ten years from the date of grant and vest as follows:10% in year one, 10% in year two, 25% in year three, 25% in year four and 30%in year five. Time options granted in 2004 have a life of ten years from thedate of grant and vest in installments of 20% on each of the first fiveanniversaries of the grant date. Time options granted in May 2007 have alife of seven years and vest in three equal annual installments on each of thefirst three anniversaries of December 31, 2006; time options granted in December 2007have a life of seven years and vest in three equal annual installments on eachof the first three anniversaries of December 31, 2007; and time optionsgranted in December 2008 have a life of seven years and vest in threeequal annual installments on each of the first three anniversaries of December 31,2008. In 2008, the Company granted 948,784 time-based stock options tomanagement and key employees under the Plan.

 

·                 Performance-Based Stock Options - Performance optionshave a life of ten years and become exercisable with respect to 20% of thetotal performance options granted upon the achievement of certain performancetargets. Performance options become exercisable on the eighth anniversary ofthe grant date to the extent that the options have not become otherwiseexercisable or have not been terminated. Certain option holders have “company-wideperformance targets,” for which targets are based on the achievement by theCompany of certain implied equity values. Other option holders have “divisionalperformance targets,” for which targets are based on a particular division’sachievement of annual or cumulative Adjusted EBITDA.

 

101

----

 

The compensation costrelated to stock options of the Company caused income from continuingoperations before taxes and minority interest to decrease by $3.6 million, $2.0million and $0.1 million in the years ended December 31, 2008, 2007 and2006, respectively. The total tax benefit recognized related to stockoptions was $0.4 million, $0.3 million and less than $0.1 million in the yearsended December 31, 2008, 2007 and 2006, respectively. As discussed in Note1, “Description of Business and Summary of Significant Accounting Policies,”the Company is recording compensation cost for the nonvested portion of awardsissued after February 2005, which is the date the Company first filed aregistration statement with the SEC.

 

As of December 31,2008, there was $9.1 million of unrecognized compensation cost related tononvested stock options determined in accordance with SFAS No. 123R, whichis expected to be recognized over a weighted-average period of approximately2.2 years.

 

The weighted-average fairvalue of options granted during the years ended December 31, 2008, 2007and 2006 was $4.26, $10.41 and $9.46, respectively. The fair value of stockoptions granted in the years ended December 31, 2008, 2007 and 2006 areestimated on the date of grant using the Black-Scholes option pricing modelthat used the assumptions noted in the following table:

 
| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected term  (in years) |       | 4.5                         |       | 4.5 |   | 6.8 |   |
| Expected  volatility      |       | 54                          | %          | 30 | % | 30 | % |
| Risk-free rate            |       | 1.6                         | %          | 4.2 | % | 4.8 | % |
| Expected  dividends       |       | N/A                         |       | N/A |   | N/A |   |

 

The expected termrepresents the period of time that options granted are expected to beoutstanding based on the simplified method for determining expected term of anemployee share option (in accordance with SAB No. 107 and 110). AsRockwood became a public company in August 2005, there is not a longperiod of history of the Company’s share price. As a result, the Company’sexpected term was based on the simplified method.  The expected volatility for awards granted inDecember 2008 is based on historical share prices of the Company since itbecame a public company.  For awardsgranted prior to December 2008, the expected volatility was based on theexpected volatilities of comparable peer companies that are publicly traded asRockwood became a public Company in August 2005 and did not have a long periodof history of the Company’s share price. The risk-free rate is based on the U.S. Treasury yield curve in effectat the time of grant. Expected dividends are not applicable as the Companycurrently does not pay and does not expect to pay a dividend on its shares.

 

In addition, SFAS No. 123Rrequires the recognition of expense only for awards that will eventuallyvest.  This requires pre-vestingforfeitures to be estimated at the time of grant and modified, if necessary, ifactual forfeitures differ from estimated forfeitures.  The Company’s forfeiture rates are based uponhistorical share-based equity award cancellations.

 

The total intrinsic valueof stock options exercised during the years ended December 31, 2008, 2007and 2006 was $3.6 million, $2.1 million and less than $0.1 million,respectively. Cash received from option exercises during 2008 was $2.4 million.The total tax benefit realized from options exercised in 2008 was $0.2 million.The total fair value of shares vested during the years ended December 31,2008, 2007 and 2006 was $4.3 million, $3.4 million and $2.0 million,respectively.

 

During 2008, the Companyextended the exercise period of 193,165 fully vested share options held by fouremployees and accelerated the vesting of 55,857 share options held by sixemployees. As a result of the modifications, the Company recognized additionalexpense of $0.2 million for the year ended December 31, 2008.

 

102

----

 

A summary of the statusof the Company’s options granted pursuant to the Plan at December 31, 2008and 2007 and changes during the year ended December 31, 2008 is presentedbelow:

 
| ** **                                                                  | ** ** | **Shares**      | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **(‘000)** | ** ** | ** **                             | ** ** | **(years)**                                         | ** ** | **($ in millions)**       | ** ** |
| Outstanding at  December 31, 2007                                           |       | 4,730           |       | $                                      | 18.50      |                                                |       |                           |       |   |
| Granted                                                                     |       | 955             |       | 9.38                                   |       |                                                |       |                           |       |
| Exercised                                                                   |       | (157            | )          | 15.05                                  |       |                                                |       |                           |       |
| Forfeited                                                                   |       | (300            | )          | 15.73                                  |       |                                                |       |                           |       |
| Outstanding at  December 31, 2008                                           |       | 5,228           |       | $                                      | 17.10      |                                                | 5.05       |                           | $          | — |   |
|                                                                        |       |            |       |                                   |       |                                                |       |                           |       |
| Options vested  at December 31, 2008 and expected to vest in the future (a) |       | 4,214           |       | $                                      | 18.77      |                                                | 4.62       |                           | $          | — |   |
|                                                                        |       |            |       |                                   |       |                                                |       |                           |       |
| Options  exercisable at December 31, 2008                                   |       | 3,095           |       | $                                      | 17.54      |                                                | 4.50       |                           | $          | — |   |

 

----

(a)         The number of options expected to vest takes intoaccount an estimate of expected forfeitures.

 

**13.EMPLOYEE BENEFIT PLANS:**

 

The Company maintainsvarious defined benefit pension plans, which cover certain employees in theU.S., U.K., Germany, Finland and other countries. Two subsidiaries in theUnited States provide various retirees with postretirement benefits,principally health care benefits. In addition, the Company provides certainretired employees in Germany with postretirement benefits for private healthinsurance premiums.

 

Funding requirements andinvestment policies for the Company’s various defined benefit plans aregoverned by local statutes and fiduciary standards outlined below.

 

The following tablesprovide a reconciliation of the benefit obligations, plan assets and the fundedstatus of the plans, along with the amounts recognized in the ConsolidatedBalance Sheets and the weighted average assumptions used. The Company uses a December 31measurement date for all of its plans.

 

103

----

 
| ** **                                                                                         | ** ** | **Pension Benefits** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                         | ** ** | **U.S. Plans**       | ** ** | **Non-U.S. Plans** | ** ** |
| **($ in millions)**                                                                           | ** ** | **2008**             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| *Change  in benefit obligation:*                                                                   | * *   | * *             | * *   | * * | * * | * * | * * | * * | * * |
| Benefit  obligation at beginning of year                                                           |       | $                    | 27.7       |   | $ | 28.2 |   | $ | 475.2 |   | $ | 483.3 |   |
| Service cost                                                                                       |       | 0.2                  |       | 0.2 |   | 7.5 |   | 7.2 |   |
| Interest cost                                                                                      |       | 1.7                  |       | 1.6 |   | 28.6 |   | 21.5 |   |
| Plan  participants’ contributions                                                             |       | —               |       | — |   | 0.5 |   | 0.7 |   |
| Actuarial loss  (gain)                                                                             |       | 1.1                  |       | (1.6 | ) | (29.8 | ) | (54.2 | ) |
| Benefits paid                                                                                      |       | (1.1                 | )          | (0.7 | ) | (28.0 | ) | (20.9 | ) |
| Acquisitions                                                                                       |       | —               |       | — |   | 170.6 |   | — |   |
| Foreign exchange  (gain) loss                                                                      |       | —               |       | — |   | (52.2 | ) | 36.9 |   |
| Effect of  curtailment/settlement                                                                  |       | —               |       | — |   | — |   | (2.1 | ) |
| Other                                                                                              |       | 0.2                  |       | — |   | (1.8 | ) | 2.8 |   |
| Benefit  obligation at end of year                                                                 |       | $                    | 29.8       |   | $ | 27.7 |   | $ | 570.6 |   | $ | 475.2 |   |
| *Change  in fair value of plan assets:*                                                            | * *   | * *             | * *   | * * | * * | * * | * * | * * | * * |
| Fair value of  plan assets at beginning of year                                                    |       | $                    | 26.7       |   | $ | 23.4 |   | $ | 130.6 |   | $ | 120.0 |   |
| Actual return on  assets                                                                           |       | (7.7                 | )          | 2.4 |   | (42.6 | ) | 3.4 |   |
| Employer  contributions                                                                            |       | 1.1                  |       | 1.6 |   | 5.3 |   | 7.0 |   |
| Plan  participants’ contributions                                                             |       | —               |       | — |   | 0.5 |   | 0.7 |   |
| Benefits paid  from fund                                                                           |       | (1.1                 | )          | (0.7 | ) | (8.6 | ) | (4.1 | ) |
| Acquisitions                                                                                       |       | —               |       | — |   | 157.3 |   | — |   |
| Foreign exchange  (loss) gain                                                                      |       | —               |       | — |   | (30.9 | ) | 3.6 |   |
| Other                                                                                              |       | —               |       | — |   | (1.9 | ) | — |   |
| Fair value of  plan assets at end of year                                                          |       | $                    | 19.0       |   | $ | 26.7 |   | $ | 209.7 |   | $ | 130.6 |   |
| Funded status                                                                                      |       | $                    | (10.8      | ) | $ | (1.0 | ) | $ | (360.9 | ) | $ | (344.6 | ) |
| *Amounts  recognized in the consolidated balance sheets:*                                          | * *   | * *             | * *   | * * | * * | * * | * * | * * | * * |
| Current  liabilities                                                                               |       | $                    | —     |   | $ | — |   | $ | (13.6 | ) | $ | (12.2 | ) |
| Noncurrent  liabilities (a)                                                                        |       | (10.8                | )          | (1.0 | ) | (347.3 | ) | (332.4 | ) |
| Net amount  recognized                                                                             |       | $                    | (10.8      | ) | $ | (1.0 | ) | $ | (360.9 | ) | $ | (344.6 | ) |
| *Amounts  recognized in accumulated other comprehensive income:*                                   | * *   | * *             | * *   | * * | * * | * * | * * | * * | * * |
| Net actuarial  losses (gains)                                                                      |       | $                    | 11.0       |   | $ | (0.2 | ) | $ | 6.3 |   | $ | (17.0 | ) |
| Prior service  cost                                                                                |       | 0.1                  |       | 0.1 |   | — |   | — |   |
| Accumulated  other comprehensive loss (income)                                                     |       | $                    | 11.1       |   | $ | (0.1 | ) | $ | 6.3 |   | $ | (17.0 | ) |
| Accumulated  benefit obligation                                                                    |       | $                    | 29.8       |   | $ | 27.5 |   | $ | 530.2 |   | $ | 443.7 |   |
| *Information  for pension plans with an accumulated benefit obligation in excess of plan  assets:* | * *   | * *             | * *   | * * | * * | * * | * * | * * | * * |
| Accumulated  benefit obligation                                                                    |       | $                    | 29.8       |   | $ | 11.8 |   | $ | 503.7 |   | $ | 427.2 |   |
| Fair value of  plan assets                                                                         |       | $                    | 19.0       |   | $ | 10.8 |   | $ | 178.9 |   | $ | 106.2 |   |
|                                                                                               |       |                 |       |   |   |   |   |   |   |
| *Weighted-average  assumptions used to determine benefit obligations at December 31:*              | * *   | * *             | * *   | * * | * * | * * | * * | * * | * * |
| Discount rate                                                                                      |       | 6.18                 | %          | 6.26 | % | 6.02 | % | 5.53 | % |
| Rate of  compensation increase                                                                     |       | N/A                  |       | N/A |   | 3.13 | % | 3.33 | % |

 

----

(a)                      Balances include$10.7 million and $10.9 million as of December 31, 2008 and 2007, respectively,related to pension obligations for certain pension plans in Germany which are reportedas “Other Liabilities” in the Consolidated Balance Sheets.

 

104

----

 
| ** **                                                                                                | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------------|------------|
| **($ in millions)**                                                                                  | ** ** | **2008**       | ** ** | **2007**           | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| *Weighted-average  assumptions used to determine net periodic benefit cost for years ended December  31:* | * *   | * *       | * *   | * *           | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Discount rate                                                                                             |       | 6.26           | %          | 5.76               | %          | 5.69 | % | 5.53 | % | 4.62 | % | 4.18 | % |
| Expected return  on plan assets (a)                                                                       |       | 8.28           | %          | 8.28               | %          | 8.29 | % | 6.00 | % | 5.19 | % | 4.83 | % |
| Rate of  compensation increase                                                                            |       | N/A            |       | N/A                |       | 4.50 | % | 3.31 | % | 3.19 | % | 2.67 | % |
| *Components  of net pension benefit costs:*                                                               | * *   | * *       | * *   | * *           | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Service cost                                                                                              |       | $              | 0.2        |               | $          | 0.2 |   | $ | 0.9 |   | $ | 7.5 |   | $ | 7.2 |   | $ | 6.8 |   |
| Interest cost                                                                                             |       | 1.7            |       | 1.6                |       | 1.6 |   | 28.6 |   | 21.5 |   | 19.0 |   |
| Expected return  on assets                                                                                |       | (2.2           | )          | (2.0               | )          | (1.7 | ) | (10.9 | ) | (6.5 | ) | (5.4 | ) |
| Net amortization  of actuarial losses (gains)                                                             |       | —         |       | 0.1                |       | 0.1 |   | (0.5 | ) | (1.0 | ) | 0.6 |   |
| Net periodic  pension (benefit) cost                                                                      |       | (0.3           | )          | (0.1               | )          | 0.9 |   | 24.7 |   | 21.2 |   | 21.0 |   |
| SFAS 88  settlement/curtailment                                                                           |       | —         |       | —             |       | (0.4 | ) | — |   | — |   | 1.1 |   |
| Total pension  (benefit) cost                                                                             |       | $              | (0.3       | )                  | $          | (0.1 | ) | $ | 0.5 |   | $ | 24.7 |   | $ | 21.2 |   | $ | 22.1 |   |

 

----

(a)                The expectedreturn on plan assets reflects the asset mix of the underlying plan assetsalong with the expected returns within each asset category, based on the localmarket. See “*Investment policies andstrategies”* below.

 

Pension plans have the following weighted-averageasset allocations at December 31, 2008 and 2007:

 
| ** **                                  | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** | ** ** |
|---------------------------------------------|------------|----------------|------------|--------------------|------------|
| ** **                                  | ** ** | **2008**       | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Equity  securities                          |       | 58             | %          | 59                 | %          | 39 | % | 47 | % |
| Debt securities                             |       | 42             | %          | 41                 | %          | 46 | % | 37 | % |
| Real estate                                 |       | 0              | %          | 0                  | %          | 1 | % | 4 | % |
| Other, including  cash and cash equivalents |       | 0              | %          | 0                  | %          | 14 | % | 12 | % |

 

The following benefit payments, whichreflect expected future service, as appropriate, are expected to be paid:

 
| **($ in millions)**                | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** |   |
|-----------------------------------------|------------|----------------|------------|--------------------|--------|
| 2009                                    |       | $              | 1.1        |               | $      | 33.2 |   |
| 2010                                    |       | 1.2            |       | 33.7               |   |
| 2011                                    |       | 1.4            |       | 34.5               |   |
| 2012                                    |       | 1.5            |       | 36.2               |   |
| 2013                                    |       | 1.7            |       | 36.2               |   |
| Years 2014 -  2018                      |       | 10.3           |       | 186.7              |   |
| *Expected  employer contributions (a):* | * *   | * *       | * *   | * *           |   |
| 2009                                    |       | $              | 2.8        |               | $      | 6.7 |   |

 

----

(a)                Expected employercontributions include only contributions to plan assets.

 

In2009, the Company expects to recognize $0.8 million of previously unrecognizedactuarial losses.

 

105

----

 
| ** **                                                                            | ** ** | **Other Postretirement Benefits** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **($ in millions)**                                                         | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| *Change  in benefit obligation:*                                                      |       |                                        |       |   |   |
| Benefit  obligation at beginning of year                                              |       | $                                           | 4.8        |   | $ | 4.9 |   |
| Service cost                                                                          |       | 0.2                                         |       | 0.2 |   |
| Interest cost                                                                         |       | 0.3                                         |       | 0.3 |   |
| Actuarial gain                                                                        |       | (0.2                                        | )          | (0.4 | ) |
| Benefits paid                                                                         |       | (0.2                                        | )          | (0.2 | ) |
| Benefit  obligation at end of year                                                    |       | $                                           | 4.9        |   | $ | 4.8 |   |
|                                                                                  |       |                                        |       |   |   |
| Funded status                                                                         |       | $                                           | (4.9       | ) | $ | (4.8 | ) |
| *Amounts  recognized in the consolidated balance sheets:*                             |       |                                        |       |   |   |
| Current  liabilities                                                                  |       | $                                           | (0.3       | ) | $ | (0.2 | ) |
| Noncurrent  liabilities                                                               |       | (4.6                                        | )          | (4.6 | ) |
| Net amount  recognized                                                                |       | $                                           | (4.9       | ) | $ | (4.8 | ) |
| *Amounts  recognized in accumulated other comprehensive income:*                      |       |                                        |       |   |   |
| Net actuarial  gains                                                                  |       | $                                           | (0.6       | ) | $ | (0.4 | ) |
| Prior service  cost                                                                   |       | (0.1                                        | )          | (0.1 | ) |
| Accumulated  other comprehensive income                                               |       | $                                           | (0.7       | ) | $ | (0.5 | ) |
|                                                                                  |       |                                        |       |   |   |
| *Weighted-average  assumptions used to determine benefit obligations at December 31:* |       |                                        |       |   |   |
| Discount rate                                                                         |       | 6.37                                        | %          | 6.25 | % |
| Rate of  compensation increase                                                        |       | N/A                                         |       | N/A |   |

 
| **($ in millions)**                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| *Weighted-average  assumptions used to determine net periodic benefit cost for years ended  December 31:* | * *   | * * | * *   | * * | * *   | * * | * *   |
| Discount rate                                                                                             |       | 6.25     | %          | 5.75     | %          | 5.52     | %          |
| Expected return  on plan assets                                                                           |       | N/A      |       | N/A      |       | N/A      |       |
| Rate of  compensation increase                                                                            |       | N/A      |       | N/A      |       | N/A      |       |
| *Components  of other postretirement benefit costs:*                                                      |       |     |       |     |       |     |       |
| Service cost                                                                                              |       | $        | 0.2        |     | $          | 0.2      |       | $ | 0.2 |   |
| Interest cost                                                                                             |       | 0.3      |       | 0.3      |       | 0.3      |       |
| Net amortization  of prior experience gains                                                               |       | (0.1     | )          | (0.1     | )          | (0.1     | )          |
| Total pension  cost                                                                                       |       | $        | 0.4        |     | $          | 0.4      |       | $ | 0.4 |   |

 
| ** **                                                                        | ** ** | **2008**       | ** ** | **2007**       | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ***Other  Postretirement Benefit Plans***                                         |       |           |       |           |       |
| Assumed health care cost trend rates at December 31  (hourly plan/salaried plan): |       |           |       |           |       |
| Health care cost  trend rate assumed for the following year                       |       | 10.00% - 11.00 | %          | 10.00% - 12.00 | %          |
| Ultimate trend  rate (rate to which the cost trend rate is assumed to decline)    |       | 4.75% - 5.00   | %          | 4.75% - 5.00   | %          |
| Year that the  rate reaches the ultimate trend rate                               |       | 2014           |       | 2014           |       |

 
| **($ in millions)**                             | ** ** | **1% Decrease** | ** ** | **1% Increase** | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| *2008  Healthcare cost trend rate sensitivity analysis:*  |       |                 |       |                 |       |
| Effect on annual  total of service cost and interest cost |       | $                    | —     |                 | $          | — |   |
| Effect on  postretirement benefit obligation              |       | (0.3                 | )          | 0.4                  |       |
|                                                           |            |                      |            |                      |            |  |  |

 

106

----

 

The following benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid:

 
| ** **                              | ** ** | **Other Post-** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| **($ in millions)**           | ** ** | **retirement**       | ** ** |
| 2009                                    |       | $                    | 0.2        |   |
| 2010                                    |       | 0.3                  |       |
| 2011                                    |       | 0.3                  |       |
| 2012                                    |       | 0.4                  |       |
| 2013                                    |       | 0.4                  |       |
| Years 2014 -  2018                      |       | 2.7                  |       |
| *Expected  employer contributions (a):* |       |                 |       |
| 2009                                    |       | $                    | —     |   |

 

----

(a)                Expected employercontributions include only contributions to plan assets.

 

***Plans with projected benefit obligations in excess of planassets***—The Company’s defined benefit plans all hadprojected benefit obligations in excess of plan assets.

 

***Contributions***—During the year ended December 31,2008, the Company made contributions of approximately $6.4 million to itsdefined benefit pension trusts and an additional $19.6 million in benefitpayments directly to plan participants. For 2009, the Company expects to makepayments of approximately $9.5 million as contributions to pension trusts plusbenefit payments directly to plan participants of approximately $18.4 million.

 

***Investment policies and strategies***—TheCompany’s plans have varying statutory and plan governance requirements. Forexample, U.K. plan investments are limited to listed securities not affiliatedwith the Company or the investment advisor and equities are divided betweendomestic and foreign equity. U.S. plan investments are generally limited tomutual funds. Although the Company has representatives of local managementinvolved in the governance of all plans, some plans or statutes also haverepresentation by workers, employee unions, and/or corporate-level executives.

 

Plans in Finland, theU.K. and the U.S. represent over 85% of total plan assets. In these countries,the general investment objectives are to maximize the expected return on theplans’ assets without unduly prejudicing the security of the members’ accruedbenefits and with sufficient liquidity to meet current plan cash flowrequirements. As each plan is locally governed, asset allocations may varybetween plans. Most plans do not have fixed targets but vary their investmentallocations based on plan trustees’ consultation with professional investmentadvisors as to whether these allocations remain appropriate in light ofrelative investment performance and risk and/or actuarial changes related toplan participants. In 2008, the plans were targeted to investment allocationswithin certain ranges that approximate the following:

 
| ** **             | ** ** | **U.S. Plans** | ** ** | **Non-U.S.  Plans** | ** ** |
|------------------------|------------|---------------------|------------|---------------------|------------|
| Equity securities |       | 61                  | %          | 47                  | %          |
| Debt securities        |       | 39                  | %          | 38                  | %          |
| Other                  |       | 0                   | %          | 15                  | %          |

 

***Expected long-term rate of return on assets***—Thelong-term rate of return on assets listed above is the average of expectedreturns developed for each plan weighted by each plan’s assets, as of January 1of the year measured. Rates of return have been estimated based on variousasset-appropriate price and yield indices, adjusted for projected inflation andlong-term dividend growth.

 

**OtherRetirement Benefit Plans**

 

***Savings Plans***—The Company sponsorsvarious defined contribution plans for certain employees. Contributions underthe plans are based on specified percentages of employee compensation. Inaggregate, the Company’s contributions to these plans were $13.3 million, $10.6million and $8.6 million in 2008, 2007 and 2006, respectively.

 

***Multiemployer Plans***—The Companyparticipates in three multiemployer plans. Contributions under the plans arebased on specified percentages of associate contributions. The Company’scontributions to the plans were $5.0 million, $4.8 million and $4.2 million andin 2008, 2007 and 2006, respectively.

 

107

----

 

**14.EARNINGS PER SHARE:**

 

Basic and dilutedearnings per common share (“EPS”) were computed using the following share data:

 
| ** **                                                                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions, except per share amounts; shares in thousands)** | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **EPS  Numerator - Basic:**                                                                                     |       |                                       |       |   |   |   |   |
| Net (loss)  income from continuing operations                                                                   |       | $                                          | (634.6     | ) | $ | 81.5 |   | $ | 60.1 |   |
| Income from  discontinued operations, net of tax                                                                |       | 3.3                                        |       | 25.3 |   | 48.1 |   |
| Gain on sale of discontinued operations, net of tax                                                             |       | 42.9                                       |       | 210.4 |   | — |   |
| Minority  interest in discontinued operations, net of tax                                                       |       | —                                     |       | (0.1 | ) | (5.2 | ) |
| Net (loss)  income                                                                                              |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   |
|                                                                                                            |       |                                       |       |   |   |   |   |
| **EPS  Denominator - Basic:**                                                                                   |       |                                       |       |   |   |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 73,983                                     |       | 73,817 |   | 73,782 |   |
|                                                                                                            |       |                                       |       |   |   |   |   |
| **Basic (loss)  earnings per common share:**                                                                    |       |                                       |       |   |   |   |   |
| (Loss) earnings  from continuing operations                                                                     |       | $                                          | (8.58      | ) | $ | 1.10 |   | $ | 0.81 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | 0.63                                       |       | 3.20 |   | 0.59 |   |
| Basic (loss)  earnings per common share                                                                         |       | $                                          | (7.95      | ) | $ | 4.30 |   | $ | 1.40 |   |
|                                                                                                            |       |                                       |       |   |   |   |   |
| **EPS  Numerator - Diluted:**                                                                                   |       |                                       |       |   |   |   |   |
| Net (loss)  income from continuing operations                                                                   |       | $                                          | (634.6     | ) | $ | 81.5 |   | $ | 60.1 |   |
| Income from  discontinued operations, net of tax                                                                |       | 3.3                                        |       | 25.3 |   | 48.1 |   |
| Gain on sale of  discontinued operations, net of tax                                                            |       | 42.9                                       |       | 210.4 |   | — |   |
| Minority  interest in discontinued operations, net of tax                                                       |       | —                                     |       | (0.1 | ) | (5.2 | ) |
| Net (loss)  income                                                                                              |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   |
|                                                                                                            |       |                                       |       |   |   |   |   |
| **EPS  Denominator - Diluted:**                                                                                 |       |                                       |       |   |   |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 73,983                                     |       | 73,817 |   | 73,782 |   |
| Effect of  dilutive stock options and other incentives                                                          |       | —                                     |       | 2,462 |   | 1,262 |   |
| Weighted average  number of common shares outstanding and common stock equivalents                              |       | 73,983                                     |       | 76,279 |   | 75,044 |   |
|                                                                                                            |       |                                       |       |   |   |   |   |
| **Diluted  (loss) earnings per common share:**                                                                  |       |                                       |       |   |   |   |   |
| (Loss) earnings  from continuing operations                                                                     |       | $                                          | (8.58      | ) | $ | 1.07 |   | $ | 0.80 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | 0.63                                       |       | 3.09 |   | 0.57 |   |
| Diluted (loss)  earnings per common share                                                                       |       | $                                          | (7.95      | ) | $ | 4.16 |   | $ | 1.37 |   |

 

Stock options underemployee compensation plans representing common stock of 6,620,466 shares,1,031,629 shares and 10,557 shares were outstanding as of December 31,2008, 2007 and 2006, respectively, but were not included in the computation ofdiluted earnings per common share because their inclusion would have had ananti-dilutive effect.

 

**15.WARRANTS:**

 

In connection with theissuance of the redeemable convertible preferred stock in connection with the July 2003refinancing, the Company issued warrants to an affiliate of KKR, exercisable atany time at a $14.61 per share exercise price, to purchase 958,315 additionalshares of common stock of the Company. The warrants expire July 23, 2013.The Company has attributed a portion of the proceeds from issuance of theredeemable convertible preferred stock to the fair value of the warrants. Thewarrants were valued at $6.1 million and were recorded as a component ofstockholders’ equity.

 

**16.RESTRUCTURING AND OTHER SEVERANCE COSTS:**

 

The Company recordsrestructuring liabilities that represent charges incurred in connection withconsolidations and cessations of certain of its operations, includingoperations from acquisitions, as well as headcount reduction programs. Thesecharges consist primarily of severance and facility 

 

108

----

 

closure costs, in somecases including asset write-offs and impairments. Severance charges are basedon 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.

 

During the year ended December 31,2008, the Company expensed $17.7 million of restructuring charges. In thePerformance Additives segment, the Company recorded $7.6 million primarilyrelated to a restructuring plan implemented in the Color Pigments and Servicesbusiness in connection with the integration of the businesses acquired fromElementis plc, including the reorganization and relocation of the NorthAmerican Finance and IT services, and the closure of three manufacturingfacilities in 2008.  This included $3.5million of asset write-offs, $3.1 million of severance costs, and $0.7 millionof facility closure costs primarily related to this plan.  In the Specialty Chemicals, Advanced Ceramicsand Specialty Compounds segments, $8.2 million, $0.8 million and $0.7 million,respectively, were recorded primarily for miscellaneous headcountreductions.  In the Corporate and othersegment, facility closure costs of $0.4 million were recorded related to therestructuring of the wafer reclaim business. In addition, “restructuring andother severance costs” in the Consolidated Statements of Earnings includedother severance-related costs of $17.6 million related to headcount reductionsundertaken throughout the Company.

 

During the year ended December 31,2007, the Company expensed $12.0 million of restructuring charges. In theCorporate and other segment, facility closure and severance costs of $4.7million were recorded, primarily related to the restructuring of the waferreclaim business.  In addition, $2.6 million was recorded in the SpecialtyChemicals segment, $2.5 million was recorded in the Advanced Ceramics segmentand $2.2 million was recorded in the Performance Additives segment formiscellaneous headcount reductions and facility closures.

 

During the year ended December 31,2006, the Company expensed $4.9 million of restructuring charges. In theSpecialty Chemicals segment, $1.6 million was recorded for miscellaneousheadcount reductions and the closure of an administrative office in Spain. Inthe Corporate and other segment, $1.0 million was recorded primarily related tothe restructuring 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, $1.2million was recorded in the Performance Additives segment and $1.1 million wasrecorded in the Advanced Ceramics segment primarily for miscellaneous headcountreductions.

 

Selected information forthe 2008 restructuring actions follows:

 
| ** **                            | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Write-** | ** ** | ** ** | ** ** |
| **($ in  millions)**             | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Downs**  | ** ** | **Total**  | ** ** |
| **2008**                              | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007 |       | $             | —     |         | $          | —         |       | $          | —     |       | $          | — |   | $ | — |   |
| Acquisitions (a)                      |       | 5.6           |       | —       |       | —         |       | —     |       | 5.6        |       |
| Restructuring  charge in 2008         |       | 11.8          |       | 0.9          |       | 0.3            |       | 3.5        |       | 16.5       |       |
| Utilized                              |       | (4.9          | )          | (0.9         | )          | (0.1           | )          | (3.5       | )          | (9.4       | )          |
| Foreign exchange  and other           |       | 0.7           |       | 0.1          |       | —         |       | —     |       | 0.8        |       |
| Liability  balance, December 31, 2008 |       | $             | 13.2       |         | $          | 0.1            |       | $          | 0.2        |       | $          | — |   | $ | 13.5 |   |

 

----

(a)     Relates primarily to the Titanium DioxidePigments venture and other bolt-on acquisitions.

 

In connection with the 2008 restructuring actions, the Company expectsadditional facility closure costs of approximately $2.5 million to be incurredin 2009. The 2008 actions are expected to be completed by the end of 2009.

 

Selected information forthe 2007 restructuring actions follows:

 
| ** **                            | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Write-** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Downs**  | ** ** | **Total**  | ** ** |
| **2007**                              | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liability balance,  December 31, 2006 |       | $             | —     |         | $          | —         |       | $          | —     |       | $          | — |   | $ | — |   |
| Acquisitions (a)                      |       | 4.7           |       | —       |       | 0.3            |       |       |       | 5.0        |       |
| Restructuring  charge in 2007         |       | 4.5           |       | 1.6          |       | 0.3            |       | 0.4        |       | 6.8        |       |
| Utilized                              |       | (3.1          | )          | (1.3         | )          | (0.3           | )          | (0.4       | )          | (5.1       | )          |
| Liability  balance, December 31, 2007 |       | 6.1           |       | 0.3          |       | 0.3            |       | —     |       | 6.7        |       |
| Restructuring  charge in 2008         |       | 0.6           |       | —       |       | —         |       | —     |       | 0.6        |       |
| Utilized                              |       | (2.9          | )          | (1.4         | )          | —         |       | —     |       | (4.3       | )          |
| Foreign exchange  and other           |       | (2.5          | )          | 2.6          |       | (0.1           | )          | —     |       | —     |       |
| Liability  balance, December 31, 2008 |       | $             | 1.3        |         | $          | 1.5            |       | $          | 0.2        |       | $          | — |   | $ | 3.0 |   |

 

----

(a)                Relates primarilyto the acquisition of the global color pigments business of Elementis plc.

 

109

----

 

These actions areexpected to be completed during 2009.

 

Selected information forthe 2006 restructuring actions follows:

 
| ** **                            | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2006**                              | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2005 |       | $             | —     |         | $          | —         |       | $          | —     |   | $ | — |   |
| Acquisitions (a)                      |       | 3.5           |       | 0.7          |       | 0.7            |       | 4.9        |       |
| Restructuring  charge in 2006         |       | 2.9           |       | 0.9          |       | —         |       | 3.8        |       |
| Utilized                              |       | (1.2          | )          | (0.9         | )          | —         |       | (2.1       | )          |
| Foreign exchange  and other           |       | (0.8          | )          | —       |       | —         |       | (0.8       | )          |
| Liability  balance, December 31, 2006 |       | 4.4           |       | 0.7          |       | 0.7            |       | 5.8        |       |
| Restructuring  charge in 2007         |       | 1.8           |       | 3.2          |       | —         |       | 5.0        |       |
| Utilized                              |       | (4.5          | )          | (1.6         | )          | —         |       | (6.1       | )          |
| Foreign exchange  and other           |       | (0.4          | )          | 1.8          |       | (0.6           | )          | 0.8        |       |
| Liability  balance, December 31, 2007 |       | 1.3           |       | 4.1          |       | 0.1            |       | 5.5        |       |
| Restructuring  charge in 2008         |       | —        |       | 0.7          |       | —         |       | 0.7        |       |
| Utilized                              |       | (1.6          | )          | (1.5         | )          | —         |       | (3.1       | )          |
| Foreign exchange  and other           |       | 0.4           |       | (1.0         | )          | (0.1           | )          | (0.7       | )          |
| Liability  balance, December 31, 2008 |       | $             | 0.1        |         | $          | 2.3            |       | $          | —     |   | $ | 2.4 |   |

 

----

(a)                Consists ofseverance costs related to the consolidation in 2007 of several U.K. facilitiesresulting from an acquisition by the Specialty Compounds segment.

 

The severance andrelocation costs related to the acquisition in the Specialty Compounds segmentare expected to be completed during 2009. The facility closure costs from the2006 restructuring actions primarily relate to the restructuring of the wafer reclaimbusiness and the closure of two wafer reclaim facilities. The facilityclosure costs are expected to be completed when a facility lease expires in2018.

 

Selected information forthe 2005 restructuring actions follows:

 
| ** **                            | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| **2005**                              |       |          |       |         |       |       |       |
| Liability  balance, December 31, 2005 |       | $             | 1.5        |         | $          | —     |       | $ | 1.5 |   |
| Restructuring  charge in 2006         |       | —        |       | 0.9          |       | 0.9        |       |
| Utilized                              |       | (0.9          | )          | (1.3         | )          | (2.2       | )          |
| Foreign exchange  and other           |       | (0.4          | )          | 0.9          |       | 0.5        |       |
| Liability  balance, December 31, 2006 |       | 0.2           |       | 0.5          |       | 0.7        |       |
| Utilized                              |       | —        |       | (0.2         | )          | (0.2       | )          |
| Foreign exchange  and other           |       | —        |       | (0.1         | )          | (0.1       | )          |
| Liability  balance, December 31, 2007 |       | 0.2           |       | 0.2          |       | 0.4        |       |
| Restructuring  charge in 2008         |       | —        |       | (0.1         | )          | (0.1       | )          |
| Utilized                              |       | —        |       | —       |       | —     |       |
| Foreign exchange  and other           |       | (0.2          | )          | (0.1         | )          | (0.3       | )          |
| Liability  balance, December 31, 2008 |       | $             | —     |         | $          | —     |       | $ | — |   |

 

110

----

 

Selected information forthe 2004 restructuring actions follows:

 
| ** **                            | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2004**                              | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2005 |       | $             | 10.6       |         | $          | 0.9            |       | $          | 0.4        |   | $ | 11.9 |   |
| Restructuring  charge in 2006         |       | —        |       | 0.2          |       | —         |       | 0.2        |       |
| Utilized                              |       | (4.8          | )          | (1.0         | )          | (0.1           | )          | (5.9       | )          |
| Foreign exchange  and other           |       | (4.2          | )          | —       |       | —         |       | (4.2       | )          |
| Liability  balance, December 31, 2006 |       | 1.6           |       | 0.1          |       | 0.3            |       | 2.0        |       |
| Restructuring  charge in 2007         |       | —        |       | 0.2          |       | —         |       | 0.2        |       |
| Utilized                              |       | (0.9          | )          | (0.1         | )          | —         |       | (1.0       | )          |
| Foreign exchange  and other           |       | 0.1           |       | —       |       | 0.1            |       | 0.2        |       |
| Liability  balance, December 31, 2007 |       | 0.8           |       | 0.2          |       | 0.4            |       | 1.4        |       |
| Utilized                              |       | (0.2          | )          | (0.1         | )          | —         |       | (0.3       | )          |
| Foreign exchange  and other           |       | (0.6          | )          | (0.1         | )          | (0.4           | )          | (1.1       | )          |
| Liability  balance, December 31, 2008 |       | $             | —     |         | $          | —         |       | $          | —     |   | $ | — |   |

 

Restructuring reserves bysegment are as follows:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Specialty  Chemicals          |       | $                     | 8.1        |   | $ | 3.4 |   |
| Performance  Additives        |       | 2.3                   |       | 4.6 |   |
| Titanium Dioxide  Pigments    |       | 1.4                   |       | — |   |
| Advanced  Ceramics            |       | 4.5                   |       | 0.8 |   |
| Specialty Compounds           |       | 0.5                   |       | 2.4 |   |
| Corporate and  other          |       | 2.1                   |       | 2.8 |   |
|                          |       | $                     | 18.9       |   | $ | 14.0 |   |

 

**17. FAIRVALUE MEASUREMENTS:**

** **

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

 

As of December 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 anyfinancial assets or liabilities that are classified as Level 3 inputs as of December 31,2008.

 

111

----

 

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 December 31, 2008:

 
| ** **                                                     | ** ** | **As of**                  | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **December 31, 2008** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable  securities (a)                                     |       | $                               | 395.8      |                                  | $          | 395.8 |   | $ | — |   | $ | — |   |
| Cash flow hedges  (b)                                          |       | 1.1                             |       | —                                |       | 1.1 |   | — |   |
| Total assets at  fair value                                    |       | $                               | 396.9      |                                  | $          | 395.8 |   | $ | 1.1 |   | $ | — |   |
|                                                           |       |                            |       |                                  |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate  swaps (c)                                       |       | $                               | 65.4       |                                  | $          | — |   | $ | 65.4 |   | $ | — |   |
| Cross-currency  interest rate swaps (d)                        |       | 4.8                             |       | —                                |       | 4.8 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (e) |       | 16.4                            |       | —                                |       | 16.4 |   | — |   |
| Total  liabilities at fair value                               |       | $                               | 86.6       |                                  | $          | — |   | $ | 86.6 |   | $ | — |   |

 

----

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

** **

(b)               In December 2008,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on third-party sales denominated ina currency other than the functional currency of the legal entity.  These instruments were designated as foreignexchange cash flow hedges and were effective at generating offsetting changesin the fair value or cash flows of the hedged item or transaction. As a result,any foreign currency gains or losses related to changes in the fair value ofthese derivatives are accounted for as a component of accumulated othercomprehensive income for as long as the hedge remains effective.

** **

(c)                The Company hashistorically entered into interest rate swaps to manage its exposure to changesin interest rates related to variable rate debt. As of December 31, 2008,these contracts cover notional amounts of $610.0 million (at interest ratesranging from 4.864% to 5.038%) and €499.9 million (at interest rates rangingfrom 2.995% to 4.416%). These derivative contracts effectively convert amajority of the senior secured credit obligations and the obligations under theTitanium Dioxide Pigments term loan facility to fixed rate obligations. Theseswaps will mature between November 2009 and July 2012. The Companyhas elected not to apply hedge accounting for these interest rate swaps and hasrecorded the mark-to-market of these derivatives as a component of interestexpense in the Consolidated Statements of Operations.

** **

(d)               The Company enteredinto cross-currency interest rate swaps with current notional amounts of $19.3million and €17.0 million that effectively convert U.S. dollar borrowings intoeuro-based obligations at an effective interest rate of EURIBOR plus 4%. Thesecontracts have final maturity dates of July 2010. The Company has electednot to apply hedge accounting for these interest rate swaps and has recordedthe mark-to-market of these derivatives as a component of interest expense inthe Consolidated Statements of Operations.

** **

(e)                In connection withthe offering of the 2014 Notes, the Company entered into a cross-currencyinterest rate swap in November 2004 with a notional amount of €155.6million that effectively converts the U.S. dollar fixed rate debt in respect ofthe 2014 dollar-denominated notes sold into euro fixed rate debt. This swap hasa final maturity date of November 2009. The Company designated thiscontract as a hedge of the foreign currency exposure of its net investment inits 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.

** **

The fair values ofmarketable securities are based on unadjusted quoted market prices from variousfinancial information service providers and securities exchanges. The fairvalues of derivatives are based on quoted market prices from various banks forsimilar instruments.  The valuation ofthese instruments reflects the contractual terms of the derivatives, includingthe period to maturity, and uses observable market-based inputs, includingforward curves.

 

**Counter-partyrisk**

 

The Company managescounter-party risk by entering into derivative contracts with only majorfinancial institutions of investment grade quality and by limiting the amountof exposure to each financial institution. The Company has considered creditadjustments in its determination of the fair value of its derivative assets andliabilities as of December 31, 2008 based on market participantassumptions. In addition, based on the credit evaluation of each institutioncomprising its derivative assets as of December 31, 2008, the Company believesthe carrying values of these assets as of December 31, 2008 to be fullyrealizable.

 

112

----

 

**18.ACCUMULATED OTHER COMPREHENSIVE INCOME:**

 

Changes in accumulatedother comprehensive income (loss) are as follows:

 
| ** **                                                                     | ** ** | **Pension**                       | ** ** | ** **               | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **                        | ** ** | **Total**                    | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|------------------------------|------------|
| ** **                                                                     | ** ** | **related**                       | ** ** | **Foreign**              | ** ** | **Intercompany**          | ** ** | **Net**                           | ** ** | **Cash flow**                | ** ** | **accumulated**              | ** ** |
| ** **                                                                     | ** ** | **adjustments,**                  | ** ** | **currency**             | ** ** | **foreign currency** | ** ** | **investment hedge,**        | ** ** | **hedges,**                       | ** ** | **other comprehensive** | ** ** |
| **($ in millions)**                                                  | ** ** | **net of tax (a)** | ** ** | **translation (b)** | ** ** | **loans (b)**        | ** ** | **net of tax (c)** | ** ** | **net of tax (d)** | ** ** | **income (loss)**       | ** ** |
| Balance at  December 31, 2005                                                  |       | $                                 | (33.6      | )                        | $          | 53.4                      |       | $                                 | 0.5        |                              | $          | 32.3                         |       | $ | (0.6 | ) | $ | 52.0 |   |
| Period change                                                                  |       | 20.7                              |       | 147.4                    |       | 131.7                     |       | (107.1                            | )          | 0.6                               |       | 193.3                        |       |
| Effect of  adoption of SFAS No. 158, net of tax                                |       | (11.3                             | )          | —                   |       | —                    |       | —                            |       | —                            |       | (11.3                        | )          |
| Balance at December 31, 2006                                                   |       | (24.2                             | )          | 200.8                    |       | 132.2                     |       | (74.8                             | )          | —                            |       | 234.0                        |       |
| Period change                                                                  |       | 36.7                              |       | 177.6                    |       | 66.8                      |       | (108.3                            | )          | —                            |       | 172.8                        |       |
| Foreign currency  translation of entities sold, primarily Electronics business |       | —                            |       | (35.8                    | )          | —                    |       | —                            |       | —                            |       | (35.8                        | )          |
| Balance at  December 31, 2007                                                  |       | 12.5                              |       | 342.6                    |       | 199.0                     |       | (183.1                            | )          | —                            |       | 371.0                        |       |
| Period change                                                                  |       | (27.9                             | )          | (146.0                   | )          | (32.2                     | )          | 38.9                              |       | 0.2                               |       | (167.0                       | )          |
| Balance at  December 31, 2008                                                  |       | $                                 | (15.4      | )                        | $          | 196.6                     |       | $                                 | 166.8      |                              | $          | (144.2                       | )          | $ | 0.2 |   | $ | 204.0 |   |

 

----

(a)                The tax effect onthe pension related adjustments is a benefit (expense) of $6.2 million, $(17.6)million and $(5.0) million for 2008, 2007 and 2006, respectively.

 

(b)               The foreigncurrency translation and intercompany loan adjustments are not adjusted forincome taxes in accordance with the indefinite reversal criteria.

 

(c)                The tax effect onthe net investment hedge is an (expense) benefit of $(2.0) million, $0.4million and $6.7 million for 2008, 2007 and 2006, respectively.

 

(d)               The tax effect onthe cash flow hedges is an expense of $0.3 million and $0.3 million for 2008and 2006, respectively.

 

Gains and losses onintercompany foreign currency loans that are of a long-term investment naturefor which settlement is not planned or anticipated in the foreseeable futureare reported as a component of accumulated other comprehensive income.

 

On October 1, 2005,the Company designated the remaining portion of its euro-denominated debt thatis recorded on its U.S. books as a net investment hedge of its euro-denominatedinvestments. As a result, any foreign currency gains and losses resulting fromthis debt, effective October 1, 2005, is accounted for as a component ofaccumulated other comprehensive income for as long as the hedge remainseffective.

 

**19.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,  *Accountingfor Contingencies*, if it is probable that a liability hasbeen incurred and an amount can be reasonably estimated. It is the Company’spolicy to disclose such matters when there is at least a reasonable possibilitythat 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 plaintiffappealed this decision and, in early 2009, the appellate court affirmed on allcounts with the exception of the negligence claim, which it reversed andremanded to the trial court. The Company will continue to vigorously defendthis matter.  While the Company believesits subsidiary has meritorious defenses against Hospira’s claims and does notbelieve that resolution of this matter will have a material adverse effect onits business or financial condition, the Company cannot predict the ultimateoutcome of this litigation and resolution of this claim may have a materialadverse effect on its results of operations or cash flows in any quarterly orannual reporting period.

 

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, 

 

113

----

 

this subsidiary may berequired to pay indemnity claims related to these lawsuits. Although theCompany expects its subsidiary to have coverage under its product liabilityinsurance policies should damages ultimately be awarded or agreed to, in suchan event, its insurance may not cover such claims and, if not, its subsidiarymay not have sufficient cash flow to pay these claims. Although the Companydoes not believe that resolution of these matters will have a material adverseeffect on its business or financial condition, the Company cannot predict theultimate outcome of this litigation, and the resolution of one or more of theseclaims may have a material adverse effect on its results of operations or cashflows 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 notbelieve that 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 December 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 the potentialfor future litigation.

 

***Indemnity Matters***— The Company may beindemnified by third parties in connection with certain matters related toacquired businesses.  For example, under the terms of the sale andpurchase agreement, mg technologies ag (now known as GEA GroupAktiengesellschaft (“GEA Group”)) and its subsidiary MG North America Holdings, Inc.(now known as GEA North America Inc. (“GEA North America”)), were obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing, subject to certainlimits and exclusions. Pursuant to these agreements, the Company has variousclaims for indemnification with GEA Group. However, in March 2008, theCompany entered into an agreement with GEA Group and GEA North America tosettle all existing and future environmental 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. Although the Company has no reason to believe that thefinancial condition of those parties who may have indemnification obligationsto the Company is other than sound, in the event the Company seeks indemnityunder any of these agreements or through other means, there can be no assurancethat any party who may have obligations to indemnify the Company will adhere totheir obligations and the Company may have to resort to legal action to enforceits rights under the indemnities. In cases where the Company’s indemnificationclaims to such third parties are uncontested, the Company expects to realizerecoveries within the short term.

 

In addition, the Companymay be subject to indemnity claims relating to properties or businesses itdivested. The Company is required to indemnify the buyer of its formerElectronics business, Groupe Novasep segment and pool and spa chemicalsbusiness. For example, the Company is required to indemnify the buyer of itsElectronics business for certain known and unknown environmental actions whichmay arise in the future that relate to the period prior to the closing. In theopinion of management, and based upon information currently available, theultimate resolution of any indemnification obligations owed to the Company orby the Company is not expected to have a material adverse effect on the Company’sfinancial condition, results of operations or cash flows, but may have amaterial adverse effect on the Company’s results of operations or cash flow inany quarterly or annual reporting period.

 

**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 

 

114

----

 

Company in meeting itscompliance 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, 2008, the capital expenditures for SHEmatters totaled $28.1 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2009, 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***

 

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 werepre-registered by December 31, 2008. REACH is expected to be implementedin three phases over the next eleven years based on known product hazardsand/or volume of product in commerce. Under REACH, where warranted by a riskassessment, specified uses of some hazardous substances may be restricted. As aspecialty chemicals company, it is possible that the Company is the onlymanufacturer of one or more substances to be regulated under REACH and thuscould potentially bear the full cost of compliance with REACH for some or allof the Company’s products. The Company estimates it has approximately 350products that are subject to REACH. The Company is taking steps to comply withREACH, which included the pre-registration of its products. The Company doesnot believe these costs will have a material impact on its results ofoperations, financial position or liquidity. In addition, it is possible thatREACH may affect raw material supply, customer demand for certain products andthe Company’s decision to continue to manufacture and sell certain products.

 

In addition, the Companyis subject to the Homeland Security Agency’s regulations, which addresschemical plant safety, the Kyoto Protocol, which relates to the emission ofgreenhouse gases and the European Union Integrated Pollution Prevention andControl Directive, which relates to environmental permitting programs forindividual facilities.  The Company does not believe, based upon currentlyavailable information, that these regulations will have a material adverseimpact on its results of operations, financial position or liquidity.

 

***Remediation Liabilities***

 

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

 

115

----

 

The following tableprovides a list of the Company’s present and former facilities withenvironmental contamination for which the Company has reserved for at December 31,2008:

 
| **Country**      | ** ** | **Location**                     | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** |
|------------------|------------|----------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|
| Brazil           |       | Diadema                          |       |    |       |    |       | X       |       |    |       |    |
| China            |       | Shenzhen                         |       |    |       |    |       | X       |       |    |       |    |
| Finland          |       | Kipsikorpi                       |       |    |       |    |       |    |       | X       |       |    |
|             |       | Pori                             |       |    |       |    |       |    |       | X       |       |    |
| France           |       | Sens                             |       |    |       |    |       | X       |       |    |       |    |
| Germany          |       | Duisburg                         |       | X       |       |    |       |    |       | X       |       |    |
|             |       | Hainhausen                       |       | X       |       |    |       |    |       |    |       |    |
|             |       | Ibbenbueren                      |       |    |       |    |       |    |       | 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       |       |    |       |    |       |    |       |    |
|             |       | Birtley                          |       |    |       |    |       | X       |       |    |       |    |
|             |       | Kidsgrove                        |       |    |       |    |       | X       |       |    |       |    |
| United  States   |       | Beltsville,  MD                  |       | X       |       |    |       | X       |       |    |       |    |
|             |       | East St. Louis, IL               |       |    |       |    |       | X       |       |    |       |    |
|             |       | Easton,  PA                      |       | X       |       |    |       |    |       |    |       |    |
|             |       | Gonzales, TX                     |       |    |       |    |       |    |       | X       |       |    |
|             |       | Harrisburg,  NC                  |       | X       |       |    |       | X       |       |    |       |    |
|             |       | La Mirada, CA                    |       |    |       |    |       | X       |       |    |       |    |
|             |       | Laurens,  SC                     |       |    |       | X       |       |    |       |    |       |    |
|             |       | Middletown, NY (formerly  owned) |       |    |       |    |       | X       |       |    |       | X       |
|             |       | New  Johnsonville, TN            |       |    |       | X       |       | X       |       |    |       |    |
|             |       | Silver Peak, NV                  |       | X       |       |    |       |    |       | X       |       |    |
|             |       | Sunbright,  VA (facility closed) |       | X       |       |    |       |    |       |    |       | X       |
|             |       | Valdosta, GA                     |       | X       |       |    |       |    |       |    |       |    |

 

----

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

 

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

 

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

 

(d)               The Company has landrestoration obligations relating to landfill activities or surface mining atthese locations.

 

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

 

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 $0.3 million at December 31, 2008. In addition, theGerman environmental authorities recently notified the Company, along with afew other potentially responsible parties, of a potential remediation at aformer site in Liebenau, Germany. The Company is currently in the process ofgathering additional information regarding the site and cannot predict the potentialscope of any such remediation.

 

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.

 

116

----

 

***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 requiredthe Company to reduce the facility’s ammonia discharge by December 31,2008. The Company has spent $2.2 million as of December 31, 2008 andexpects to spend $2.4 million in total capital expenditures in connection withthis matter.

 

During 2008, the Company’sTimber Treatment Chemicals subsidiary was cited by the U.S. EPA for failure toreport hazardous material production quantities under the Toxic SubstancesControl Act - 2005 Inventory Update Rule.  The business has provided therequired information; however, the business expects to pay a fine as a resultof this violation. The Company does not believe, based upon currently availableinformation, that this issue will have a material adverse impact on its resultsof operations, financial position or liquidity.

 

***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 remediation costs,the Company records a reserve for the estimated cost of the remediation, eventhough the costs of the remediation will likely be spread out over many years.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 by its insurers, and are generatedby several means, including State-mandated schedules, environmental consultantsand internal experts, depending on the circumstances. On a consolidated basis,the Company has accrued $55.1 million and $40.7 million for known environmentalliabilities as of December 31, 2008 and 2007, respectively, all of whichwere classified as other non-current liabilities in the Consolidated BalanceSheets.  The increase in the environmental reserve is primarily due toenvironmental liabilities assumed from the Titanium Dioxide Pigments venturethat was completed in September 2008. The environmental liabilitiesassumed are subject to change upon the finalization of purchase accounting.Included in the $55.1 million as of December 31, 2008 is $21.4 millionthat is discounted using discount rates ranging from 5.0% to 7.5%, with theundiscounted amount of these reserves equaling $30.9 million. Included in the$40.7 million as of December 31, 2007 is $15.8 million that is discountedusing discount rates ranging from 5.0% to 7.0%, with the undiscounted amount ofthese reserves equaling $22.5 million. In certain cases, the Company’sremediation liabilities are payable over periods of up to 30 years. At a numberof the sites described above, the extent of contamination has not yet beenfully investigated or the final scope of remediation is not yet determinableand could potentially affect the range. The Company estimates that thepotential range for such environmental matters as of December 31, 2008 isfrom $55.1 million to $96.6 million. For the year ended December 31, 2008,the Company recorded charges of $2.9 million to increase its environmentalliabilities and made payments of $2.4 million for clean-up and remediationcosts, which reduced its environmental liabilities. For the year ended December 31,2008, the recurring cost of managing hazardous substances for ongoingoperations is $52.7 million.

 

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 not accruedfor any environmental related costs to remediate soil at these facilities.

 

The Company believesthese accruals are adequate based on currently available information. TheCompany may incur losses in excess of the amounts accrued; however, based on currentlyavailable information it does not believe the additional amount of potentiallosses would have a material effect on its results of operations or financialcondition, but may have a material effect on the results of operations or cashflow in any given quarterly or annual reporting period. The Company does notbelieve that any known individual environmental matter would have a materialeffect on its results of operations or financial condition. The Company isunable to estimate the amount or range of any potential incremental chargesshould facts and circumstances change and may in the future revise itsestimates based on new information becoming available.

 

***Commitments***

 

As of December 31,2008, the Company has unconditional purchase obligations of $498.2 millionprimarily consisting of take-or-pay contracts to purchase goods and energy thatare enforceable and legally binding and that specify all significant terms,including: fixed or minimum quantities to be purchased; fixed, minimum orvariable price provisions; and the approximate timing of the transaction. 

 

117

----

 

These purchaseobligations are expected to be incurred as follows: $227.2 million in less thanone year, $153.4 million in two-three years, $33.7 million in four-five yearsand $83.9 million after five years. The Company has disclosed its contractualobligations as of December 31, 2008 in Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations—Liquidity andCapital Resources,” section.

 

**Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure.**

 

None.

 

**Item9A. 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 December 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 thefourth quarter of 2008.

 

118

----

 

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

The management ofRockwood Holdings, Inc. and subsidiaries (the “Company”) is responsiblefor establishing and maintaining adequate internal control over financialreporting. The Company’s internal control system was designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation and fair presentation of published financialstatements.

 

Our disclosure controlsand procedures are designed to ensure that (a) information required to bedisclosed in our reports under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (b) such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosures.All internal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effective canprovide only reasonable assurance with respect to financial statementpreparation and presentation.

 

Management assessed theeffectiveness of the Company’s internal control over financial reporting as of December 31,2008. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) in*Internal Control—Integrated Framework*.Based on this assessment, management believes that, as of December 31,2008, the Company’s internal control over financial reporting is effectivebased on those criteria.

 

The effectiveness of theCompany’s internal control over financial reporting as of December 31,2008 has been audited by Deloitte & Touche LLP, an independentregistered public accounting firm, who expressed an unqualified opinion asstated in their report included herein.

 

 
| /s/ SEIFI GHASEMI                                  |   |
|----------------------------------------------------|--------|
| Seifi Ghasemi                                      |   |
| Chairman and Chief  Executive Officer              |   |
| March 2, 2009                                      |   |
|                                               |   |
| /s/ ROBERT J. ZATTA                                |   |
| Robert J. Zatta                                    |   |
| Senior Vice President  and Chief Financial Officer |   |
| March 2, 2009                                      |   |

 

119

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of 

Rockwood Holdings, Inc. **Princeton, New Jersey

 

We have audited the internal control over financial reporting ofRockwood Holdings, Inc. and subsidiaries (the “Company”) as ofDecember 31, 2008, based on the**criteriaestablished in *Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Report on Internal Control overFinancial Reporting.  Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects.  Our audit included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectivenessof internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances.  We believethat our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned by, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions, andeffected by the company’s board of directors, management, and other personnelto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not beprevented or detected on a timely basis.  Also, projections of anyevaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2008, based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule as of and for the year ended December 31, 2008 of the Company andour report, dated March 2, 2009, expressed an unqualified opinion on thosefinancial statements and financial statement schedule and included anexplanatory paragraph relating to the Company’s adoption of Statement of FinancialAccounting Standard No. 157, *Fair ValueMeasurements* on January 1, 2008.

 

 
| /s/ Deloitte &  Touche LLP |   |
|-------------------------------------|--------|
| Parsippany, New Jersey              |   |
| March 2, 2009                       |   |

 

120

----

 

**Item9B. Other Information**

 

None.

 

**PART III**

 

**Item10. Directors, Executive Officers and CorporateGovernance.**

 

Information concerningdirectors, executive officers of the Company and corporate governance isincluded under the caption “Proposal One—Election of Directors,” “CorporateGovernance and Related Matters,” “Executive Officers,” “Stock Ownership—Section 16(a) BeneficialOwnership Reporting Compliance,” in the Proxy Statement for the 2009 AnnualMeeting of Stockholders and is incorporated herein by reference.

 

**Item11. Executive Compensation.**

 

Information concerningexecutive compensation is included under the captions “Executive Compensationand Related Information,” “Corporate Governance and RelatedMatters—Compensation Committee Interlocks and Insider Participation” and “CorporateGovernance and Related Matters—Compensation Committee Report” in the ProxyStatement for the 2009 Annual Meeting of Stockholders and is incorporatedherein by reference.

 

**Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

 

Information concerningsecurity ownership of certain beneficial owners and management is includedunder the caption “Stock Ownership—Security Ownership of Certain BeneficialOwners and Management” and “Executive Compensation and RelatedInformation—Equity Compensation Plan Information” in the Proxy Statement forthe 2009 Annual Meeting of Stockholders and is incorporated herein byreference.

 

**Item13. Certain Relationships and Related Transactions, and Director Independence.**

 

Information concerningcertain transactions is included under the caption “Certain Relationships andRelated Party Transactions,” “Corporate Governance and Related Matters—DirectorIndependence” in the Proxy Statement for the 2009 Annual Meeting ofStockholders and is incorporated herein by reference.

 

**Item14. Principal Accounting Fees and Services.**

 

Information concerningcertain transactions is included under the caption “Audit and Related Fees” inthe Proxy Statement for the 2009 Annual Meeting of Stockholders and isincorporated herein by reference.

 

121

----

 

**PART IV**

 

**Item15. Exhibits and Financial Statement Schedules.**

 

List of documents filedas part of this report:

 
|   |   |                                                                                                                       | **Page No.** |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|--------------|
| 1.     |   | Financial Statements:                                                                                                      |         |
|   |   |                                                                                                                       |         |
|   |   | Consolidated  Statements of Operations for the years ended December 31, 2008, 2007 and  2006                          | 72           |
|   |   | Consolidated  Balance Sheets as of December 31, 2008 and 2007                                                         | 73           |
|   |   | Consolidated Statements of Cash Flows for the years  ended December 31, 2008, 2007 and 2006                           | 74           |
|   |   | Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2008, 2007 and 2006 | 75           |
|   |   | Notes to  Consolidated Financial Statements                                                                                | 76           |
|   |   |                                                                                                                       |         |
| 2.     |   | Financial Statement Schedules.                                                                                             | 123          |
|   |   |                                                                                                                       |         |
| 3.     |   | Exhibits.                                                                                                                  | 127          |

 

122

----

 

2.  Financial Statement Schedules

 

**ROCKWOODHOLDINGS, INC. (PARENT COMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED STATEMENTS OF OPERATIONS**

**(Dollarsin millions)**

 
| ** **                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |     |       |
| Equity in  undistributed earnings of subsidiaries |       | $        | (588.4     | )        | $          | 317.1    |       | $ | 103.0 |   |
|                                              |       |     |       |     |       |     |       |
| Net (loss)  income                                |       | $        | (588.4     | )        | $          | 317.1    |       | $ | 103.0 |   |
|                                                   |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

These condensed financialstatements should be read in conjunction with the accompanying consolidatedfinancial statements and notes thereto of Rockwood Holdings, Inc. andSubsidiaries.

 

See accompanyingnotes to condensed financial statements.

 

123

----

 

**ROCKWOODHOLDINGS, INC. (PARENT COMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts; shares in thousands)**

 
| ** **                                                                                                                                                                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                           |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                |       | $                     | 5.3        |   | $ | 3.0 |   |
| Total current  assets                                                                                                                                                                                                                     |       | 5.3                   |       | 3.0 |   |
| Investment in  subsidiaries                                                                                                                                                                                                               |       | 808.4                 |       | 1,563.3 |   |
| Due from  affiliates                                                                                                                                                                                                                      |       | 11.7                  |       | 6.9 |   |
| Total assets                                                                                                                                                                                                                              |       | $                     | 825.4      |   | $ | 1,573.2 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |       |                  |       |   |   |
| Deferred income  taxes                                                                                                                                                                                                                    |       | $                     | (0.2       | ) | $ | (0.2 | ) |
| Total  liabilities                                                                                                                                                                                                                        |       | (0.2                  | )          | (0.2 | ) |
| Restricted stock  units                                                                                                                                                                                                                   |       | 2.1                   |       | 1.8 |   |
|                                                                                                                                                                                                                                      |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                                                                                                                               |       |                  |       |   |   |
| Common stock  ($0.01 par value, 400,000 shares authorized, 74,155 shares issued and 74,061  shares outstanding at December 31, 2008; 400,000 shares authorized, 73,989  shares issued and 73,895 shares outstanding at December 31, 2007) |       | 0.7                   |       | 0.7 |   |
| Paid-in capital                                                                                                                                                                                                                           |       | 1,163.5               |       | 1,156.2 |   |
| Accumulated  other comprehensive income                                                                                                                                                                                                   |       | 204.0                 |       | 371.0 |   |
| Retained  (deficit) earnings                                                                                                                                                                                                              |       | (543.3                | )          | 45.1 |   |
| Treasury stock,  at cost                                                                                                                                                                                                                  |       | (1.4                  | )          | (1.4 | ) |
| Total  stockholders’ equity                                                                                                                                                                                                          |       | 823.5                 |       | 1,571.6 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                          |       | $                     | 825.4      |   | $ | 1,573.2 |   |

 

These condensed financialstatements should be read in conjunction with the accompanying consolidatedfinancial statements and notes thereto of Rockwood Holdings, Inc. andSubsidiaries.

 

See accompanyingnotes to condensed financial statements.

 

124

----

 

**ROCKWOODHOLDINGS, INC. (PARENT COMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

 
| ** **                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |                                       |       |   |   |   |   |
| Net (loss)  income                                                                                       |       | $                                          | (588.4     | ) | $ | 317.1 |   | $ | 103.0 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities:                |       |                                       |       |   |   |   |   |
| Equity in  undistributed income of subsidiaries                                                          |       | 588.4                                      |       | (317.1 | ) | (103.0 | ) |
| Deferred income  taxes                                                                                   |       | —                                     |       | — |   | (0.2 | ) |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |                                       |       |   |   |   |   |
| Due from  affiliates                                                                                     |       | —                                     |       | 0.1 |   | (2.3 | ) |
| Income taxes  payable                                                                                    |       | —                                     |       | (0.2 | ) | 0.2 |   |
| Accrued expenses  and other liabilities                                                                  |       | —                                     |       | (0.2 | ) | (0.1 | ) |
| **Net  cash used in operating activities**                                                               |       | —                                     |       | (0.3 | ) | (2.4 | ) |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |                                       |       |   |   |   |   |
| **Net  cash used in investing activities**                                                               |       | —                                     |       | — |   | — |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |                                       |       |   |   |   |   |
| Issuance of  common stock, net of fees                                                                   |       | 2.3                                        |       | 1.5 |   | 0.1 |   |
| **Net  cash provided by financing activities**                                                           |       | 2.3                                        |       | 1.5 |   | 0.1 |   |
| Net increase (decrease)  in cash and cash equivalents                                                    |       | 2.3                                        |       | 1.2 |   | (2.3 | ) |
| Cash and cash  equivalents, beginning of year                                                            |       | 3.0                                        |       | 1.8 |   | 4.1 |   |
| Cash and cash  equivalents, end of year                                                                  |       | $                                          | 5.3        |   | $ | 3.0 |   | $ | 1.8 |   |

 

These condensed financialstatements should be read in conjunction with the accompanying consolidatedfinancial statements and notes thereto of Rockwood Holdings, Inc. andSubsidiaries.

 

See accompanyingnotes to condensed financial statements.

 

125

----

 

**Notes to Condensed FinancialStatements**

 

The accompanyingcondensed financial statements of Rockwood Holdings, Inc. (the “Registrant”)should be read in conjunction with the consolidated financial statements andnotes thereto of Rockwood Holdings, Inc. and Subsidiaries includedelsewhere in this filing.

 

**1.    BASIS OF PRESENTATION**

 

Pursuant to rules andregulations of the Securities and Exchange Commission, the unconsolidatedcondensed financial statements of Rockwood Holdings, Inc. (“the Company”)do not reflect all of the information and notes normally included withfinancial statements prepared in accordance with generally accepted accountingprinciples. Therefore, these financial statements should be read in conjunctionwith the consolidated financial statements and related notes thereto includedin this filing.

 

*Accountingfor subsidiaries—*The Company has accounted for itssubsidiaries under the equity method in the unconsolidated condensed financialstatements.

 

**2.    STOCK-BASED COMPENSATION**

 

The Company has in placethe 2008 Amended and Restated Stock Purchase and Option Plan. See Note 12, “Stock-BasedCompensation” to the consolidated financial statements.

 

**3.    DIVIDEND RESTRICTIONS**

 

Under the terms of thesenior secured credit facilities of Rockwood Holdings, Inc. andsubsidiaries, certain subsidiaries may not, subject to certain exceptions, (i) declareor pay any dividends, other than dividends payable solely in its equityinterests; (ii) redeem or otherwise acquire or retire for value any of itsor its parent companies’ equity interests; (iii) make any principalpayment on or otherwise acquire or retire for value any subordinatedindebtedness; or (iv) make any loan or capital contribution to, orpurchase any securities or assets of, any person. So long as no default exists,the Company’s subsidiaries may make certain otherwise restricted payments, suchas (i) redeeming capital stock with the proceeds from concurrent equitycontributions; (ii) repurchasing shares of their capital stock pursuant toemployee stock plans or shareholder agreements; (iii) paying dividends toany parent company; (iv) paying taxes; (v) making certain permittedinvestments; or (vi) redeeming or refinancing certain other debtobligations; however, some of these permitted payments are subject to certainlimitations and others may only be made subject to compliance with certainfinancial covenants, such as Debt to EBITDA ratio (as defined).

 

Generally, under theterms of the 2014 Notes, the Company’s subsidiaries may not (i) declare orpay any dividend on their equity interests other than dividends payable solelyin equity interests or in options, warrants, or other rights to purchase suchequity interests; (ii) redeem or otherwise acquire or retire for value anyof the Company’s subsidiaries or the Company’s equity interests; (iii) makeany principal payment on or otherwise acquire or retire for value anysubordinated indebtedness; or (iv) make any loan or capital contributionto, or purchase any securities or assets of, any person. These restrictions donot apply if, at the time of taking any of these actions, (a) no Defaultor Event of Default exists under the Company’s debt obligations, (b) immediatelyafter taking such action, the Company could incur additional indebtednesswithout violating the Company’s debt covenants, and (c) the total amountof payments made pursuant to the above actions does not exceed the sum of (1) 50%of net income, (2) the proceeds of any capital contributions or equityofferings, and (3) the fair market value of any unrestricted subsidiaryredesignated as a restricted subsidiary. Numerous exceptions to these generalprohibitions exist that permit the Company’s subsidiaries to make certainrestricted payments without compliance with (a), (b) and (c).

 

126

----

 

3.    Exhibits:

 
| **Exhibit No.** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1 (A)              |       | Business and Share Sale  and Purchase Agreement, dated September 25, 2000 between Rockwood  Holdings, Inc. and Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.2 (B)              |       | Sale and Purchase  Agreement, dated April 19, 2004 among mg technologies ag and MG North  America Holdings Inc., as Sellers and other parties named as purchasers  therein                                                                                                                                                                                                                                                                                                                                                          |
| 2.3(M)               |       | Share Purchase  Agreement dated November 29, 2006 by and among Rockwood Specialties  Group GmbH and Gilde Buyout Partners BV, Banexi Capital and Groupe Novasep  management.                                                                                                                                                                                                                                                                                                                                                        |
| 2.4 (N)              |       | Stock Purchase  Agreement dated as of October 7, 2007 by and between Rockwood  Specialties Group, Inc. and OM Group, Inc.                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1 (I)              |       | Form of Amended  and Restated Certificate of Incorporation of Rockwood Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2 (Q)              |       | Form of Amended  and Restated By-Laws of Rockwood Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1 (I)              |       | Form of  Certificate of Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2 (I)              |       | Warrant Agreement,  dated as of July 23, 2003, between Rockwood Holdings, Inc. and KKR  Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.3 (I)              |       | Registration Rights  Agreement, dated as of November 20, 2000, among Rockwood  Holdings, Inc., KKR 1996 Fund L.P. and KKR Partners II, L.P.                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.4 (I)              |       | First Amendment, dated  as of July 23, 2003, to the Registration Rights Agreement, among  Rockwood Holdings, Inc., KKR 1996 Fund L.P., KKR Partners II, L.P. and  KKR Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                     |
| 4.5 (A)              |       | Registration Rights  Agreement, dated as of July 23, 2003, among Rockwood Specialties Group, Inc.,  the Guarantors named therein and Merrill Lynch & Co., Merrill Lynch,  Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and  Goldman, Sachs & Co., as Initial Purchasers                                                                                                                                                                                                         |
| 4.6 (I)              |       | Stockholders Agreement,  dated as of July 29, 2004, among Rockwood Holdings, Inc., KKR 1996  Fund, L.P., KKR Partners II, L.P., KKR Millennium Fund, L.P., KKR Partners  III, L.P., KKR European Fund, Limited Partnership and DLJ Merchant Banking  Partners III, L.P., DLJ Offshore Partners III-1, C.V., DLJ Offshore Partners  III-2, C.V., DLJ Offshore Partners III, C.V., DLJ MB Partners III  GmbH & Co. KG, Millennium Partners II, L.P. and MBP III Plan  Investors, L.P.                                   |
| 4.7 (C)              |       | Indenture, dated as of  November 10, 2004, among Rockwood Specialties Group, Inc., the  Guarantors named therein and The Bank of New York, as Trustee                                                                                                                                                                                                                                                                                                                                                                          |
| 4.8 (C)              |       | Registration Rights  Agreement, dated as of November 10, 2004, among Rockwood Specialties  Group, Inc., the Guarantors named therein and Credit Suisse First Boston  (Europe) Limited, Goldman, Sachs & Co., UBS Limited, Credit Suisse  First Boston LLC, UBS Securities LLC, BNP Paribas Securities Corp., ING  Financial Markets LLC, NatCity Investments, Inc., Rabo Securities  USA, Inc. and WestLB AG, London Branch, as the Initial Purchasers                                                      |
| 4.9 (I)              |       | Investors’ Rights  Agreement, dated as of November 20, 2000, among K-L Holdings, Inc.,  KKR 1996 Fund L.P., KKR Partners II L.P. and Merrill Lynch Capital  Corporation                                                                                                                                                                                                                                                                                                                                                   |
| 4.10 (I)             |       | Amendment and  Supplement No. 1 dated as of February 7, 2001 to the Investors’  Rights Agreement, dated as of November 20, 2000,among Rockwood  Holdings, Inc., KKR 1996 Fund L.P., KKR Partners II, L.P., Merrill Lynch  Capital Corporation and Allianz Lebensversicherungs—AG, Stuttgart                                                                                                                                                                                                                |
| 4.11 (I)             |       | Supplement No. 2  dated as of January 14, 2005 to the Investors’ Rights Agreement, dated  as of November 20, 2000, among Rockwood Holdings, Inc., Merrill  Lynch Capital Corporation and SPCP Group, L.L.C.                                                                                                                                                                                                                                                                                                     |
| 4.12 (L)             |       | Amendment to  Stockholders Agreement and Waiver, dated as of January 27, 2006, by and  among Rockwood Holdings, Inc., KKR 1996 Fund, L.P., KKR Partners II,  L.P., KKR Millennium Fund, L.P., KKR Partners III, L.P., KKR European Fund,  Limited Partnership and DLJ Merchant Banking Partners III, L.P., DLJ Offshore  Partners III-1, C.V., DLJ Offshore Partners III-2, C.C., DLJ Offshore  Partners III, C.V., DLJ MB Partners III GmbH & Co. KG, Millennium  Partners II, L.P. and MBP III Plan Investors, L.P. |

 

127

----

 
| 10.1 (D) |   | Credit Agreement, dated  as of July 30, 2004, among Rockwood Specialties Group, Inc.,  Rockwood Specialties Limited, Rockwood Specialties International, Inc.,  the lenders party thereto, Credit Suisse First Boston, acting through its  Cayman Islands Branch, as Administrative agent and Collateral agent, and UBS  Securities LLC and Goldman Sachs Credit Partners L.P., as Co-Syndication  Agents                                                                                                                                                                                                                                                                                                |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 (E) |   | First Amendment, dated  as of October 8, 2004, to the Credit Agreement, dated as of  July 30, 2004, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse First Boston, acting through its Cayman  Islands Branch, as Administrative agent and Collateral agent, and UBS  Securities LLC and Goldman Sachs Credit Partners L.P., as Co-Syndication  Agents                                                                                                                                                                                                                                     |
| 10.3 (F) |   | Second Amendment, dated  as of December 10, 2004, to the Credit Agreement, dated as of  July 30, 2004, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse First Boston, acting through its Cayman  Islands Branch, as Administrative agent and Collateral agent, and UBS  Securities LLC and Goldman Sachs Credit Partners L.P., as Co-Syndication  Agents                                                                                                                                                                                                                                  |
| 10.4 (K) |   | Third Amendment, dated  as of December 13, 2005, to the Credit Agreement dated as of  July 30, 2004 and as amended by the First Amendment dated as of  October 8, 2004 and by the Second Amendment dated as of  December 10, 2004, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse (formerly known as Credit Suisse First  Boston), acting through its Cayman Islands Branch, as Administrative Agent  and Collateral Agent, and UBS Securities LLC and Goldman Sachs Credit  Partners L.P., as Co-Syndication Agents                                                          |
| 10.5 (O) |   | Fourth Amendment, dated  as of March 23, 2007, to the Credit Agreement dated as of July 30,  2004 and as amended by the First Amendment dated as of October 8, 2004,  by the Second Amendment dated as of December 10, 2004 and by the Third  Amendment dated as of December 13, 2005, among Rockwood Specialties  Group, Inc., Rockwood Specialties Limited, Rockwood Specialties  International, Inc., the lenders party thereto, Credit Suisse (formerly  known as Credit Suisse First Boston), acting through its Cayman Islands  Branch, as Administrative Agent and Collateral Agent, and UBS Securities LLC  and Goldman Sachs Credit Partners L.P., as Co-Syndication Agents |
| 10.6(D)  |   | Security Agreement,  dated as of July 30, 2004, among Rockwood Specialties  International, Inc., Rockwood Specialties Group, Inc., as US  Borrower, the Subsidiaries of the U.S. Borrower named therein and Credit  Suisse First Boston, acting through its Cayman Islands Branch, as  Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7(D)  |   | Pledge Agreement, dated  as of July 30, 2004, among Rockwood Specialties Group, Inc., as  U.S. Borrower, the Subsidiaries of the U.S. Borrower named therein and Credit  Suisse First Boston, acting through its Cayman Islands Branch, as Administrative  Agent                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8(D)  |   | Guarantee, dated as of  July 30, 2004, among Rockwood Specialties International, Inc.,  Rockwood Specialties Group, Inc., as U.S. Borrower, the Subsidiaries of  the U.S. Borrower named therein and Credit Suisse First Boston, acting through  its Cayman Islands Branch, as Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.9(D)  |   | Guarantee, dated as of  July 30, 2004, among Rockwood Specialties Group, Inc., the  Subsidiaries of Rockwood Specialties Limited named therein and Credit Suisse  First Boston, acting through its Cayman Islands Branch, as Administrative  Agent                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10(D) |   | Guarantee, dated as of  July 30, 2004, among the Subsidiaries of Rockwood Specialties  Group, Inc. named therein and Credit Suisse First Boston, acting through  its Cayman Islands Branch, UBS Securities LLC and Goldman Sachs Credit  Partners L.P. and UBS AG, Stamford Branch, as Agents                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11(A) |   | Deed of Tax Covenant  dated September 25, 2000 between Rockwood Holdings, Inc. and  Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12(A) |   | Environmental Deed  dated September 25, 2000 between Rockwood Holdings, Inc. and  Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13(A) |   | Form of Management  Stockholder’s Agreement, dated as of February 2, 2001, between Rockwood  Holdings, Inc. and each Management Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.14(I) |   | Form of Management  Stockholder’s Agreement, dated as of November 30, 2004 between Rockwood  Holdings, Inc. and each Management Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.15(I) |   | Form of Amended  and Restated Management Stockholder’s Agreement, dated as of October, 2004,  between Rockwood Holdings, Inc. and each Management Stockholder (as  defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16(A) |   | Form of Sale  Participation Agreement, dated as of January 30, 2001, among Rockwood  Holdings, Inc., each Management Stockholder party to the Management  Stockholders’ Agreement, dated as of January 30, 2001, KKR Partners II  L.P. and KKR 1996 Fund L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

128

----

 
| 10.17(I) |   | Form of Sale  Participation Agreement, dated as of November 30, 2004, among KKR 1996  Fund L.P., KKR Partners II L.P., KKR Millennium Fund, L.P., KKR Partners III,  L.P. and KKR European Fund, Limited Partnership and each Management  Stockholder (as defined therein) |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18(I) |   | Form of Amended  and Restated Sale Participation Agreement, dated as of October, 2004, between  Rockwood Holdings, Inc. and each Management Stockholder (as defined  therein)                                                                                              |
| 10.19(A) |   | Form of Pledge  Agreement in favor of Rockwood Specialties, Inc. made by an executive  officer in connection with 2001 management equity program                                                                                                                           |
| 10.20(A) |   | Form of Promissory  Note made by an executive officer in connection with 2001 management equity  program                                                                                                                                                                        |
| 10.21(G) |   | Amended and Restated  Management Stockholder’s Agreement, dated as of September 24, 2004,  between Rockwood Holdings, Inc. and Seifi Ghasemi                                                                                                                          |
| 10.22(G) |   | Amended and Restated  Sale Participation Agreement, dated as of September 24, 2004, among  Seifi Ghasemi, KKR 1996 Fund L.P., KKR Partners II, L.P., KKR Millennium  Fund, L.P., KKR Partners III, L.P. and KKR European Fund, Limited Partnership                              |
| 10.23(G) |   | Time Stock Option  Agreement, dated as of September 24, 2004, between Rockwood  Holdings, Inc. and Seifi Ghasemi (included as Exhibit A to the  Second Amendment to the Employment Agreement listed as Exhibit 10.37  herewith)                                  |
| 10.24(J) |   | Time/Performance Stock  Option Agreement, dated as of September 24, 2004, between Rockwood  Holdings, Inc. and Seifi Ghasemi                                                                                                                                               |
| 10.25(H) |   | Amended and Restated  Management Stockholder’s Agreement, dated as of October 15, 2004,  between Rockwood Holdings, Inc. and Robert J. Zatta                                                                                                                          |
| 10.26(H) |   | Time/Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                               |
| 10.27(H) |   | Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                                    |
| 10.28(H) |   | Amended and Restated  Sale Participation Agreement, dated as of October 15, 2004, between  Rockwood Holdings, Inc. and Robert J. Zatta                                                                                                                                     |
| 10.29(I) |   | Amendment to Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                                   |
| 10.30(H) |   | Amended and Restated  Management Stockholder’s Agreement, dated as of October 15, 2004,  between Rockwood Holdings, Inc. and Thomas J. Riordan                                                                                                                        |
| 10.31(H) |   | Time/Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                             |
| 10.32(H) |   | Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                  |
| 10.33(H) |   | Amended and Restated  Sale Participation Agreement, dated as of October 15, 2004, between  Rockwood Holdings, Inc. and Thomas J. Riordan                                                                                                                                   |
| 10.34(I) |   | Amendment to Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                 |
| 10.35(A) |   | Employment Agreement  dated as of September 28, 2001 between Rockwood Holdings, Inc. and  Seifi Ghasemi                                                                                                                                                                    |
| 10.36(G) |   | First Amendment, dated  as of August 9, 2004, to the Employment Agreement dated as of  September 28, 2001 between Rockwood Holdings, Inc. and Seifi  Ghasemi                                                                                                          |
| 10.37(G) |   | Second Amendment, dated  as of September 24, 2004, to the Employment Agreement dated as of  September 28, 2001 between Rockwood Holdings, Inc. and Seifi  Ghasemi                                                                                                     |
| 10.38(S) |   | Amended and Restated  Employment Agreement, dated November 13, 2008, by and between Rockwood  Holdings, Inc. and Seifollah Ghasemi                                                                                                                                         |
| 10.39(A) |   | Employment Agreement  dated as of March 21, 2001 between Rockwood Specialties, Inc. and  Robert J. Zatta                                                                                                                                                                   |
| 10.40(H) |   | Amendment, dated as of  October 15, 2004, to the Employment Agreement, dated as of  March 21, 2001 between Rockwood Specialties, Inc. and Robert J.  Zatta                                                                                                            |
| 10.41(S) |   | Employment Agreement,  dated November 13, 2008, by and between Rockwood Holdings, Inc. and  Robert J. Zatta                                                                                                                                                                |
| 10.42(A) |   | Employment Agreement  dated as of October 14, 1994 and amended as of August 26, 1999  between Laporte Inc. and Thomas J. Riordan                                                                                                                                           |
| 10.43(S) |   | Employment Agreement,  dated November 13, 2008, by and between Rockwood Holdings, Inc. and  Thomas Riordan                                                                                                                                                                 |
| 10.44*   |   | Profit-Sharing/401(K) Plan  for Employees of Rockwood Specialties, Inc. as amended and restated  effective as of January 1, 2009                                                                                                                                      |

 

129

----

 
| 10.45*    |   | The Rockwood  Specialties, Inc. Money Purchase Pension Plan as amended and restated  effective as of January 1, 2009                                                                                                                                                                                                                                                                           |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.46*    |   | Supplementary Savings  Plan of Rockwood Specialties, Inc. as amended and restated effective as  of January 1, 2009                                                                                                                                                                                                                                                                             |
| 10.47(A)  |   | Rockwood  Specialties, Inc. Deferred Compensation Plan                                                                                                                                                                                                                                                                                                                                              |
| 10.48(I)  |   | Management Services  Agreement dated as of July 29, 2004 between Kohlberg Kravis  Roberts & Co. L.P., DLJ Merchant Banking Partners III, L.P. and  Rockwood Holdings, Inc.                                                                                                                                                                                                            |
| 10.49(I)  |   | Termination Agreement  dated as of May 13, 2005 between Kohlberg Kravis Roberts & Co.  L.P., DLJ Merchant Banking Partners III, L.P. and Rockwood  Holdings, Inc.                                                                                                                                                                                                                     |
| 10.50(I)  |   | Restricted Stock Unit  Award Agreement effective as of November 1, 2001 between Rockwood  Holdings, Inc. and Seifi Ghasemi                                                                                                                                                                                                                                                                     |
| 10.51(I)  |   | Form of 2001 Stock  Option Agreement, dated as of February 2, 2001, between K-L  Holdings, Inc. and an employee of the Company or a Subsidiary or  Affiliate of the Company.                                                                                                                                                                                                              |
| 10.52(I)  |   | Form of 2004 Stock  Option Agreement between Rockwood Holdings, Inc. and an employee of the  Company or a Subsidiary or Affiliate of the Company.                                                                                                                                                                                                                                              |
| 10.53*    |   | 2008 Amended and  Restated Stock Purchase and Option Plan for Rockwood Holdings, Inc. and  Subsidiaries                                                                                                                                                                                                                                                                                             |
| 10.54 (I) |   | Short-Term Incentive  Plan for Rockwood Holdings, Inc. and Subsidiaries                                                                                                                                                                                                                                                                                                                             |
| 10.55(I)  |   | Form of  Non-Employee Director Stock Option Agreement                                                                                                                                                                                                                                                                                                                                               |
| 10.56(P)  |   | Form of Company’s  Stock Option Agreement (May 2007)                                                                                                                                                                                                                                                                                                                                      |
| 10.57(P)  |   | Form of Performance  Restricted Stock Unit Award Agreement (May 2007)                                                                                                                                                                                                                                                                                                                          |
| 10.58(Q)  |   | Form of Company’s  Stock Option Agreement (December 2007)                                                                                                                                                                                                                                                                                                                                 |
| 10.59(Q)  |   | Form of  Performance Restricted Stock Unit Award Agreement (December 2007)                                                                                                                                                                                                                                                                                                                     |
| 10.60(R)  |   | Master Agreement, dated  May 21, 2008, by and among, Rockwood Holdings, Inc., Rockwood  Specialties Group, Inc. and certain of their affiliates and Kemira Oyj  and certain of its affiliates                                                                                                                                                                                             |
| 10.61(R)  |   | Shareholders’ and Joint  Venture Agreement, dated May 21, 2008, by and among, Rockwood Holdings, Inc.,  Rockwood Specialties Group, Inc. and certain of their affiliates and  Kemira Oyj and certain of its affiliates                                                                                                                                                               |
| 10.62(R)  |   | Share and Asset  Purchase and Transfer Agreement, dated May 21, 2008, by and among,  Rockwood Holdings, Inc., Rockwood Specialties Group, Inc. and  certain of their affiliates and Kemira Oyj and certain of its affiliates                                                                                                                                                              |
| 10.63(R)  |   | Facility Agreement,  made between Deukalion Einhundertvierundzwanzigste Vermögensverwaltungs GmbH,  Sachtleben Chemie GmbH, White Pigments Holding Oy, and Kemira Pigments Oy,  Merchant Banking, Skandinaviska Enskilda Banken AB as Agent, Security Agent  and Issuing Bank; and Nordea Bank Finland Plc as Arranger and Original  Lender; and the lenders party thereto                          |
| 10.64*    |   | Facility Agreement, as  amended and restated, made between Deukalion Einhundertvierundzwanzigste  Vermögensverwaltungs GmbH, Sachtleben Chemie GmbH, White Pigments Holding Oy,  and Kemira Pigments Oy, Merchant Banking, Skandinaviska Enskilda Banken AB as  Agent, Security Agent and Issuing Bank; and Nordea Bank Finland Plc as  Arranger and Original Lender; and the lenders party thereto |
| 10.65(T)  |   | Form of Stock  Option Agreement (December 2008)                                                                                                                                                                                                                                                                                                                                                |
| 10.66(T)  |   | Form of Restricted  Stock Unit Award Agreement (December 2008)                                                                                                                                                                                                                                                                                                                                 |
| 10.67(T)  |   | Form of  Performance Restricted Stock Unit Award Agreement (December 2008)                                                                                                                                                                                                                                                                                                                     |
| 21.1*     |   | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1*     |   | Consent of  Deloitte & Touche LLP                                                                                                                                                                                                                                                                                                                                                               |
| 31.1*     |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                            |
| 31.2*     |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                            |
| 32.1      |   | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                        |
| 32.2      |   | Section 1350  Certification of Chief Financial Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                        |

 

----

| *      |   | Filed herewith.                                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                       |
| (A)    |   | Incorporated by  reference to Rockwood Specialties Group, Inc.’s Registration Statement  on form S-4 (File No. 333-109686). |
|   |   |                                                                                                                                       |
| (B)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on May 4, 2004.           |
|   |   |                                                                                                                                       |
| (C)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on November 12, 2004.     |
|   |   |                                                                                                                                       |
| (D)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on August 4, 2004.        |

 

130

----

 
| (E)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on October 12, 2004.         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| (F)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on December 14, 2004.        |
|   |   |                                                                                                                                          |
| (G)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on September 30, 2004.       |
|   |   |                                                                                                                                          |
| (H)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on October 19, 2004.         |
|   |   |                                                                                                                                          |
| (I)    |   | Incorporated by  reference to the Company’s Registration Statement on Form S-1 (File  No. 333-122764).                         |
|   |   |                                                                                                                                          |
| (J)    |   | Incorporated by  reference to the Annual Report on Form 10-K of the Rockwood Specialties  Group, Inc. filed on April 29, 2005. |
|   |   |                                                                                                                                          |
| (K)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  December 15, 2005.                            |
|   |   |                                                                                                                                          |
| (L)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  February 2, 2006.                             |
|   |   |                                                                                                                                          |
| (M)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on January 16,  2007.                             |
|   |   |                                                                                                                                          |
| (N)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  January 7, 2008.                              |
|   |   |                                                                                                                                          |
| (O)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  March 27, 2007.                               |
|   |   |                                                                                                                                          |
| (P)    |   | Incorporated by reference  to the Company’s Current Report on Form 8-K filed on May 22, 2007.                                  |
|   |   |                                                                                                                                          |
| (Q)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  December 20, 2007.                            |
|   |   |                                                                                                                                          |
| (R)    |   | Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q filed on  August 6, 2008.                            |
|   |   |                                                                                                                                          |
| (S)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  November 13, 2008.                            |
|   |   |                                                                                                                                          |
| (T)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  December 12, 2008.                            |

 

131

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | ROCKWOOD  HOLDINGS, INC. |
|--------|-------------------------------|
|   |                          |   |
|   |                          |   |
|   | By:                           | /s/ SEIFI GHASEMI |
|   |                          | Seifi Ghasemi |
|   |                          | Chairman and Chief  Executive Officer |
|   |                          | Date: March 2, 2009 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Annual Report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated

 
| **Name**   | ** **         | **Title**  | ** **                                         | **Date**   |
|------------|--------------------|------------|----------------------------------------------------|------------|
| ** ** | ** **         | ** ** | ** **                                         | ** ** |
| /s/        | SEIFI GHASEMI      |       | Chairman and Chief  Executive Officer and Director |       | March 2, 2009 |
| By:        | Seifi Ghasemi      |       | (Principal Executive  Officer)                     |       |   |
|       |               |       |                                               |       |   |
| /s/        | ROBERT J. ZATTA    |       | Senior Vice President  and Chief Financial Officer |       | March 2, 2009 |
| By:        | Robert J. Zatta    |       | (Principal Financial  Officer)                     |       |   |
|       |               |       |                                               |       |   |
| /s/        | JAMES T. SULLIVAN  |       | Corporate Controller  and Treasurer                |       | March 2, 2009 |
| By:        | James T. Sullivan  |       | (Principal Accounting  Officer)                    |       |   |
|       |               |       |                                               |       |   |
| /s/        | BRIAN F. CARROLL   |       | Director                                           |       | March 2, 2009 |
| By:        | Brian F. Carroll   |       |                                               |       |   |
|       |               |       |                                               |       |   |
| /s/        | NANCE K. DICCIANI  |       | Director                                           |       | March 2, 2009 |
| By:        | Nance K. Dicciani  |       |                                               |       |   |
|       |               |       |                                               |       |   |
| /s/        | SHELDON R. ERIKSON |       | Director                                           |       | March 2, 2009 |
| By:        | Sheldon R. Erikson |       |                                               |       |   |
|       |               |       |                                               |       |   |
| /s/        | TODD A. FISHER     |       | Director                                           |       | March 2, 2009 |
| By:        | Todd A. Fisher     |       |                                               |       |   |
|       |               |       |                                               |       |   |
| /s/        | DOUGLAS L. MAINE   |       | Director                                           |       | March 2, 2009 |
| By:        | Douglas L. Maine   |       |                                               |       |   |
|       |               |       |                                               |       |   |
| /s/        | J. KENT MASTERS    |       | Director                                           |       | March 2, 2009 |
| By:        | J. Kent Masters    |       |                                               |       |   |

 

132

----

 

**ExhibitIndex**

 
| **Exhibit No.** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1 (A)              |       | Business and Share Sale  and Purchase Agreement, dated September 25, 2000 between Rockwood  Holdings, Inc. and Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.2 (B)              |       | Sale and Purchase  Agreement, dated April 19, 2004 among mg technologies ag and MG North  America Holdings Inc., as Sellers and other parties named as purchasers  therein                                                                                                                                                                                                                                                                                                                                                          |
| 2.3(M)               |       | Share Purchase  Agreement dated November 29, 2006 by and among Rockwood Specialties  Group GmbH and Gilde Buyout Partners BV, Banexi Capital and Groupe Novasep  management.                                                                                                                                                                                                                                                                                                                                                        |
| 2.4 (N)              |       | Stock Purchase  Agreement dated as of October 7, 2007 by and between Rockwood  Specialties Group, Inc. and OM Group, Inc.                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1 (I)              |       | Form of Amended  and Restated Certificate of Incorporation of Rockwood Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2 (Q)              |       | Form of Amended  and Restated By-Laws of Rockwood Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1 (I)              |       | Form of  Certificate of Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2 (I)              |       | Warrant Agreement,  dated as of July 23, 2003, between Rockwood Holdings, Inc. and KKR  Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.3 (I)              |       | Registration Rights  Agreement, dated as of November 20, 2000, among Rockwood  Holdings, Inc., KKR 1996 Fund L.P. and KKR Partners II, L.P.                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.4 (I)              |       | First Amendment, dated  as of July 23, 2003, to the Registration Rights Agreement, among  Rockwood Holdings, Inc., KKR 1996 Fund L.P., KKR Partners II, L.P. and  KKR Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                     |
| 4.5 (A)              |       | Registration Rights  Agreement, dated as of July 23, 2003, among Rockwood Specialties  Group, Inc., the Guarantors named therein and Merrill Lynch &  Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan  Securities Inc. and Goldman, Sachs & Co., as Initial Purchasers                                                                                                                                                                                                         |
| 4.6 (I)              |       | Stockholders Agreement,  dated as of July 29, 2004, among Rockwood Holdings, Inc., KKR 1996  Fund, L.P., KKR Partners II, L.P., KKR Millennium Fund, L.P., KKR Partners  III, L.P., KKR European Fund, Limited Partnership and DLJ Merchant Banking  Partners III, L.P., DLJ Offshore Partners III-1, C.V., DLJ Offshore Partners  III-2, C.V., DLJ Offshore Partners III, C.V., DLJ MB Partners III  GmbH & Co. KG, Millennium Partners II, L.P. and MBP III Plan  Investors, L.P.                                   |
| 4.7 (C)              |       | Indenture, dated as of  November 10, 2004, among Rockwood Specialties Group, Inc., the  Guarantors named therein and The Bank of New York, as Trustee                                                                                                                                                                                                                                                                                                                                                                          |
| 4.8 (C)              |       | Registration Rights  Agreement, dated as of November 10, 2004, among Rockwood Specialties  Group, Inc., the Guarantors named therein and Credit Suisse First Boston  (Europe) Limited, Goldman, Sachs & Co., UBS Limited, Credit Suisse  First Boston LLC, UBS Securities LLC, BNP Paribas Securities Corp., ING  Financial Markets LLC, NatCity Investments, Inc., Rabo Securities  USA, Inc. and WestLB AG, London Branch, as the Initial Purchasers                                                      |
| 4.9 (I)              |       | Investors’ Rights  Agreement, dated as of November 20, 2000, among K-L Holdings, Inc.,  KKR 1996 Fund L.P., KKR Partners II L.P. and Merrill Lynch Capital  Corporation                                                                                                                                                                                                                                                                                                                                                   |
| 4.10 (I)             |       | Amendment and  Supplement No. 1 dated as of February 7, 2001 to the Investors’  Rights Agreement, dated as of November 20, 2000,among Rockwood  Holdings, Inc., KKR 1996 Fund L.P., KKR Partners II, L.P., Merrill Lynch  Capital Corporation and Allianz Lebensversicherungs—AG, Stuttgart                                                                                                                                                                                                                |
| 4.11 (I)             |       | Supplement No. 2  dated as of January 14, 2005 to the Investors’ Rights Agreement, dated  as of November 20, 2000, among Rockwood Holdings, Inc., Merrill  Lynch Capital Corporation and SPCP Group, L.L.C.                                                                                                                                                                                                                                                                                                     |
| 4.12 (L)             |       | Amendment to  Stockholders Agreement and Waiver, dated as of January 27, 2006, by and  among Rockwood Holdings, Inc., KKR 1996 Fund, L.P., KKR Partners II,  L.P., KKR Millennium Fund, L.P., KKR Partners III, L.P., KKR European Fund,  Limited Partnership and DLJ Merchant Banking Partners III, L.P., DLJ Offshore  Partners III-1, C.V., DLJ Offshore Partners III-2, C.C., DLJ Offshore  Partners III, C.V., DLJ MB Partners III GmbH & Co. KG, Millennium Partners  II, L.P. and MBP III Plan Investors, L.P. |

 

----

 
| 10.1 (D) |   | Credit Agreement, dated  as of July 30, 2004, among Rockwood Specialties Group, Inc.,  Rockwood Specialties Limited, Rockwood Specialties International, Inc.,  the lenders party thereto, Credit Suisse First Boston, acting through its  Cayman Islands Branch, as Administrative agent and Collateral agent, and UBS  Securities LLC and Goldman Sachs Credit Partners L.P., as Co-Syndication  Agents                                                                                                                                                                                                                                                                                                |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 (E) |   | First Amendment, dated  as of October 8, 2004, to the Credit Agreement, dated as of  July 30, 2004, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse First Boston, acting through its Cayman  Islands Branch, as Administrative agent and Collateral agent, and UBS  Securities LLC and Goldman Sachs Credit Partners L.P., as Co-Syndication  Agents                                                                                                                                                                                                                                     |
| 10.3 (F) |   | Second Amendment, dated  as of December 10, 2004, to the Credit Agreement, dated as of  July 30, 2004, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse First Boston, acting through its Cayman  Islands Branch, as Administrative agent and Collateral agent, and UBS Securities  LLC and Goldman Sachs Credit Partners L.P., as Co-Syndication Agents                                                                                                                                                                                                                                   |
| 10.4 (K) |   | Third Amendment, dated  as of December 13, 2005, to the Credit Agreement dated as of  July 30, 2004 and as amended by the First Amendment dated as of  October 8, 2004 and by the Second Amendment dated as of  December 10, 2004, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse (formerly known as Credit Suisse First  Boston), acting through its Cayman Islands Branch, as Administrative Agent  and Collateral Agent, and UBS Securities LLC and Goldman Sachs Credit  Partners L.P., as Co-Syndication Agents                                                          |
| 10.5 (O) |   | Fourth Amendment, dated  as of March 23, 2007, to the Credit Agreement dated as of July 30,  2004 and as amended by the First Amendment dated as of October 8, 2004,  by the Second Amendment dated as of December 10, 2004 and by the Third  Amendment dated as of December 13, 2005, among Rockwood Specialties  Group, Inc., Rockwood Specialties Limited, Rockwood Specialties  International, Inc., the lenders party thereto, Credit Suisse (formerly  known as Credit Suisse First Boston), acting through its Cayman Islands  Branch, as Administrative Agent and Collateral Agent, and UBS Securities LLC  and Goldman Sachs Credit Partners L.P., as Co-Syndication Agents |
| 10.6(D)  |   | Security Agreement,  dated as of July 30, 2004, among Rockwood Specialties  International, Inc., Rockwood Specialties Group, Inc., as US  Borrower, the Subsidiaries of the U.S. Borrower named therein and Credit  Suisse First Boston, acting through its Cayman Islands Branch, as  Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7(D)  |   | Pledge Agreement, dated  as of July 30, 2004, among Rockwood Specialties Group, Inc., as  U.S. Borrower, the Subsidiaries of the U.S. Borrower named therein and Credit  Suisse First Boston, acting through its Cayman Islands Branch, as  Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8(D)  |   | Guarantee, dated as of  July 30, 2004, among Rockwood Specialties International, Inc.,  Rockwood Specialties Group, Inc., as U.S. Borrower, the Subsidiaries of  the U.S. Borrower named therein and Credit Suisse First Boston, acting  through its Cayman Islands Branch, as Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.9(D)  |   | Guarantee, dated as of  July 30, 2004, among Rockwood Specialties Group, Inc., the  Subsidiaries of Rockwood Specialties Limited named therein and Credit Suisse  First Boston, acting through its Cayman Islands Branch, as Administrative  Agent                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10(D) |   | Guarantee, dated as of  July 30, 2004, among the Subsidiaries of Rockwood Specialties  Group, Inc. named therein and Credit Suisse First Boston, acting through  its Cayman Islands Branch, UBS Securities LLC and Goldman Sachs Credit  Partners L.P. and UBS AG, Stamford Branch, as Agents                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11(A) |   | Deed of Tax Covenant  dated September 25, 2000 between Rockwood Holdings, Inc. and  Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12(A) |   | Environmental Deed  dated September 25, 2000 between Rockwood Holdings, Inc. and  Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13(A) |   | Form of Management  Stockholder’s Agreement, dated as of February 2, 2001, between Rockwood Holdings, Inc.  and each Management Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.14(I) |   | Form of Management  Stockholder’s Agreement, dated as of November 30, 2004 between Rockwood  Holdings, Inc. and each Management Stockholder (as defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.15(I) |   | Form of Amended  and Restated Management Stockholder’s Agreement, dated as of October, 2004,  between Rockwood Holdings, Inc. and each Management Stockholder (as  defined therein)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16(A) |   | Form of Sale  Participation Agreement, dated as of January 30, 2001, among Rockwood  Holdings, Inc., each Management Stockholder party to the Management  Stockholders’ Agreement, dated as of January 30, 2001, KKR Partners II  L.P. and KKR 1996 Fund L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

----

 
| 10.17(I) |   | Form of Sale  Participation Agreement, dated as of November 30, 2004, among KKR 1996  Fund L.P., KKR Partners II L.P., KKR Millennium Fund, L.P., KKR Partners III,  L.P. and KKR European Fund, Limited Partnership and each Management  Stockholder (as defined therein) |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18(I) |   | Form of Amended  and Restated Sale Participation Agreement, dated as of October, 2004, between  Rockwood Holdings, Inc. and each Management Stockholder (as defined  therein)                                                                                              |
| 10.19(A) |   | Form of Pledge  Agreement in favor of Rockwood Specialties, Inc. made by an executive  officer in connection with 2001 management equity program                                                                                                                           |
| 10.20(A) |   | Form of Promissory  Note made by an executive officer in connection with 2001 management equity  program                                                                                                                                                                        |
| 10.21(G) |   | Amended and Restated  Management Stockholder’s Agreement, dated as of September 24, 2004,  between Rockwood Holdings, Inc. and Seifi Ghasemi                                                                                                                          |
| 10.22(G) |   | Amended and Restated  Sale Participation Agreement, dated as of September 24, 2004, among  Seifi Ghasemi, KKR 1996 Fund L.P., KKR Partners II, L.P., KKR Millennium  Fund, L.P., KKR Partners III, L.P. and KKR European Fund, Limited Partnership                              |
| 10.23(G) |   | Time Stock Option  Agreement, dated as of September 24, 2004, between Rockwood  Holdings, Inc. and Seifi Ghasemi (included as Exhibit A to the  Second Amendment to the Employment Agreement listed as Exhibit 10.37  herewith)                                  |
| 10.24(J) |   | Time/Performance Stock  Option Agreement, dated as of September 24, 2004, between Rockwood  Holdings, Inc. and Seifi Ghasemi                                                                                                                                               |
| 10.25(H) |   | Amended and Restated  Management Stockholder’s Agreement, dated as of October 15, 2004,  between Rockwood Holdings, Inc. and Robert J. Zatta                                                                                                                          |
| 10.26(H) |   | Time/Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                               |
| 10.27(H) |   | Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood Holdings, Inc.  and Robert J. Zatta                                                                                                                                                    |
| 10.28(H) |   | Amended and Restated  Sale Participation Agreement, dated as of October 15, 2004, between  Rockwood Holdings, Inc. and Robert J. Zatta                                                                                                                                     |
| 10.29(I) |   | Amendment to Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                                   |
| 10.30(H) |   | Amended and Restated  Management Stockholder’s Agreement, dated as of October 15, 2004,  between Rockwood Holdings, Inc. and Thomas J. Riordan                                                                                                                        |
| 10.31(H) |   | Time/Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                             |
| 10.32(H) |   | Performance Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                  |
| 10.33(H) |   | Amended and Restated  Sale Participation Agreement, dated as of October 15, 2004, between  Rockwood Holdings, Inc. and Thomas J. Riordan                                                                                                                                   |
| 10.34(I) |   | Amendment to Stock  Option Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                 |
| 10.35(A) |   | Employment Agreement  dated as of September 28, 2001 between Rockwood Holdings, Inc. and  Seifi Ghasemi                                                                                                                                                                    |
| 10.36(G) |   | First Amendment, dated  as of August 9, 2004, to the Employment Agreement dated as of  September 28, 2001 between Rockwood Holdings, Inc. and Seifi Ghasemi                                                                                                           |
| 10.37(G) |   | Second Amendment, dated  as of September 24, 2004, to the Employment Agreement dated as of  September 28, 2001 between Rockwood Holdings, Inc. and Seifi  Ghasemi                                                                                                     |
| 10.38(S) |   | Amended and Restated  Employment Agreement, dated November 13, 2008, by and between Rockwood  Holdings, Inc. and Seifollah Ghasemi                                                                                                                                         |
| 10.39(A) |   | Employment Agreement  dated as of March 21, 2001 between Rockwood Specialties, Inc. and  Robert J. Zatta                                                                                                                                                                   |
| 10.40(H) |   | Amendment, dated as of  October 15, 2004, to the Employment Agreement, dated as of  March 21, 2001 between Rockwood Specialties, Inc. and Robert J.  Zatta                                                                                                            |
| 10.41(S) |   | Employment Agreement,  dated November 13, 2008, by and between Rockwood Holdings, Inc. and  Robert J. Zatta                                                                                                                                                                |
| 10.42(A) |   | Employment Agreement  dated as of October 14, 1994 and amended as of August 26, 1999  between Laporte Inc. and Thomas J. Riordan                                                                                                                                           |
| 10.43(S) |   | Employment Agreement,  dated November 13, 2008, by and between Rockwood Holdings, Inc. and  Thomas Riordan                                                                                                                                                                 |
| 10.44*   |   | Profit-Sharing/401(K) Plan  for Employees of Rockwood Specialties, Inc. as amended and restated  effective as of January 1, 2009                                                                                                                                      |

 

----

 
| 10.45*    |   | The Rockwood  Specialties, Inc. Money Purchase Pension Plan as amended and restated  effective as of January 1, 2009                                                                                                                                                                                                                                                                           |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.46*    |   | Supplementary Savings  Plan of Rockwood Specialties, Inc. as amended and restated effective as  of January 1, 2009                                                                                                                                                                                                                                                                             |
| 10.47(A)  |   | Rockwood  Specialties, Inc. Deferred Compensation Plan                                                                                                                                                                                                                                                                                                                                              |
| 10.48(I)  |   | Management Services  Agreement dated as of July 29, 2004 between Kohlberg Kravis  Roberts & Co. L.P., DLJ Merchant Banking Partners III, L.P. and  Rockwood Holdings, Inc.                                                                                                                                                                                                            |
| 10.49(I)  |   | Termination Agreement  dated as of May 13, 2005 between Kohlberg Kravis Roberts & Co.  L.P., DLJ Merchant Banking Partners III, L.P. and Rockwood  Holdings, Inc.                                                                                                                                                                                                                     |
| 10.50(I)  |   | Restricted Stock Unit  Award Agreement effective as of November 1, 2001 between Rockwood  Holdings, Inc. and Seifi Ghasemi                                                                                                                                                                                                                                                                     |
| 10.51(I)  |   | Form of 2001 Stock  Option Agreement, dated as of February 2, 2001, between K-L  Holdings, Inc. and an employee of the Company or a Subsidiary or Affiliate  of the Company.                                                                                                                                                                                                              |
| 10.52(I)  |   | Form of 2004 Stock  Option Agreement between Rockwood Holdings, Inc. and an employee of the  Company or a Subsidiary or Affiliate of the Company.                                                                                                                                                                                                                                              |
| 10.53*    |   | 2008 Amended and  Restated Stock Purchase and Option Plan for Rockwood Holdings, Inc. and  Subsidiaries                                                                                                                                                                                                                                                                                             |
| 10.54 (I) |   | Short-Term Incentive  Plan for Rockwood Holdings, Inc. and Subsidiaries                                                                                                                                                                                                                                                                                                                             |
| 10.55(I)  |   | Form of  Non-Employee Director Stock Option Agreement                                                                                                                                                                                                                                                                                                                                               |
| 10.56(P)  |   | Form of Company’s  Stock Option Agreement (May 2007)                                                                                                                                                                                                                                                                                                                                      |
| 10.57(P)  |   | Form of  Performance Restricted Stock Unit Award Agreement (May 2007)                                                                                                                                                                                                                                                                                                                          |
| 10.58(Q)  |   | Form of Company’s  Stock Option Agreement (December 2007)                                                                                                                                                                                                                                                                                                                                 |
| 10.59(Q)  |   | Form of  Performance Restricted Stock Unit Award Agreement (December 2007)                                                                                                                                                                                                                                                                                                                     |
| 10.60(R)  |   | Master Agreement, dated  May 21, 2008, by and among, Rockwood Holdings, Inc., Rockwood  Specialties Group, Inc. and certain of their affiliates and Kemira Oyj  and certain of its affiliates                                                                                                                                                                                             |
| 10.61(R)  |   | Shareholders’ and Joint  Venture Agreement, dated May 21, 2008, by and among, Rockwood  Holdings, Inc., Rockwood Specialties Group, Inc. and certain of  their affiliates and Kemira Oyj and certain of its affiliates                                                                                                                                                               |
| 10.62(R)  |   | Share and Asset  Purchase and Transfer Agreement, dated May 21, 2008, by and among,  Rockwood Holdings, Inc., Rockwood Specialties Group, Inc. and  certain of their affiliates and Kemira Oyj and certain of its affiliates                                                                                                                                                              |
| 10.63(R)  |   | Facility Agreement,  made between Deukalion Einhundertvierundzwanzigste Vermögensverwaltungs GmbH,  Sachtleben Chemie GmbH, White Pigments Holding Oy, and Kemira Pigments Oy,  Merchant Banking, Skandinaviska Enskilda Banken AB as Agent, Security Agent  and Issuing Bank; and Nordea Bank Finland Plc as Arranger and Original  Lender; and the lenders party thereto                          |
| 10.64*    |   | Facility Agreement, as  amended and restated, made between Deukalion Einhundertvierundzwanzigste  Vermögensverwaltungs GmbH, Sachtleben Chemie GmbH, White Pigments Holding Oy,  and Kemira Pigments Oy, Merchant Banking, Skandinaviska Enskilda Banken AB as  Agent, Security Agent and Issuing Bank; and Nordea Bank Finland Plc as  Arranger and Original Lender; and the lenders party thereto |
| 10.65(T)  |   | Form of Stock  Option Agreement (December 2008)                                                                                                                                                                                                                                                                                                                                                |
| 10.66(T)  |   | Form of Restricted  Stock Unit Award Agreement (December 2008)                                                                                                                                                                                                                                                                                                                                 |
| 10.67(T)  |   | Form of Performance  Restricted Stock Unit Award Agreement (December 2008)                                                                                                                                                                                                                                                                                                                     |
| 21.1*     |   | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1*     |   | Consent of  Deloitte & Touche LLP                                                                                                                                                                                                                                                                                                                                                               |
| 31.1*     |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                            |
| 31.2*     |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                            |
| 32.1      |   | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                        |
| 32.2      |   | Section 1350  Certification of Chief Financial Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                        |

 

----

| *      |   | Filed herewith.                                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                       |
| (A)    |   | Incorporated by  reference to Rockwood Specialties Group, Inc.’s Registration Statement  on form S-4 (File No. 333-109686). |
|   |   |                                                                                                                                       |
| (B)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on May 4, 2004.           |
|   |   |                                                                                                                                       |
| (C)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on November 12, 2004.     |
|   |   |                                                                                                                                       |
| (D)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on August 4, 2004.        |

 

----

 
| (E)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on October 12, 2004.         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| (F)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on December 14, 2004.        |
|   |   |                                                                                                                                          |
| (G)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on September 30, 2004.       |
|   |   |                                                                                                                                          |
| (H)    |   | Incorporated by  reference to the Current Report on Form 8-K of Rockwood Specialties  Group, Inc filed on October 19, 2004.         |
|   |   |                                                                                                                                          |
| (I)    |   | Incorporated by  reference to the Company’s Registration Statement on Form S-1 (File  No. 333-122764).                         |
|   |   |                                                                                                                                          |
| (J)    |   | Incorporated by  reference to the Annual Report on Form 10-K of the Rockwood Specialties  Group, Inc. filed on April 29, 2005. |
|   |   |                                                                                                                                          |
| (K)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  December 15, 2005.                            |
|   |   |                                                                                                                                          |
| (L)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  February 2, 2006.                             |
|   |   |                                                                                                                                          |
| (M)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  January 16, 2007.                             |
|   |   |                                                                                                                                          |
| (N)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  January 7, 2008.                              |
|   |   |                                                                                                                                          |
| (O)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  March 27, 2007.                               |
|   |   |                                                                                                                                          |
| (P)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  May 22, 2007.                                 |
|   |   |                                                                                                                                          |
| (Q)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  December 20, 2007.                            |
|   |   |                                                                                                                                          |
| (R)    |   | Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q filed on  August 6, 2008.                            |
|   |   |                                                                                                                                          |
| (S)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  November 13, 2008.                            |
|   |   |                                                                                                                                          |
| (T)    |   | Incorporated by  reference to the Company’s Current Report on Form 8-K filed on  December 12, 2008.                            |

 

----