S-1/A 1 ds1a.htm AMENDMENT NO. 9 TO FORM S-1 Amendment No. 9 to Form S-1
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As filed with the Securities and Exchange Commission on June 2, 2006

Registration No. 333-124287


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 9

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


HEXION SPECIALTY CHEMICALS, INC.

(Exact name of registrant as specified in charter)


New Jersey   2821   13-0511250

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)


180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive offices)


Ellen German Berndt, Esq.

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

(Name, address, including zip code, and telephone number, including area code, of agent for service of process)


With a copy to:

William B. Kuesel, Esq.

O’Melveny & Myers LLP

7 Times Square

New York, New York 10036

(212) 326-2000

  

Kris F. Heinzelman, Esq.

LizabethAnn R. Eisen, Esq.

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, New York 10019

(212) 474-1000


Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

CALCULATION OF REGISTRATION FEE


Title of each Class of

Securities to be Registered

  

Proposed Maximum

Aggregate

    Offering Price(1)(2)    

  

Amount of

Registration Fee(3)

Common Stock, par value $0.01 per share (4)

   $611,800,000    $65,462.60

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

 

(2) The proposed maximum offering price of each security will be determined by the registrant in connection with, and at the time of, the issuance of the securities.

 

(3) Previously paid $94,160 by wire transfer on April 22, 2005.

 

(4) Includes shares of common stock that the underwriters have the option to purchase to cover over-allotments, if any.

 


 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We and the selling shareholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 2, 2006

 

19,000,000 Shares

 

LOGO

 

HEXION SPECIALTY CHEMICALS, INC.

 

Common Stock

 


 

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $25.00 and $28.00. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “HXN.”

 

We are selling 3,773,585 shares of common stock, and Hexion LLC, our parent (the “selling shareholder”), is selling 15,226,415 shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling shareholder. We intend to use all of the net proceeds from the sale of common stock being sold by us together with available cash to repay certain indebtedness.

 

The underwriters have an option to purchase a maximum of 2,850,000 additional shares of common stock from the selling shareholder to cover over-allotments of shares of common stock.

 

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 19.

 

       Price to
Public


     Underwriting
Discounts and
Commissions


    

Proceeds to

Hexion Specialty
Chemicals, Inc.


     Proceeds to
Selling
Shareholder


Per Share

     $      $      $      $

Total

     $              $              $              $        

 

Delivery of the shares of common stock will be made on or about                     , 2006.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Credit Suisse           Goldman, Sachs & Co.
JPMorgan           Lehman Brothers

 


Bear, Stearns & Co. Inc.

Citigroup

Deutsche Bank Securities

Morgan Stanley

UBS Investment Bank

William Blair & Company

KeyBanc Capital Markets

 

 

The date of this prospectus is                     , 2006.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

   1

RISK FACTORS

   19

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

   36

USE OF PROCEEDS

   38

DIVIDEND POLICY

   39

CAPITALIZATION

   40

DILUTION

   41

UNAUDITED PRO FORMA FINANCIAL INFORMATION

   43

SELECTED HISTORICAL FINANCIAL AND OTHER INFORMATION

   53

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   56

BUSINESS

   89

MANAGEMENT

   111

PRINCIPAL AND SELLING SHAREHOLDERS

   127

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   130

DESCRIPTION OF CERTAIN INDEBTEDNESS

   140

DESCRIPTION OF CAPITAL STOCK

   149

SHARES ELIGIBLE FOR FUTURE SALE

   154

MATERIAL U.S. FEDERAL TAX CONSEQUENCES

   156

UNDERWRITING

   159

LEGAL MATTERS

   167

EXPERTS

   167

WHERE YOU CAN FIND MORE INFORMATION

   168

INDEX TO FINANCIAL STATEMENTS

   F-1

 


 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 


 

 

Dealer Prospectus Delivery Obligation

 

Until                    , 2006 (25 days after commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligations to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.

 

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Market, Industry and Financial Data

 

This prospectus includes industry data that we obtained from periodic industry publications and internal company surveys. This prospectus includes market share and industry data that we prepared primarily based on management’s knowledge of the industry and industry data. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable.

 

Unless otherwise noted, statements as to our market share and market position relative to our competitors are approximated and based on management estimates using the above-mentioned latest-available third-party data and internal analysis and estimates. The global thermoset resins market is approximately $34 billion in annual sales. We based our market estimates on the $19 billion market for the product areas of the global thermoset resins market upon which we focus.

 

We determined our market share and market positions utilizing periodic industry publications. If we were unable to obtain relevant periodic industry publications, we based our estimates on our knowledge of the size of our markets, our sales in each of these markets and publicly available information regarding our competitors, as well as internal estimates of competitors’ sales based on discussion with our sales force and other industry participants.

 

Except as may otherwise be noted in this prospectus, all financial and other data for the year ended December 31, 2005 and the three months ended March 31, 2005 and 2006 presented herein give pro forma effect to the Hexion Formation, the Hexion Refinancings and the offering (each, as defined in “Prospectus Summary—Hexion Specialty Chemicals, Inc.—The Prior Transactions, the Hexion Formation and the Hexion Refinancings”), including the application of the net proceeds to the Company therefrom, as if they each had occurred on January 1, 2005, and all financial and other data as of March 31, 2006 presented herein give pro forma effect to the Hexion Refinancings and the offering, including the application of the net proceeds to the Company therefrom, as if they each had occurred on March 31, 2006 (with the financial and other data as of March 31, 2006 already reflecting the Hexion Formation, the Rhodia Acquisition, the Rohm and Haas Acquisition and the Brazilian Consumer Divestiture (each as defined in “Prospectus Summary—Recent Acquisitions and Divestiture”)). Except as may otherwise be noted in this prospectus, all financial and other data for the year ended December 31, 2005 and the three months ended March 31, 2005 does not give effect to the Akzo Acquisition, the Rhodia Acquisition, the Rohm and Haas Acquisition or the Brazilian Consumer Divestiture. Except as may otherwise be noted in this prospectus, all financial and other data for the three months ended and as of March 31, 2006 gives effect to the Rhodia Acquisition and the Rohm and Haas Acquisition from the respective dates of acquisition, but does not give effect to the Akzo Acquisition which was completed during the second quarter.

 

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PROSPECTUS SUMMARY

 

This summary highlights information about Hexion Specialty Chemicals, Inc. and the offering contained elsewhere in this prospectus. It is not complete and may not contain all the information that may be important to you. You should carefully read the entire prospectus before making an investment decision, especially the information presented under the heading “Risk Factors.” In this prospectus, except as otherwise indicated herein, or as the context may otherwise require (i) all references to “Borden Chemical” refer to Borden Chemical, Inc. and its subsidiaries prior to the Hexion Formation (as defined in “—Hexion Specialty Chemicals, Inc.—The Prior Transactions, the Hexion Formation and the Hexion Refinancings”), (ii) all references to “Resolution Performance” refer to Resolution Performance Products Inc. and its subsidiaries prior to the Hexion Formation, provided that with respect to financial data, all references to “Resolution Performance” refer to Resolution Performance Products LLC, a former wholly-owned operating subsidiary of Resolution Performance Products Inc., and its subsidiaries, (iii) all references to “Resolution Specialty” refer to Resolution Specialty Materials Inc. and its subsidiaries prior to the Hexion Formation and (iv) all references to “Bakelite” refer to Bakelite Aktiengesellschaft and its subsidiaries prior to the Bakelite Transaction.

 

Hexion Specialty Chemicals, Inc.

 

Overview

 

We are the world’s largest producer of thermosetting resins, or thermosets. Thermosets are a critical ingredient for virtually all paints, coatings, glues and other adhesives produced for consumer or industrial uses. We are focused on providing a broad array of thermosets and associated technologies, with leading market positions in all key markets served. Our breadth of related products provides us with significant advantages across our operations, technologies and commercial organizations, while our scale provides us with significant efficiencies in our fixed and variable cost structure, allowing us to compete effectively throughout the value chain. In areas where it is advantageous, we are able to internally produce strategic raw materials, providing us with a lower cost operating structure and security of supply. Our value-added, technical service-oriented business model enables us to effectively participate in high-end specialty markets, while our scale enables us to extract value from higher volume applications.

 

Thermosets are developed to meet the performance characteristics required for each specific end use product. The type of thermoset used and how it is formulated, applied and cured determines the key attributes, such as durability, gloss, heat resistance, adhesion or strength of the final product. Hexion has the broadest range of thermoset resin technologies, with world class research, applications development and technical service capabilities. The total global thermoset resins market is approximately $34 billion in annual sales and includes products such as polyurethanes, urea-formaldehyde, phenol-formaldehyde, unsaturated polyesters, epoxies and melamine-formaldehyde. The key product areas of the global thermoset resins market upon which we focus and in which we have leading market positions is approximately $19 billion in annual sales, which excludes polyurethanes, unsaturated polyesters and furans/other.

 

Our products are used in thousands of applications and are sold into diverse markets, such as forest products, architectural and industrial paints, packaging, consumer products and automotive coatings, as well as higher growth markets, such as composites, UV cured coatings and electrical laminates. As of March 31, 2006, we had 94 production sites globally, and produce many of our key products locally in North America, Latin America, Europe and Asia. Through our worldwide network of strategically located production facilities, we serve more than 10,000 customers in over 100 countries. Our global customers include leading companies in their respective industries, such as 3M, Ainsworth, Ashland Inc., BASF, Bayer, DuPont, GE, Halliburton, Honeywell, Huntsman, Louisiana- Pacific, Owens Corning, PPG Industries, Sumitomo, Sun Chemical, Valspar and Weyerhaeuser.

 

Hexion was formed on May 31, 2005 through the combination of Borden Chemical (including Bakelite), Resolution Performance and Resolution Specialty. We believe the consolidation of these entities will provide us

 

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with significant opportunities for growth through global product line management, as well as considerable opportunities to increase operational efficiencies, reduce fixed costs, optimize manufacturing assets and improve the efficiency of capital spending. In 2005 and for the three months ended March 31, 2006, on a pro forma basis, we generated pro forma net sales of $4.7 billion and $1.2 billion, respectively. In 2005, 58% of our pro forma net sales were derived from sales to North America, 32% to Western Europe and 10% to Asia-Pacific, Latin America, Eastern Europe and other emerging markets. As of March 31, 2006, after giving pro forma effect to the Hexion Refinancings and the offering, we would have had $2.7 billion principal amount of outstanding indebtedness and $0.1 billion of cash and equivalents.

 

Our Business

 

Our organizational structure is based on the products we offer and the markets we serve and at March 31, 2006 consisted of four operating divisions that are directly aligned with our reportable segments: Epoxy and Phenolic Resins, Formaldehyde and Forest Products Resins, Coatings and Inks, and Performance Products. The thermosets produced in each of our operating divisions and segments are used in two primary applications: adhesive & structural and coating. The table below illustrates our pro forma net sales to external customers for the year ended December 31, 2005 segregated by our two primary applications as well as the major product lines, major industry sectors, major end-use markets and key differentiating characteristics relative to each primary application.

 

   

Adhesive & Structural


 

Coating


2005 Pro Forma Net Sales

  $3.4 billion   $1.3 billion

Major Products

 

•   Formaldehyde based resins and intermediates

•   Epoxy resins and intermediates

•   Composite resins

•   Phenolic encapsulated substrates

•   Molding compounds

 

•   Epoxy coating resins

•   Polyester resins

•   Alkyd resins

•   Acrylic resins

•   Ink resins and additives

•   Versatic acids and derivatives

Major Industry Sectors Served

 

•   Wood products and furniture

•   Transportation and industrial

•   Electrical equipment and appliances

•   Electronic products

•   Oil and gas field support

•   Marine and recreational (boats, RVs)

•   Chemical manufacturing

 

•   Home building and maintenance

•   Transportation and industrial

•   Electrical equipment and appliances

•   Furniture

•   Printing

•   Chemical manufacturing

Major End-Use Markets

 

•   Plywood, particleboard, OSB, MDF

•   Carbon and glass fiber composites

•   Automotive friction materials

•   Furniture

•   Construction

•   Electrical laminates

•   Foundry

•   Oil and gas field proppants

 

•   Decorative paints

•   Auto coatings

•   Marine and industrial coatings

•   Construction and maintenance coatings

•   Printing inks

•   Specialty coatings

Key Characteristics of Resins

 

•   Strength

•   Adhesion

•   Resistance (heat, water, electricity)

 

•   Durability

•   Gloss and color retention

•   Resistance (water, UV, corrosion, temperature)

•   Strength

 

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Adhesive & Structural Products and Market Applications

 

We are a leading global supplier of thermosets used in adhesive and structural applications. These products are used in a variety of end-markets including residential, commercial and industrial construction and repair/remodeling, furniture manufacture, automotive, oil and gas, chemicals and electronics. In 2005, sales of products used in adhesive & structural applications contributed approximately $3.4 billion to our total pro forma net sales. Our key products serving adhesive & structural applications include:

 

    Formaldehyde Based Resins and Intermediates. We are the leading producer of formaldehyde based resins for the forest products industry in North America with a 44% market share by volume and also hold significant positions in Europe, Latin America and Australia. Our products are used in a wide range of applications in the construction, automotive, electronics, oil drilling and steel industries. We are also the world’s largest producer of specialty phenolic resins and formaldehyde. We internally consume the majority of our formaldehyde production, giving us a significant competitive advantage.

 

    Epoxy Resins and Intermediates. We are the world’s largest supplier of epoxy resins. Epoxy resins comprise the fundamental building blocks of many types of materials, such as formulated composite resins and structural adhesives and are often used in the auto, aerospace and electronics industries due to their unparalleled strength and durability. We also provide complementary products such as epoxy modifiers, curing agents, reactive diluents and specialty liquids.

 

    Composite Resins. We are a leading producer of resins used in composites. Composites are a fast growing class of materials which are used in a wide variety of applications ranging from airframes and windmill blades to golf clubs. We supply epoxy resins to fabricators in the aerospace, sporting goods and pipe markets with a 50% market share in the United States and a 44% market share in Europe. In addition to epoxy, we manufacture resins from unsaturated polyester (UPR), which are generally combined with fiberglass for applications ranging from boat hulls to bathroom fixtures.

 

    Phenolic Encapsulated Substrates. We are a leading producer of phenolic encapsulated sand and ceramic substrates used in oil field services and foundry applications. Our highly specialized compounds are designed to perform under extreme conditions, such as intense heat, high-stress and corrosive environments. In the oil field services industry we have a 45% global market share in resin encapsulated proppants, which are used to enhance oil and gas recovery rates and extend well life. We are also the leading producer by volume of foundry resins in North America with a 48% market share. Our foundry resin systems are used by major automotive and industrial companies for precision casting.

 

    Molding Compounds. We are the leading producer of molding compounds in Europe, with an estimated market share of 64%. We formulate and produce a wide range of phenolic, polyester and epoxy compounds used to manufacture components requiring heat stability, electrical insulation, fire resistance and durability.

 

Coating Products and Market Applications

 

We are also a leading global supplier of resins used in surface coating applications. Our coating products are used by customers in a variety of end-markets including architectural coatings, civil engineering, electronics, automotive and a wide variety of applications in the industrial and consumer markets. In 2005, sales of products used in coating applications contributed approximately $1.3 billion to our total pro forma net sales. Our key products serving coating applications include:

 

    Epoxy Coating Resins. In addition to the adhesive uses mentioned previously, epoxy resins are used for a variety of high-end coating applications which require the superior strength and durability of epoxy. Examples include protective coating for industrial and domestic flooring, pipe, marine and construction applications, powder coatings and automotive coatings.

 

   

Polyester Resins. We are a leading supplier of polyester coatings resins in North America with a market share of 10% and are also a major producer in Europe with a powder coatings market share of 10%. We

 

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provide custom polyester resins, both liquid and powder, to customers for use in industrial coatings requiring specific properties such as gloss and color retention, resistance to corrosion and flexibility. Polyester coatings are typically used in transportation, automotive, machinery, appliances and metal office furniture.

 

    Alkyd Resins. We share the leading position in alkyd resins in North America with a market share of 31% and are a major producer in Europe, specifically in Scandinavia and Italy. We provide alkyd resins to customers for use in the manufacture of professional grade paints and coatings. Our alkyd resins business shares an integrated production platform with our polyester resins business, which allows for flexible sourcing, plant balancing and economies of scale.

 

    Acrylic Resins. We are a supplier of acrylic resins (solvent and water-based) in North America and Europe. Acrylic resins are used for interior trim paints and exterior applications where weathering protection, color and gloss retention are critical. In addition, we produce a wide range of specialty acrylic resins for marine and maintenance paints and automotive topcoats. We are also a low cost producer of acrylic monomer, the key raw material for our acrylic resins. This ability to produce key raw materials gives us a competitive cost advantage relative to our competitors and ensures adequacy of supply.

 

    Ink Resins and Additives. We are the world’s largest producer of ink resins and associated products with a market share of 15%. Ink resins are used to apply ink to a variety of different substrates including paper, cardboard, metal foil and plastic. We are also a provider of formulated UV-cure coatings and inks. Our proprietary technology has enabled us to gain a leading position in the global fiber optic market.

 

    Versatic Acids and Derivatives. We are the world’s largest producer of versatic acids and derivatives, with a market share of 76%. Versatic acids and derivatives are specialty monomers which provide significant performance advantages to finished coatings, including superior adhesion, flexibility, ease of application and other high performance characteristics. Applications for versatic acids and derivatives include decorative, automotive and protective coatings as well as other uses, such as pharmaceuticals and personal care products.

 

Competitive Strengths

 

We are one of the leading specialty chemical companies in the world based on the following competitive strengths:

 

World’s Largest Thermoset Resins Producer. We are the world’s largest producer of thermoset resins with leading positions across various end-markets and geographies. Our global scale and breadth of product line provide us with significant advantages over many of our competitors. We are first or second in market position by volume in our key product areas, which collectively represent more than 75% of our pro forma 2005 net sales.

 

Unique Selling Proposition. The majority of our customers require solutions that are tailored to their individual production needs and require a high degree of technical service and customized product formulations. Our diverse thermoset product offering allows us to leverage related technologies across geographies, customers and end-markets in order to provide a broad range of product and technical service solutions. As a result, we have cultivated stable, longstanding customer relationships.

 

Global Infrastructure. We believe our global scope and our ability to internally produce key raw materials give us an advantage compared with many of our smaller competitors. We believe that we are well positioned in higher growth regions and will continue to grow internationally.

 

Low Cost Position. Our low cost manufacturing position is the result of our 94 production sites strategically located throughout the world and our selectively integrated supply position in critical intermediate materials. Our ability to internally produce key raw materials provides us a significant cost advantage over our competitors. Furthermore, our large market position and scale in each of our key product markets provides us with significant purchasing and manufacturing efficiencies.

 

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Well Positioned in Diverse End-Markets and Higher Growth Sectors. We have a diversified revenue and customer base in a variety of end-markets and geographies. Our products are used in a broad range of applications and are sold into stable markets, as well as higher growth markets.

 

Strong Free Cash Flow. We expect to generate strong free cash flow (cash flow from operating activities less anticipated capital expenditures) due to our size and position within the thermoset resins industry, and the industry leading cost structure we have in place. Additionally, we expect to realize significant synergies from the Hexion Formation which should further improve free cash flow.

 

Strong Management Team. We believe that we have a world-class management team led by Craig O. Morrison, our President and Chief Executive Officer, and William H. Carter, our Chief Financial Officer. Marvin O. Schlanger, former Chief Executive Officer of Arco Chemical and Resolution Performance, is our Vice Chairman. Our management team has demonstrated expertise in growing our businesses organically, integrating acquisitions and executing on significant cost cutting programs.

 

Strategy

 

We are focused on augmenting our growth, as well as increasing shareholder value, return on investment, cash flows and profitability. We believe we can achieve these related goals through the following strategies:

 

Utilize Our Integrated Platform Across Product Offerings. As the world’s largest producer of thermoset resins, we have an opportunity to provide our customers with a broad range of resins products on a global basis. We believe this provides us the opportunity to become a global, comprehensive solutions provider to our customers rather than simply offering a particular product, selling in a single geography or competing on price.

 

Develop and Market New Products. We will continue to expand our product offerings through internal innovation, joint research and development initiatives with our customers and research partnership formations. In 2005, on a pro forma basis, we incurred approximately $67 million in research and development expenses, which represented approximately 1.4% of our pro forma net sales during that period.

 

Expand Our Global Reach In Faster Growing Regions. We are focused on growing our business in the Asia-Pacific, Eastern Europe and Latin American markets, where the usage of our products is increasing. Furthermore, by combining sales and distribution infrastructures, we expect to accelerate the penetration of our high-end, value-added products into new markets.

 

Increase Margins Through Focus on Operational Excellence. We believe that through the combination of four stand-alone global resin companies, there will be opportunities to extract substantial cost savings in the near future. Management is currently targeting $250 million in synergies from the Hexion Formation, of which $125 million of net cost savings have been specifically identified. Management has developed detailed implementation plans to achieve the $125 million of cost savings. We achieved cost savings of $20 million in 2005 and $11 million in the first quarter of 2006. We expect that approximately 60% of the $125 million near term cost savings will be achieved by the end of 2006 with the remainder expected to be achieved in the following year. Through March 31, 2006, we have incurred one-time costs of approximately $13 million in connection with implementing these synergies and we expect to incur additional one-time costs of $62 million through 2007. Management has specifically identified a number of areas for savings and is actively pursuing key components of this strategy.

 

Pursue Targeted Add-On Acquisitions and Joint Ventures. The global thermoset resin industry is highly fragmented and is comprised of numerous small and mid-sized specialty companies focusing on niche markets, as well as small non-core divisions of large chemical conglomerates. As the largest company focused primarily on the thermoset resins space, we have a significant advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core strengths, expand our product, technology and geographic portfolio, and better serve our customers. We believe we can consummate a number of these acquisitions at relatively low valuations due to the scalability of our existing global operations.

 

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Risk Factors

 

Despite our competitive strengths discussed elsewhere in this prospectus, investing in our stock involves substantial risk. In addition, our ability to execute our strategy is subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Before you invest in our stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors.”

 

The Prior Transactions, the Hexion Formation and the Hexion Refinancings

 

The Hexion Refinancings. In May 2006, we amended and restated our senior secured credit facilities. We refer to these senior secured credit facilities as the “new senior secured credit facilities” in this prospectus. Our new senior secured credit facilities are described under the heading “Description of Certain Indebtedness—First-Priority Lien Obligations—New Senior Secured Credit Facilities.” Upon entering into these new senior secured credit facilities, we repaid all amounts outstanding under our May 2005 term loan and synthetic letter of credit facilities. In addition, we made tender offers to repurchase all of our outstanding 8% Senior Secured Notes, 9½% Senior Second Secured Notes and 13½% Senior Subordinated Notes. As of the expiration of the tender offers on May 17, 2006, we accepted tenders from holders of 100% of the outstanding principal amount of the 8% Senior Secured Notes, 99.9% of the outstanding principal amount of the 9 1/2% Senior Second Secured Notes and 89.0% of the outstanding principal amount of the 13 1/2% Senior Subordinated Notes. On May 18, 2006, we called for the redemption of all of our outstanding 9 1/2% Senior Second Secured Notes and 13 1/2% Senior Subordinated Notes, which we intend to redeem on June 18, 2006 with available cash. We do not expect to incur any material additional costs in connection with any such redemptions. In connection with the tender offers, we received the required consents with respect to each series of notes to eliminate substantially all of the restrictive covenants and certain events of default included in the indentures under which such notes were issued. On May 10, 2006, we entered into interest rate swap arrangements of $1 billion, which we refer to as the “swap.” The swap is a three-year arrangement designed to offset cash flow variability associated with interest rate fluctuations on our variable rate debt. The initial aggregate notional amount of the swap is $1 billion, which amortizes on a quarterly basis based on expected payments on our term loan in order to maintain a fixed to variable debt ratio of approximately 70% fixed to 30% variable. On May 12, 2006, we redeemed all of our outstanding Series A Preferred Stock with the proceeds of borrowings under our new senior secured credit facilities. We refer to the swap, the refinancing and the repurchases and redemptions of notes and preferred stock as the “Hexion Refinancings.”

 

The Combinations. On May 31, 2005, Resolution Performance and Resolution Specialty were combined with and into Borden Chemical (the “Combinations”), all of which were controlled by Apollo Management, L.P. and its affiliates (“Apollo”). As of December 31, 2004, Apollo and its affiliated funds held approximately 98%, 72% and 95% of the then outstanding capital stock of Borden Chemical, Resolution Performance and Resolution Specialty, respectively. In connection with the Combinations, the minority interests in Resolution Performance and Resolution Specialty were eliminated. Upon the consummation of the Combinations, Borden Chemical changed its name to Hexion Specialty Chemicals, Inc. and BHI Acquisition LLC, Borden Chemical’s parent, changed its name to Hexion LLC. Immediately following completion of this offering, Apollo, through Hexion LLC, will hold approximately 70.5% of the outstanding common stock of Hexion.

 

The Borden Transaction. On August 12, 2004, an affiliate of Apollo acquired all of the outstanding capital stock of Borden Chemical (the “Borden Acquisition”). The Borden Acquisition, the related offering of second-priority senior secured floating rate notes (the “Original Floating Rate Notes”) and 9% second-priority senior secured notes (the “Fixed Rate Notes”) and the related transactions are collectively referred to in this prospectus as the “Borden Transaction.”

 

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The Resolution Performance Transaction. On November 14, 2000, an affiliate of Apollo acquired control of Resolution Performance in a recapitalization transaction (the “Resolution Performance Transaction”). Prior to the recapitalization, Resolution Performance was a wholly owned subsidiary of the Royal Dutch/Shell Group of Companies (“Shell”).

 

The Resolution Specialty Transaction. On August 2, 2004, Resolution Specialty, an affiliate of Apollo, acquired the resins, inks and monomers division (the “Resolution Specialty Acquisition”) of Eastman Chemical Company (“Eastman”). The Resolution Specialty Acquisition and the related transactions are collectively referred to in this prospectus as the “Resolution Specialty Transaction.”

 

The Bakelite Transaction. On April 29, 2005, a subsidiary of Borden Chemical acquired Bakelite (the “Bakelite Acquisition”). Upon the consummation of the Bakelite Acquisition, Bakelite became an indirect, wholly-owned subsidiary of Hexion Specialty Chemicals Canada, Inc. (“Hexion Canada”). The Bakelite Acquisition was financed through a combination of available cash and borrowings under a bridge loan facility, which was refinanced with the proceeds of our second-priority senior secured floating rate notes issued on May 20, 2005 (the “New Floating Rate Notes”) and borrowings under our May 2005 senior secured credit facilities (collectively, the “Bakelite Financing”). The Bakelite Acquisition, the repayment or assumption of certain of Bakelite’s debt in connection therewith and the Bakelite Financing are collectively referred to in this prospectus as the “Bakelite Transaction.”

 

We refer to the Borden Transaction, the Resolution Performance Transaction and the Resolution Specialty Transaction collectively as the “Prior Transactions.” We refer to the borrowings under our May 2005 senior secured credit facilities, the issuance of our Series A Preferred Stock and the application of the net proceeds therefrom to repay then-existing debt and pay a dividend on our common stock in May 2005 as described elsewhere in this prospectus, collectively, as the “Hexion Financings.” We refer to the Original Floating Rate Notes, the Fixed Rate Notes and the New Floating Rate Notes as the “Second-Priority Senior Secured Notes.” We refer to the offering of our common stock pursuant to this prospectus as “the offering.” We refer to the Combinations, the Hexion Financings and the Bakelite Transaction as the “Hexion Formation.” We refer to the Prior Transactions, the Hexion Formation, the Hexion Refinancings and the offering, including the application of the net proceeds to the Company therefrom, as the “Transactions.”

 

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Ownership Structure

 

The chart below illustrates our beneficial ownership structure after giving effect to the Transactions. Our ownership is presented on a fully-diluted basis.

 

LOGO

 

We are a New Jersey corporation, with predecessors dating back to 1899. Our principal executive offices are located at 180 East Broad Street, Columbus, Ohio 43215. Our telephone number is (614) 225-4000. We maintain a website at www.hexion.com where general information about our business is available. The information contained on our website is not a part of this prospectus.

 

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Recent Acquisitions and Divestiture

 

Acquisition of the Global Ink and Adhesive Resins Business of Akzo Nobel

 

On June 1, 2006, we acquired the global ink and adhesive resins business of Akzo Nobel (the “Akzo Acquisition”). The business produces resins used to manufacture inks for commercial printing and packaging, digital inks for laser and photocopying printing, and pressure sensitive adhesives used in tape and labeling applications. The business generated 2005 sales of approximately $215 million, and includes 10 manufacturing facilities in Europe, North America, Argentina, Asia and New Zealand. The acquisition was funded through a combination of available cash and existing credit lines.

 

Acquisition of Decorative Coatings and Adhesives Business Unit of The Rhodia Group

 

On January 31, 2006, we acquired the decorative coatings and adhesives business unit of The Rhodia Group (the “Rhodia Acquisition”). The business generated 2005 sales of approximately $200 million, with 8 manufacturing facilities in Europe, Australia and Thailand. The acquisition was funded through a combination of available cash and existing credit lines.

 

Acquisition of Global Wax Compounds Business of Rohm and Haas

 

On March 1, 2006, we acquired the global wax compounds business of Rohm and Haas (the “Rohm and Haas Acquisition”). The business generated 2005 sales of approximately $10 million. The purchase included Rohm and Haas’ wax compounds technology and product lines, manufacturing equipment and other business assets. The acquisition was funded through available cash.

 

Divestiture of Alba Adesivos

 

On March 31, 2006, we sold Alba, Adesivos Industria e Comercio Ltda. (“Alba Adesivos”), a consumer adhesives company based in Boituva, Brazil, to the Henkel Group (the “Brazilian Consumer Divestiture”). Alba Adesivos is a producer of branded consumer and professional grade adhesives. The company generated 2005 sales of $38 million and has approximately 140 employees. The purchase price was paid in cash.

 

The aggregate purchase price for these three acquisitions, net of proceeds from the divestiture, was approximately $117 million.

 

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The Offering

 

Common stock offered by us

3,773,585 shares

 

Common stock offered by the selling shareholder

15,226,415 shares

 

Common stock to be outstanding after this offering

86,330,432 shares(a)

 

Use of Proceeds

We estimate that we will receive proceeds from our offering of our common stock, after deducting underwriting discounts and other expenses, of approximately $87 million, assuming the shares are offered at $26.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. We intend to use all of the net proceeds from the sale of the shares of our common stock being sold by us together with available cash to repay $100 million of our term loan under our new senior secured credit facilities. For sensitivity analysis as to the offering price and other information, see “Use of Proceeds” and “Dividend Policy.”

 

 

We will not receive any proceeds from the sale of our common stock by the selling shareholder, including if the underwriters exercise their option to purchase additional shares. In the aggregate, the selling shareholder will receive approximately $383 million of the net proceeds of this offering, or approximately $455 million if the underwriters’ option to purchase additional shares is exercised in full, assuming the shares are offered at $26.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. See “Use of Proceeds” and “Underwriting.”

 

Dividend Policy

We do not currently intend to pay any cash dividends on our common stock. See “Dividend Policy” and “Description of Capital Stock—Common Stock.”

 

Listing

Our common stock has been approved for listing on the New York Stock Exchange under the symbol “HXN.”

 

All information in this prospectus, unless otherwise indicated or the context otherwise requires:

 

    gives effect to a 0.853-for-1 reverse stock split of our common stock; and

 

    does not give effect to the issuance of the following:

 

(1) 4,105,148 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2006, at a weighted average exercise price of approximately $6.39 per share (split adjusted and giving effect to the assumption of the applicable option plans from Hexion LLC by the Company prior to the consummation of the offering); or

 

(2) 14,000,000 shares of common stock which may be issued upon the exercise of options reserved for future grant.


(a) Includes 954,378 shares related to deferred compensation units.

 

 

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Summary Historical and Pro Forma Financial and Other Data

 

The combination of Borden Chemical, Resolution Performance and Resolution Specialty has been treated, for accounting purposes, as a combination of entities under common control due to Apollo’s controlling interest in each of the companies. The audited consolidated financial statements presented herein reflect the results of operations of each company from the date such company was acquired by Apollo.

 

The following table summarizes certain historical and pro forma financial and other data for Hexion. The summary historical and pro forma financial and other data for Hexion as of December 31, 2004 and 2005, and for the years ended December 31, 2003, 2004 and 2005 have been derived from the audited consolidated financial statements of Hexion, included elsewhere in this prospectus. The summary historical and pro forma financial and other data for Hexion as of and for the three months ended March 31, 2005 and 2006 have been derived from the unaudited consolidated financial statements of Hexion, included elsewhere in this prospectus, and include all adjustments that management considers necessary for a fair presentation of our financial position and results of operations as of the date and for the period indicated. Results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the entire year. The summary historical financial data of Hexion for the years ended December 31, 2003, 2004 and 2005 and the three months ended March 31, 2005 include:

 

    the results of operations of Resolution Performance for the years ended December 31, 2003, 2004 and 2005 and the three months ended March 31, 2005, which reflect purchase accounting adjustments from the date of acquisition of Resolution Performance by Apollo on November 14, 2000;

 

    the results of operations of Borden Chemical for the period from August 12, 2004 to December 31, 2004, the year ended December 31, 2005 and the three months ended March 31, 2005, on a historical basis (because Borden Chemical is a public reporting registrant as a result of public debt that was outstanding prior to the Borden Transaction and which debt remains outstanding, Borden Chemical has elected to present its financial statements from the date of its acquisition by Apollo on the historical basis of accounting permitted under the SEC’s public debt exemptions);

 

    the results of operations of Resolution Specialty for the period from August 2, 2004 to December 31, 2004, the year ended December 31, 2005 and the three months ended March 31, 2005, which reflect purchase accounting adjustments from the date of acquisition of Resolution Specialty by Apollo on August 2, 2004; and

 

    the results of operations of Bakelite for the period from April 30, 2005 to December 31, 2005, which reflect purchase accounting adjustments from the date of the acquisition of Bakelite on April 29, 2005.

 

The financial data for Hexion for the three months ended March 31, 2006 includes the results of the Rhodia Acquisition and Rohm and Haas Acquisition since January 31, 2006 and March 1, 2006, the respective dates of acquisition.

 

Accordingly, the results of operations of Hexion for periods prior to the Borden Acquisition, the Resolution Specialty Acquisition and the Bakelite Acquisition are not comparable to results for subsequent periods.

 

The summary unaudited pro forma financial data of Hexion gives effect, in the manner described under “Unaudited Pro Forma Financial Information,” to the Hexion Formation, the Hexion Refinancings and the offering, including the application of the net proceeds to the Company therefrom. Our unaudited pro forma balance sheet as of March 31, 2006, which already reflects the Prior Transactions, the Hexion Formation, the Rhodia Acquisition, the Rohm and Haas Acquisition and the Brazilian Consumer Divestiture, gives pro forma effect to the Hexion Refinancings and the offering, including the application of the net proceeds to the Company therefrom, as if they

 

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had occurred on such date but does not give effect to the Akzo Acquisition which is not considered significant under the provisions of Article 11-01(b) of Regulation S-X. Our unaudited pro forma statements of operations for the year ended December 31, 2005 and the three months ended March 31, 2005 give pro forma effect to the Hexion Formation, the Hexion Refinancings and the offering and our unaudited pro forma statement of operations for the three months ended March 31, 2006 gives pro forma effect to the Hexion Refinancings and the offering, including the application of the net proceeds to the Company therefrom, as if they had each occurred on January 1, 2005, as described under “Unaudited Pro Forma Financial Information”, but does not give effect to the Akzo Acquisition, the Rhodia Acquisition, the Rohm and Haas Acquisition and the Brazilian Consumer Divestiture which are not considered significant under the provisions of Article 11-01(b) of Regulation S-X. We have included pro forma data related to EBITDA and transaction costs, impairments and unusual items included in EBITDA for the last twelve months ended March 31, 2006 (the “LTM Period”) as we are required to measure compliance with the financial covenants in certain of our indentures based on Adjusted EBITDA for the most recent four quarter period.

 

The pro forma adjustments relating to the Bakelite Transaction and the minority interest acquisitions of Resolution Performance and Resolution Specialty as part of the Combinations are based on preliminary estimates of the fair value of the consideration provided, estimates of the fair values of assets acquired and liabilities assumed and available information and assumptions. The final determination of fair value could result in changes to the pro forma adjustments and the pro forma data included herein.

 

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The unaudited pro forma financial data for the year ended December 31, 2005, for the three months ended March 31, 2005 and 2006 and as of March 31, 2006 and for the LTM Period is presented for informational purposes only, and does not purport to represent what our results of operations would actually have been if the transactions had occurred on the dates indicated, nor does it purport to project our results of operations or financial condition that we may achieve in the future.

 

You should read this summary historical and pro forma financial and other data in conjunction with “Selected Historical Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Financial Information,” together with all of the financial statements and related notes included elsewhere in this prospectus.

 

    Historical

    Pro Forma

 
   

Year Ended

December 31,


    Three Months
Ended March 31,


   

Year Ended
December 31,

2005


   

Three Months
Ended

March 31,


 
    2003

    2004

    2005

    2005

    2006

      2005

    2006

 
    (dollars in millions)  

Statement of Operations

                                                               

Net sales (1)

  $ 782     $ 2,019     $ 4,470     $ 1,012     $ 1,245     $ 4,717     $ 1,194     $ 1,245  

Cost of sales

    714       1,785       3,808       863       1,060       4,006       1,017       1,060  
   


 


 


 


 


 


 


 


Gross profit

    68       234       662       149       185       711       177       185  
   


 


 


 


 


 


 


 


Selling, general & administrative expense

    81       163       400       86       101       431       108       101  

Transaction costs

    —         56       44       7       4       44       7       4  

Other operating (income) expense (2)

    10       6       10       (3 )     (30 )     7       (4 )     (31 )
   


 


 


 


 


 


 


 


Operating income (loss)

    (23 )     9       208       59       110       229       66       111  
   


 


 


 


 


 


 


 


Interest expense, net

    77       117       204       45       54       220       55       55  

Write-off of deferred financing fees

    —         —         17       —         —         —         —         —    

Other non-operating expense, net

    —         5       16       9       1       16       9       1  
   


 


 


 


 


 


 


 


Income (loss) from continuing operations before income tax and minority interest

    (100 )     (113 )     (29 )     5       55       (7 )     2       55  

Income tax expense (benefit)

    (37 )     —         48       13       19       60       14       19  
   


 


 


 


 


 


 


 


Income (loss) from continuing operations before minority interest

    (63 )     (113 )     (77 )     (8 )     36       (67 )     (12 )     36  

Earnings for unconsolidated entities, net of taxes

    —         —         2       —         1       2       —         1  

Minority interest in net (income) loss of consolidated subsidiaries

    13       8       (3 )     (2 )     (2 )     (4 )     (1 )     (2 )
   


 


 


 


 


 


 


 


Income (loss) from continuing operations

    (50 )     (105 )     (78 )     (10 )     35       (69 )     (13 )     35  

Loss from discontinued operations

    —         —         9       —         —         —         —         —    
   


 


 


 


 


 


 


 


Net income (loss)

    (50 )     (105 )     (87 )     (10 )     35       (69 )     (13 )     35  

Redeemable preferred stock accretion

    —         —         30       —         13       —         —         —    
   


 


 


 


 


 


 


 


Net income (loss) available to common shareholders

  $ (50 )   $ (105 )   $ (117 )   $ (10 )   $ 22     $ (69 )   $ (13 )   $ 35  
   


 


 


 


 


 


 


 


Cash Flow Data

                                                               

Cash flows (used in) from operating activities

  $ (43 )   $ (32 )   $ 171     $ 24     $ 44       —         —         —    

Cash flows (used in) from investing activities

    7       (20 )     (354 )     (20 )     (42 )     —         —         —    

Cash flows from (used in) financing activities

    80       148       219       3       (16 )     —         —         —    

Depreciation and amortization (3)

    58       86       148       36       38     $ 158     $ 42     $ 38  

Capital expenditures

    18       57       105       13       27       111       17       27  

 

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    Historical

    Pro Forma

 
   

Year Ended

December 31,


    Three Months
Ended
March 31,


    Year Ended
December 31,
2005


  Three Months
Ended
March 31,


    LTM
Period


 
    2003

  2004

    2005

    2005

  2006

      2005

  2006

   
    (dollars in millions)  

Other Financial Data

                                                             

EBITDA (4)

    —       —         —       —       —       $ 369   $ 98   $ 147     $ 418  

Transaction costs and non-cash charges included in EBITDA (5)

    —       —         —       —       —         76     7     10       79  

Unusual items included in EBITDA (6)

    —       —         —       —       —         36     16     (25 )     (5 )

Balance Sheet Data (at end of period)

                                                             

Cash and equivalents

  $ 49   $ 152     $ 183     —     $ 168       —       —     $ 141       —    

Working capital (7)

    177     433       427     —       423       —       —       379       —    

Total assets

    1,191     2,696       3,209     —       3,307       —       —       3,263       —    

Total debt

    683     1,850       2,354     —       2,340       —       —       2,690       —    

Total liabilities and minority interest

    1,039     3,005       3,769     —       3,819       —       —       4,163       —    

Redeemable preferred stock

    —       —         364     —       377       —       —       —         —    

Total common stock and other shareholder’s equity (deficit)

    152     (309 )     (924 )   —       (889 )     —       —       (900 )     —    

(1) Net sales included in the consolidated statement of operations for the year ended December 31, 2004 is comprised of:

 

     Year Ended
December 31, 2004


 
    
     (dollars in millions)  

Resolution Performance—For the year ended December 31, 2004

   $ 996  

Borden—For the period from August 12, 2004 to December 31, 2004

     702  

Resolution Specialty—For the period from August 2, 2004 to December 31, 2004

     325  

Eliminations

     (4 )
    


Total consolidated net sales for the year ended December 31, 2004

   $ 2,019  
    


 

(2) Other operating (income) expense for the three months ended March 31, 2006 (historical and pro forma) includes net gain of $37 recognized primarily on the Brazilian Consumer Divestiture.

 

(3) Depreciation and amortization included in the pro forma statement of operations for the year ended December 31, 2005 and for the three months ended March 31, 2005 and 2006 is comprised of:

 

     Year Ended
December 31, 2005


    Three Months
Ended
March 31,


       2005

    2006

     (dollars in millions)

Hexion—For the year ended December 31, 2005 and for the three months ended March 31, 2005 and 2006

   $ 148     $ 36     $ 38

Bakelite—For the period from January 1, 2005 to April 29, 2005 and for the three months ended March 31, 2005

     11       7       —  

Total pro forma adjustment

     (1 )     (1 )     —  
    


 


 

Total pro forma depreciation and amortization expense for the year ended December 31, 2005 and for the three months ended March 31, 2005 and 2006

   $ 158     $ 42     $ 38
    


 


 

 

(4)

EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization and is used by management as a performance measure for certain performance-based cash bonus plans and measuring triggering events of certain performance-based stock options. We have presented EBITDA on a pro forma basis since management plans on using EBITDA as a benchmark for developing its ongoing performance measures for its cash bonus plans and certain performance-based stock option plans. We believe that pro forma EBITDA is more representative of our performance since it gives the full year effect to the Bakelite Acquisition which was completed in April 2005 whereas historical EBITDA gives effect to our acquisitions only as of the date we acquired such entity. We also believe that EBITDA is useful to investors because it is

 

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frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is not a recognized term under GAAP, should not be viewed in isolation and does not purport to be an alternative to net income (loss) as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. There are material limitations associated with making the adjustments to our earnings to calculate EBITDA and using this non-GAAP financial measure as compared to the most directly comparable U.S. GAAP financial measures. For instance, EBITDA does not include:

 

    interest expense, and because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue;

 

    depreciation and amortization expense, and because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue; and

 

    tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate.

 

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 capital expenditures, contractual commitments, interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly titled measures for other companies. Also the amounts shown for EBITDA as presented herein differ from the amounts calculated under the definition of Adjusted EBITDA used in our debt instruments, which further adjust for certain cash and non-cash charges and is used to determine compliance with financial covenants and our ability to engage in certain activities such as incurring additional debt and making acquisitions.

 

The following table is a reconciliation of pro forma net income (loss) to pro forma EBITDA for Hexion:

 

     Pro Forma

 
    

Year Ended

December 31, 2005


    Three Months Ended
March 31,


  

LTM
Period


 
       2005

    2006

  
     (dollars in millions)  

Pro forma net income (loss)

   $ (69 )   $ (13 )   $ 35    $ (21 )

Pro forma interest expense, net (a)

     220       55       55      220  

Pro forma income tax expense

     60       14       19      65  

Pro forma depreciation and amortization

     158       42       38      154  
    


 


 

  


Pro forma EBITDA

   $ 369     $ 98     $ 147    $ 418  
    


 


 

  



                               
  (a) Includes $7 of amortization of deferred financing fees for the year ended December 31, 2005, and $2 for the three months ended March 31, 2005 and 2006.

 

(5) Transaction costs and non-cash charges for Hexion are further detailed on the following table:

 

     Pro Forma

    

Year Ended

December 31, 2005


   Three Months Ended
March 31,


  

LTM
Period


        2005

   2006

  
     (dollars in millions)

Transaction costs (a)

   $  44    $ 7    $ 4    $ 41

Non-cash charges (b)

     32      —        6      38
    

  

  

  

     $ 76    $ 7    $ 10    $ 79
    

  

  

  


                           
  (a) Represents merger costs principally related to the Hexion Formation and expenses related to terminated acquisition activities.
  (b) Represents impairments of fixed assets of $9 and $4, non-cash stock based compensation of $13 and $2 and unrealized foreign currency exchange losses of $10 and $0 on debt instruments denominated in currencies other than the functional currency of the holder, for the year ended December 31, 2005 and the three months ended March 31, 2006, respectively.

 

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(6) Unusual items that do not relate to the core operations of Hexion are further detailed on the following table:

 

     Pro Forma

 
    

Year Ended

December 31, 2005


   Three Months Ended
March 31,


   

LTM
Period


 
        2005

   2006

   
     (dollars in millions)  

Business realignment expenses (a)

   $ 9    $ 1    $ 3     $ 11  

Other expenses (b)

     27      15      (28 )     (16 )
    

  

  


 


Unusual items

   $  36    $ 16    $ (25 )   $ (5 )
    

  

  


 



                              

 

  (a) Business realignment expenses for the year ended December 31, 2005 included in EBITDA for Hexion relate to the excess of historical costs over current business staffing levels and comprises employee related costs of $4 including (i) historical salaries and benefits of employees terminated in 2005 at Resolution Specialty and Borden Chemical and (ii) the excess cost of employee benefit programs prior to the revision of such plans in 2005. Business realignment expenses include plant closure and non-recurring severance and other one time benefits paid to employees of $5, $1, $3 and $7 for the year ended December 31, 2005, the three months ended March 31, 2005 and 2006 and the LTM period, respectively.

 

  (b) Amounts include the following:

 

    

Year Ended

December 31, 2005


   Three Months Ended
March 31,


   

LTM
Period


 
        2005

    2006

   

Non-recurring litigation expenses

   $ 10    $ 2     $ 1     $ 9  

Foreign currency loss on an exchange rate hedge relating to the Bakelite Acquisition

     11      11       —         —    

Integration costs, transition fees and other non-recurring expenses

     6      4       8       10  

Gain on divestitures of businesses

     —        (2 )     (37 )     (35 )
    

  


 


 


     $  27    $ 15     $ (28 )   $ (16 )
    

  


 


 


 

(7) Working capital is defined as current assets less current liabilities.

 

Senior Secured Credit Facilities

 

In May 2006, we amended and restated our senior secured credit facilities. Our new senior secured credit facilities consist of a seven-year $1,625 term loan facility, a seven-year $50 synthetic letter of credit facility and a five-year $225 revolving credit facility, each subject to an earlier maturity date, under certain circumstances. Upon entering into these new senior secured credit facilities, we repaid all amounts outstanding under our May 2005 term loan and synthetic letter of credit facilities. In addition, we made tender offers to repurchase all of our 8% Senior Secured Notes, 9 1/2% Senior Second Secured Notes and 13 1/2% Senior Subordinated Notes. As of the expiration of the tender offers on May 17, 2006, we accepted tenders from holders of 100% of the outstanding principal amount of the 8% Senior Secured Notes, 99.9% of the outstanding principal amount of the 9 1/2% Senior Second Secured Notes and 89.0% of the outstanding principal amount of the 13 1/2% Senior Subordinated Notes. On May 18, 2006, we called for the redemption of all of our outstanding 9 1/2% Senior Second Secured Notes and 13 1/2% Senior Subordinated Notes, which we intend to redeem on June 18, 2006 with available cash. On May 12, 2006, we redeemed all of our outstanding Series A Preferred Stock with the proceeds of borrowings under our new senior secured credit facilities. As of March 31, 2006, after giving pro forma effect to the Hexion Refinancings and the offering, we would have had $2,690 principal amount of outstanding indebtedness, including amounts outstanding under the new senior secured credit facilities and $141 of cash. See “Description of Certain Indebtedness—First-Priority Lien Obligations—New Senior Secured Credit Facilities.”

 

On May 10, 2006, we entered into interest rate swap arrangements of $1 billion. The swap is a three-year arrangement designed to offset cash flow variability associated with interest rate fluctuations on our variable rate debt. The initial aggregate notional amount of the swap is $1 billion, which amortizes on a quarterly basis based on expected payments on our term loan in order to maintain a fixed to variable debt ratio of approximately 70% fixed to 30% variable.

 

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Covenant Compliance

 

Certain covenants contained in the credit agreement governing our new senior secured credit facilities and the indentures governing the Second-Priority Senior Secured Notes (i) require the maintenance of a senior secured debt to Adjusted EBITDA ratio and (ii) restrict our ability to take certain actions such as incurring additional debt or making certain acquisitions if we are unable to meet defined Adjusted EBITDA to Fixed Charges, senior secured debt to Adjusted EBITDA and consolidated debt to Adjusted EBITDA ratios. The most restrictive of these indenture covenants, the covenants to incur additional indebtedness and the ability to make future acquisitions, require an Adjusted EBITDA to Fixed Charges ratio (measured on a trailing four-quarter basis) of 2.0 to 1.0. Failure to comply with these covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.

 

Fixed Charges are defined as interest expense excluding the amortization or write-off of deferred financing costs. Adjusted EBITDA is defined as EBITDA further adjusted to exclude certain non-cash, non-recurring and realized or expected future cost savings directly related to prior acquisitions and the Combinations. We believe that the inclusion of the supplemental adjustments applied in calculating Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financial covenants and assess our ability to incur additional indebtedness in the future. Adjusted EBITDA and Fixed Charges are not defined terms under GAAP. Adjusted EBITDA should not be considered an alternative to operating income or net income as a measure of operating results or an alternative to cash flows as a measure of liquidity. Fixed Charges should not be considered an alternative to interest expense.

 

See “Description of Certain Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further information on our indebtedness and covenants.

 

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     Pro Forma

 
    

Year Ended

December 31,

2005


  

LTM
Period


 
       
     (dollars in millions)  

Pro Forma EBITDA(1)

   $ 369    $ 418  

Transaction costs and non-cash charges(1)

     76      79  

Unusual items(1)

     36      (5 )

Effect of acquisitions, net of divestiture(2)

     32      32  

In process synergies(3)

     105      94  
    

  


Pro Forma Adjusted EBITDA(4)

   $ 618    $ 618  
    

  


Pro Forma Fixed Charges

   $ 214    $ 214  
    

  


Ratio of Pro Forma Adjusted EBITDA to Fixed Charges

     2.89      2.89  
    

  



  (1) See footnotes (4) - (6) on pages 14-16 for more information on EBITDA, transaction costs and non-cash charges and unusual items.

 

  (2) Amount represents the incremental EBITDA impact for the Akzo Acquisition, the Rhodia Acquisition, the Rohm and Haas Acquisition less the Brazilian Consumer Divestiture as if they had taken place at the beginning of the applicable twelve month period. These acquisitions and the divestiture closed after December 31, 2005 and are included in our calculation of pro forma Adjusted EBITDA as permitted by our indenture covenants.

 

  (3) Represents $125 in estimated net cost savings specifically identified in connection with the Hexion Formation. We achieved cost savings of $20 in 2005 and $11 million in the first quarter of 2006. We expect that approximately 60% of the $125 near term cost savings will be achieved by the end of 2006 with the remainder expected to be achieved in the following year. Through March 31, 2006, we have incurred one-time costs of approximately $13 in connection with implementing these synergies and we expect to incur additional one-time costs of $62 through 2007. These estimated synergies include cost savings from rationalization of manufacturing facilities, removal of duplicative corporate and administrative functions, alignment of benefit plans and raw material purchasing initiatives. The estimated in process synergies by category are as follows:

 

     Year Ended
December 31,
2005


   LTM
Period


       

Rationalization of manufacturing facilities

   $ 29    $ 27

Overhead synergies

     29      25

Raw material savings

     47      42
    

  

     $ 105    $ 94
    

  

  (4) We are required to have an Adjusted EBITDA to Fixed Charges ratio of greater than 2.0 to 1.0 to incur additional indebtedness under certain of our indentures. Based on the calculation for the LTM period, we are able to satisfy this covenant and incur additional indebtedness under our indentures.

 

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RISK FACTORS

 

An investment in our stock involves a high degree of risk. You should carefully consider the following information, together with other information in this prospectus, before buying shares of our stock. If any of the following risks or uncertainties occur, our business, financial condition and results of operations could be materially and adversely affected, the trading price of our stock could decline and you may lose all or a part of the money you paid to buy our stock.

 

Risks Relating to Our Business

 

Borden Chemical, Resolution Performance, Resolution Specialty and Bakelite have a limited history of working together as a single company. Should we fail to integrate the operations of Borden Chemical, Resolution Performance, Resolution Specialty and Bakelite and achieve cost savings and synergies, our results of operations and profitability would be negatively impacted.

 

We may not be successful integrating Borden Chemical, Resolution Performance, Resolution Specialty and Bakelite, and the combined company may not perform as we expect or achieve the net cost savings and synergies we anticipate. A significant element of our business strategy is the improvement of our operating efficiencies and a reduction of our operating costs. Management is currently targeting $250 million in synergies from the Hexion Formation, of which $125 million of net cost savings have been specifically identified. We achieved cost savings of $20 million in 2005 and $11 million in the first quarter of 2006. Through March 31, 2006, we have incurred one-time costs of approximately $13 in connection with implementing these synergies and we expect to incur additional one-time costs of $62 million through 2007. A variety of factors could cause us not to achieve the benefits of the cost savings plan, or could result in harm to our business. For example, certain of our European operations utilize IT systems with limited systems support. In the event we are not able to integrate these systems with our more advanced IT systems, our ability to efficiently operate in certain European countries could be diminished. In addition, the impact of Hurricanes Katrina and Rita on our business (negative cost impact of $27 million in the second half of 2005), along with future hurricanes and natural disasters, may affect our ability to achieve our cost savings plan in the near term. Additional factors include:

 

    delays in the anticipated timing of activities related to our cost savings plan;

 

    higher than expected or unanticipated costs to implement the plan and to operate the business;

 

    inadequate resources to implement the plan and to operate the business;

 

    our inability to optimize manufacturing processes between the companies;

 

    our inability to obtain lower raw material prices;

 

    our inability to utilize new geographic distribution channels;

 

    our inability to reduce corporate and administrative expenses; and

 

    our inability to identify an additional $125 million of cost savings consistent with our synergy target.

 

As a result, we may not achieve our expected cost savings in the time anticipated, or at all. In such case, our results of operations and profitability would be negatively impaired.

 

The Hexion Formation may prove disruptive and could result in the combined business failing to meet our expectations.

 

The continuing process of integrating the operations of Borden Chemical, Resolution Performance, Resolution Specialty and Bakelite may continue to require a disproportionate amount of resources and management attention. Our future operations and cash flows will depend largely upon our ability to operate Hexion efficiently, achieve the strategic operating objectives for our business and realize significant cost savings and synergies. Our management team may encounter unforeseen difficulties in managing the integration of our four businesses. In order to successfully combine and operate our businesses, our management team will need to

 

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continue to focus on realizing anticipated synergies and cost savings on a timely basis while maintaining the efficiency of our operations. Any substantial diversion of management attention or difficulties in operating the combined business could affect our sales and ability to achieve operational, financial and strategic objectives. For example, we expect to devote substantial management attention in order to implement financial reporting and other systems that will permit us to utilize a shared service business model (for certain processes) along with a single company wide management information and accounting system.

 

Our historical and pro forma financial information may not reflect what our actual results of operations and financial condition would have been had we been a combined company for the periods presented and thus these results may not be indicative of our future operating performance.

 

The historical financial information included in this prospectus is constructed from the separate financial statements of Resolution Performance, Borden Chemical and Resolution Specialty for periods prior to the consummation of the Hexion Formation. In addition, Bakelite has historically prepared its financial statements in accordance with German GAAP, which differs in certain respects from US GAAP. The Bakelite financial statement presentation included in this prospectus has been converted from the local GAAP of Bakelite and its subsidiaries to US GAAP. The pro forma financial information presented in this prospectus is based in part on certain assumptions regarding the Hexion Formation that we believe are reasonable. Our assumptions may prove to be inaccurate over time. Accordingly, the historical and pro forma financial information included in this prospectus may not reflect what our results of operations and financial condition would have been had we been a combined entity during the periods presented, or what our results of operations and financial condition will be in the future.

 

Our limited operating history and the challenge of integrating previously independent businesses make evaluating our business and our future financial prospects difficult. Our potential for future business success and operating profitability must be considered in light of the risks, uncertainties, expenses and difficulties typically encountered by recently organized or combined companies.

 

Although EBITDA is derived from the financial statements (pro forma or historical, as the case may be) of Hexion, the calculation of Adjusted EBITDA contains a number of estimates and assumptions that may prove to be incorrect. For example, the synergies assume we can obtain improved raw materials pricing, the determination of legacy corporate expenses, net contains an estimate as to the cost of replacement services and business realignment expenses contains a number of assumptions as to excess costs. Although management of Hexion believes these estimates and assumptions are reasonable and correct and are consistent with the definition of Adjusted EBITDA in our indentures, investors should not place undue reliance upon Adjusted EBITDA as an indicator of current and future performance.

 

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from fulfilling our obligations under our existing or future indebtedness.

 

We are a highly leveraged company. As of March 31, 2006, after giving pro forma effect to the Hexion Refinancings and the offering, we would have had $2.7 billion of outstanding indebtedness. In fiscal 2006, after giving pro forma effect to the Hexion Refinancings and the offering, our cash debt service is expected to be approximately $269 million (including $52 million of short term debt maturities) based on current interest rates, of which $72 million represents debt service on fixed-rate obligations. Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt depends on a range of economic, competitive and business factors, many of which are outside our control. Our business may not generate sufficient cash flow from operations to meet our debt service and other obligations, and currently anticipated cost savings and operating improvements may not be realized on schedule, or at all. If we are unable to meet our expenses and debt service obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We may not be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity.

 

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Our substantial indebtedness could have important consequences for you, including the following:

 

    it may limit our ability to borrow money or sell stock for our working capital, capital expenditures, dividend payments, debt service requirements, strategic initiatives or other purposes;

 

    it may limit our flexibility in planning for, or reacting to, changes in our operations or business;

 

    it may increase the amount of our interest expense, because certain of our borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;

 

    we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

 

    it may make us more vulnerable to downturns in our business or the economy;

 

    a substantial portion of our cash flow from operations will be dedicated to the repayment of our indebtedness and will not be available for other purposes;

 

    it may restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;

 

    it may make it more difficult for us to satisfy our obligations with respect to our existing indebtedness; and

 

    it may limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds or dispose of assets.

 

Our variable-rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.

 

Certain of our indebtedness, including indebtedness under our floating rate notes and borrowings under our new senior secured credit facilities, are or will be at variable rates of interest and expose us to interest rate risk. See “Description of Certain Indebtedness.” If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same. Assuming the amount of variable rate indebtedness remains the same, after giving pro forma effect to the Hexion Refinancings and the offering, an increase of 1% in the interest rates payable on our variable rate indebtedness would increase our fiscal 2006 estimated debt service requirements by approximately $9 million. Accordingly, an increase in interest rates from current levels could cause our annual debt-service obligations to increase significantly.

 

Despite our substantial indebtedness we may still be able to incur significantly more debt. This could intensify the risks described above.

 

The terms of the indentures governing our notes, our new senior secured credit facilities and the instruments governing our other indebtedness contain restrictions on our ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we could incur significant additional indebtedness in the future. As of March 31, 2006, after giving pro forma effect to the Hexion Refinancings and the offering, we would have had $220 million available for additional borrowing under our new senior secured credit facilities, including the subfacility for letters of credit, and the covenants under our debt agreements would allow us to borrow a significant amount of additional indebtedness. The more we become leveraged, the more we, and in turn our securityholders, become exposed to the risks described above under “—Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from fulfilling our obligations under our existing or future indebtedness.”

 

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The terms of our new senior secured credit facilities and our existing indebtedness may restrict our current and future operations.

 

Our new senior secured credit facilities and our existing indebtedness contain, and any future indebtedness we incur would likely contain, a number of restrictive covenants that will impose significant operating and financial restrictions on our ability to, among other things:

 

    incur or guarantee additional debt;

 

    pay dividends and make other distributions to our shareholders;

 

    create or incur certain liens;

 

    make certain loans, acquisitions, capital expenditures or investments;

 

    engage in sales of assets and subsidiary stock;

 

    enter into sale/leaseback transactions;

 

    enter into transactions with affiliates;

 

    transfer all or substantially all of our assets or enter into merger or consolidation transactions; and

 

    make capital expenditures.

 

In addition, our new senior secured credit facilities require us to maintain a maximum senior secured bank leverage ratio. As a result of these covenants and this ratio, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. While we are currently in compliance with all of the terms of our outstanding indebtedness, including the financial covenants contained therein, a downturn in our business could cause us to fail to comply with the financial or other covenants in our new senior secured credit facilities.

 

A failure to comply with the covenants contained in our new senior secured credit facilities or our existing indebtedness could result in an event of default under the facilities or the existing agreements. In the event of any default under our new senior secured credit facilities or our other indebtedness, the lenders thereunder:

 

    will not be required to lend any additional amounts to us;

 

    could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable; or

 

    require us to apply all of our available cash to repay these borrowings.

 

If the indebtedness under our new senior secured credit facilities or our other indebtedness were to be accelerated, our assets may not be sufficient to repay such indebtedness in full. See “Description of Certain Indebtedness.”

 

Demand for many of our products is cyclical and we may experience prolonged depressed market conditions for our products, which may decrease our net sales and operating margins.

 

Many of our products are used in industries that are cyclical in nature, such as the new home construction, automotive, oil and gas, chemicals and electronics industries. We sell our products to manufacturers in those industries who incorporate them into their own products. Sales to the construction industry are driven by trends in commercial and residential construction, housing starts and trends in residential repair and remodeling. Consumer confidence, mortgage rates and income levels play a significant role in driving demand in the residential construction, repair and remodeling sector. A drop in consumer confidence or an increase in mortgage rates or unemployment could cause a slowdown in the construction industry, and in particular the residential construction, repair and remodeling industry. These and other similar adverse developments could cause a material decrease in our net sales and operating margins.

 

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Downturns in one or more of the other businesses that use our products can adversely affect our net sales and operating margins. Many of our customers are in businesses that are cyclical in nature and sensitive to changes in general economic conditions. In 2002, sales of Borden Chemical’s oil field services products declined 29% as a result of reduced drilling activity. Demand for our products depends, in part, on general economic conditions, and a decline in economic conditions in the industries served by our customers has, and may continue to have, a material adverse effect on our business. An economic downturn in one or more of the businesses or geographic regions in which we sell our products could cause a material decrease in our net sales and operating margins.

 

We rely significantly on raw materials in the production of our products and fluctuations in costs would increase our operating expenses.

 

Our manufacturing operations depend upon obtaining adequate supplies of our raw materials on a timely basis. We rely on long-term agreements with key suppliers for most of our raw materials. The loss of a key source of supply or a delay in shipments could have an adverse effect on our business. Should any of our suppliers fail to deliver or should any of the key long-term supply contracts be cancelled, we would be forced to purchase raw materials in the open market, and no assurances can be given that we would be able to make these purchases or make them at prices that would allow us to remain competitive. One supplier provides over 10% of certain raw material purchases, and we could incur significant time and expense if we had to replace the supplier. In addition, several of our feedstocks at various facilities are transported through a pipeline from one supplier. If we were unable to receive these feedstock through these pipeline arrangements, we may not be able to obtain them from other suppliers at competitive prices or in a timely manner. During the past three years, the prices of these materials have been volatile. We are exposed to price risks associated with these raw material purchases. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates, cost components of raw materials and worldwide price levels. In addition, we may be subject to increasing raw material prices and fuel surcharges due to hurricanes, such as Hurricanes Katrina and Rita in 2005, and other natural disasters and the associated damage to our suppliers. In 2005, approximately $27 million of incremental expenses associated with Hurricanes Katrina and Rita negatively impacted our results. Our ability to manufacture products depends on our ability to obtain an adequate supply of raw materials in a timely manner. Furthermore, if the cost of raw materials increases significantly and we are unable to offset the increased costs with higher selling prices, our profitability will decline.

 

From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although certain of our contracts include competitive price clauses that allow us to buy outside the contract if market pricing falls below contract pricing and other contracts have minimum-maximum monthly volume commitments that allow us to take advantage of spot pricing, we may not be able to purchase raw materials at market price. In addition, some of our customer contracts include selling price provisions that are indexed to publicly available indices for these commodity raw materials; however, we may not be able to immediately pass on raw material price increases to our customers, if at all. Due to differences in timing of the pricing mechanism trigger points between our sales and purchase contracts, there is often a “lead-lag” impact during which margins are negatively impacted for the short term in periods of rising raw material prices and positively impacted in periods of falling raw material prices. Raw material prices may not decrease from currently high levels or, if they do, we may not be able to capitalize on any such reductions in a timely manner, if at all.

 

Rising energy costs have previously increased our operating expenses and reduced net income and may in the future continue to do so, which could have a negative impact on our financial condition.

 

Natural gas is essential in our manufacturing processes, and its cost can vary widely and unpredictably. Our energy costs represented approximately 4% of our total cost of sales in 2005. Energy costs have risen significantly over the past several years due to the increase in the cost of oil and natural gas and the recent shortages of energy in various states, including those caused by Hurricanes Katrina and Rita. Our operating expenses increased in 2005 and will continue to increase if these costs continue to rise or do not return to

 

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historical levels. Rising energy costs may also increase our raw material costs. If we cannot pass these costs through to our customers, our profitability may decline. In addition, rising energy costs also negatively impact our customers and the demand for our products. These risks will be exacerbated if our customers or production facilities are in locations experiencing severe energy shortages.

 

Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows and profitability.

 

Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, state, local and international level. Such environmental laws and regulations include those governing the discharge of pollutants into the air and water, the management and disposal of hazardous materials and wastes, the cleanup of contaminated sites and occupational health and safety. We have incurred, and will continue to incur, significant costs and capital expenditures in complying with these laws and regulations. In 2005, we incurred related capital expenditures of $18 million including costs for other environmental improvements. In addition, violations of environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, criminal proceedings, third party property damage or personal injury claims or other costs. In addition, future developments or increasingly stringent regulation could require us to make additional unforeseen environmental expenditures. For example, the Louisville Metro Air Pollution control district has proposed new regulations that, if promulgated in their current form, could result in increased costs at our Louisville, Kentucky facility. In addition, potential air compliance issues at the Louisville facility could adversely affect our ability to achieve operational synergies in a timely fashion.

 

Even if we fully comply with environmental laws, we are subject to liability associated with hazardous substances in soil, groundwater and elsewhere at a number of sites. These include sites that we formerly owned or operated, and sites where hazardous wastes and other substances from our current and former facilities and operations have been treated, stored or disposed of, as well as sites that we currently own or operate. Depending upon the circumstances, our liability may be joint and several, meaning that we may be held responsible for more than our proportionate share, or even all, of the liability involved. Environmental conditions at such sites can lead to claims against us for personal injury or wrongful death, property damages, and natural resource damage, as well as to claims and obligations for the investigation and cleanup of environmental conditions. The extent of any such liabilities can be difficult to predict.

 

We have been notified that we are or may be responsible for environmental remediation at a number of sites in the United States, Europe and South America, and we are also undertaking a number of voluntary cleanups. We believe the most significant of these and the site that makes up approximately half of our remediation accrual is the site formerly owned by us in Geismar, Louisiana. As a result of former, current or future operations, there are likely to be additional environmental remediation or restoration liabilities or claims of personal injury by employees or members of the public due to exposure or alleged exposure to hazardous materials in connection with our operations, properties or products. We are aware of several sites, sold by us over 20 years ago, that may have significant site closure or remediation costs. Actual costs at these sites, as well as our share, if any, are unknown to us at this time. In addition, we have been served in two tort actions relating to one of these sites. If we fail to mount a successful defense against legal proceedings involving former sites, any significant finding of liability could have a negative impact on our financial condition, cash flows and profitability.

 

These environmental liabilities or obligations, or any that may arise or become known to us in the future, could have a material adverse effect on our financial condition, cash flows and profitability.

 

Because we manufacture and use materials that are known to be hazardous, we are subject to comprehensive product and manufacturing regulations, for which compliance can be costly and time consuming.

 

We produce hazardous chemicals that require care in handling and use and are subject to regulation by many U.S. and non-U.S. national, supra-national, state and local governmental authorities. In some circumstances, before we may sell some of our products these authorities must approve these products and our manufacturing

 

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processes and facilities. As our facilities grow, we may become subject to additional regulation or higher compliance standards. We are also subject to ongoing reviews of our products and manufacturing processes. For example, formaldehyde is an extensively regulated chemical, which various public health agencies continue to evaluate. The International Agency for Research on Cancer, or IARC, has recently reclassified formaldehyde as “carcinogenic to humans,” a higher classification than previous IARC evaluations, based principally on a study conducted by the National Cancer Institute (NCI) linking formaldehyde exposure to nasopharyngeal cancer, a rare form of cancer in humans. IARC also concluded that there was strong but not sufficient evidence for a finding of a causal association between leukemia and occupational exposure to formaldehyde, although IARC could not identify a mechanism for leukemia induction. IARC’s monograph reporting this decision has not yet been published. It is possible that this reclassification will lead to further governmental review of existing regulations and may result in additional costly requirements. In addition, BPA, which is used as an intermediate at our Deer Park and Pernis manufacturing facilities and is also sold directly to third parties, is currently under evaluation as an “endocrine disrupter.” Endocrine disrupters are chemicals that have been alleged to interact with the endocrine systems of humans and wildlife and disrupt normal processes. Pursuant to EU regulation 793/93/EC, BPA producers are currently conducting an extensive toxicology testing program of the chemical. In the event that BPA is further regulated, additional operating costs would likely be incurred to meet more stringent regulation of the chemical.

 

In order to obtain regulatory approval of certain new products, we must, among other things, demonstrate to the relevant authority that the product is safe for its intended uses and that we are capable of manufacturing the product in accordance with current regulations. The process of seeking approvals can be costly, time consuming and subject to unanticipated and significant delays. Approvals may not be granted to us on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate revenue from those products. New laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution or sale of our products. For example, we produce resin-coated sand. Because sand consists primarily of crystalline silica, it creates the potential for silica exposure, which is a recognized health hazard. The Occupational Safety and Health Administration, or OSHA, will likely propose in 2006 a comprehensive occupational health standard for crystalline silica to provide for lower permissible exposure limits, exposure monitoring, medical surveillance and worker training. We may have to incur substantial additional costs over time to comply with any new OSHA regulations. In addition, the European Commission is finalizing a new regulatory system, known as Registration, Evaluation and Authorization of Chemicals, or REACH, which would require manufacturers, importers and consumers of certain chemicals to register such chemicals and evaluate their potential impacts on human health and the environment. Based on the results of the evaluation, a newly created regulatory body would then determine if the chemical should be further tested, regulated, restricted or banned from use. If REACH is enacted in its current form, significant market restrictions could be imposed on the current and future uses of chemical products sold by us in the European Union. Because the timing and ultimate form of the potential REACH regulation is not yet known, we cannot accurately predict future compliance costs, which could be significant. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, which would have an adverse effect on our financial condition, cash flows and profitability.

 

Because we manufacture and use materials that are known to be hazardous, our production facilities are subject to significant operating hazards which could cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination.

 

We are dependent on the continued operation of our 94 production facilities. These facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, and environmental hazards, such as spills, discharges or releases of toxic or hazardous substances and gases, storage tank leaks and remediation complications. These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination and other environmental damage and

 

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could have a material adverse effect on our financial condition. In addition, due to the nature of our business operations, we have been and may continue to be subject to scrutiny from environmental action groups. For example, currently there is an environmental group in the vicinity of our Louisville facility led by residents of the “Rubbertown” area, in which there are many chemical facilities, including our plant. As is typical for such groups, residents are claiming that the chemical facilities have caused health and property damage, and we have been named as a defendant in a lawsuit alleging such claims. In addition, in another state, we have been named as a defendant in a lawsuit involving one of our divested facilities that alleges residents living nearby suffered health issues as a result of exposure to chemicals used at that plant. In addition, a group has challenged the use of toluene di-isocyanate (“TDI”) at our Môlndal, Sweden facility. As a result, a court has ruled that TDI use under the current permit must be reduced. Although we are appealing the court’s ruling, a limit on TDI use would restrict certain operations at that facility. The activities by the environmental groups could result in additional litigation and damage to our reputation. We may incur losses beyond the limits of, or outside the coverage of, our insurance policies, in particular for liabilities associated with environmental cleanup that may arise out of such hazards. In addition, from time to time, various types of insurance for companies in the chemical industry, such as coverage for silica claims, have not been available on commercially acceptable terms, or, in some cases, have been unavailable. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.

 

We are subject to adverse claims from our customers and their employees as a result of the hazardous nature of our products.

 

We produce hazardous chemicals that require appropriate procedures and care to be used in handling them or using them to manufacture other products. As a result of the hazardous nature of some of the products we use and produce, we may face exposure relating to incidents involving our customers’ improper handling, storage and use of our products. On February 20, 2003, an explosion occurred at the facility of one of our customers, CTA Acoustics, Inc., which we refer to as CTA. Seven plant workers were killed and more than 40 workers were injured. There are six lawsuits in Laurel County, Kentucky, arising out of this incident, primarily seeking recovery for wrongful death, personal injury, emotional distress, loss of consortium, property damage and indemnity. On October 20, 2005, a settlement was reached with representatives of seven deceased plant workers and twelve seriously injured workers. We also settled claims for emotional distress and minor injuries from 75 current and former CTA workers. Our share of the settlement amounts are covered by insurance. The property damage claims remain to be resolved. Although we believe that we have adequate insurance coverage to address any additional payments and/or legal fees in excess of $5 million involved in any single incident, we could be subject to additional significant judgments given the nature of this litigation. We have historically faced a substantial number of lawsuits, including class action lawsuits, claiming liability for death, injury or property damage caused by products we manufacture or those that contain our components. These lawsuits, and any future lawsuits, could result in substantial damage awards against us, which in turn could encourage additional lawsuits. The classification of formaldehyde as “carcinogenic to humans” by IARC could become the basis in product liability litigation, particularly if there are any definitive studies demonstrating a causal association with leukemia. In addition, in large part as a result of the bankruptcies of many producers of asbestos containing products, plaintiffs’ attorneys are increasing their focus on peripheral defendants, including us, and asserting that even products that contained a small amount of asbestos caused injury. Plaintiffs’ attorneys are also focusing on alleged harm caused by other products we have made or used, including silica-containing resin coated sands and vinyl chloride monomer, or VCM. While we cannot predict the outcome of pending suits and claims, we believe that we have adequate reserves to address currently pending litigation and adequate insurance to cover currently pending and foreseeable future claims. An unfavorable outcome in these litigation matters may cause our profitability, business, financial condition and reputation to decline.

 

Our substantial international operations subject us to risks not faced by domestic competitors, which include unfavorable political, regulatory, labor and tax conditions in other countries.

 

We have significant manufacturing operations outside the United States. In 2005, our net sales outside the United States represented approximately 50% of our total sales. We have 57 production facilities located

 

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outside the United States, primarily concentrated in Australia, Brazil, Canada, China, the Czech Republic, Germany, Italy, Korea, Malaysia, the Netherlands and the United Kingdom. Accordingly, our business is subject to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks are inherent in international operations, including, but not limited to, the following:

 

    difficulty in enforcing agreements through foreign legal systems;

 

    foreign customers may have longer payment cycles;

 

    foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade and investment, including currency exchange controls;

 

    fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided by us in foreign markets where payment for our products and services is made in the local currency;

 

    increased costs of transportation or shipping;

 

    risk of nationalization of private enterprises;

 

    changes in general economic and political conditions in the countries in which we operate;

 

    unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to environmental protection, export duties and quotas;

 

    difficulty with staffing and managing widespread operations; and

 

    required compliance with a variety of foreign laws and regulations.

 

In addition, intellectual property rights may be more difficult to enforce in foreign countries. We currently have joint ventures in China, where we license technology to our joint venture partners. We may not be able to adequately protect our intellectual property in China or elsewhere. Our business in emerging markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not continue to succeed in developing and implementing policies and strategies that will be effective in each location where we do business. Furthermore, each of the foregoing risks is likely to take on increased significance as we implement our plans to expand our foreign operations.

 

Currency translation risk and currency transaction risk may negatively affect our net sales, cost of sales and operating margins and could result in exchange losses.

 

We conduct our business and incur costs in the local currency of most countries in which we operate. In 2005, our net sales outside the United States represented approximately 50% of our total sales. Accordingly, our results of operations are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our financial statements. Changes in exchange rates between those foreign currencies and the U.S. dollar will affect our net sales, cost of sales and operating margins and could result in exchange losses. In addition to currency translation risks, we incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it receives revenues. In an effort to mitigate the impact of exchange rate fluctuations we engage in exchange rate hedging activities. However, the hedging transactions we enter into may not be effective or could result in foreign exchange hedging loss. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted. Given the volatility of exchange rates, we may not be able to effectively manage our currency transaction and/or translation risks, and any volatility in currency exchange rates may have an adverse effect on our financial condition, cash flows and profitability.

 

We operate our business in countries that historically have been and may continue to be susceptible to recessions or currency devaluation, including Brazil and Malaysia. In addition, as we expand our business in emerging markets, particularly China and Russia, the uncertain regulatory environment relating to currency policy in these countries could have a negative impact on our operations there.

 

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Failure to develop new products will make us less competitive.

 

Our results of operations depend to a significant extent on our ability to expand our product offerings, and to continue to develop our production processes to be a competitive producer. We are committed to remaining a competitive producer and believe that our portfolio of new or re-engineered products is strong. However, we may not be able to continue to develop new products, re-engineer our existing products successfully or bring them to market in a timely manner. For example, our historical research and development efforts generally have focused on customer service, and we may be unsuccessful in shifting our focus to the type of research that will lead to significant new product development. In addition, some of our research and development scientists are located at our individual plants rather than at a research facility, which may impede their ability to share ideas and create new products. While we believe that the products, pricing and services we offer customers are competitive, we may not be able to continue to attract and retain customers to which to sell our products.

 

We face competition from other chemical companies, which could force us to lower our prices, thereby adversely affecting our operating margins, financial condition, cash flows and profitability.

 

The markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash flow and financial condition. Our competitors include major international producers as well as smaller regional competitors. We believe that the most significant competitive factor for our products is selling price and we may be forced to lower our selling price based on our competitors’ pricing decisions, thereby reducing our profitability. In addition, current and anticipated future consolidation among our competitors and customers may cause us to lose market share as well as put downward pressure on pricing. Furthermore, there is a trend in the chemical industry toward relocation of manufacturing facilities to lower-cost regions such as Asia. Such relocation may permit some of our competitors to lower their costs and improve their competitive position. Some of our competitors are larger, have greater financial resources and have less debt than we do. As a result, those competitors may be better able to withstand a change in conditions within our industry and throughout the economy as a whole. If we do not compete successfully, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.

 

Competition from producers of materials that are substitutes for formaldehyde-based resins could lead to declines in our net sales attributable to these products.

 

We face competition from a number of products that are potential substitutes for formaldehyde-based resins. Currently, we estimate that formaldehyde-based resins make up most of the resins used as panelboard resins, wood and specialty adhesives and industrial resins. Decreases in the average selling price of formaldehyde may cause our profitability to decline. For example, competition among producers of foundry and specialty resins has led to erosion in certain product prices in the past. Our ability to maintain or increase our profitability will continue to be dependent, in large part, upon our ability to offset decreases in average selling prices by improving production efficiency or by shifting to higher margin chemical products. In addition, in some markets, non-formaldehyde based resins may be an alternative to our formaldehyde-based resins. Considerable growth in these substitutes for formaldehyde-based resins could adversely affect our market share, net sales and profit margins. Furthermore, the movement towards substitute products could be exacerbated as a result of the IARC recent reclassification of formaldehyde from a “probable human carcinogen” to “carcinogenic to humans” based on studies linking formaldehyde exposure to nasopharyngeal cancer, and a possible causal association between leukemia and occupational exposure to formaldehyde.

 

Acquisitions and joint ventures that we pursue may present unforeseen integration obstacles and costs, increase our leverage and negatively impact our performance.

 

We have made acquisitions of related businesses, and entered into joint ventures in the recent past and intend to selectively pursue acquisitions of, and joint ventures with, related businesses as one element of our growth strategy. We are pursuing various potential strategic acquisitions, including participation in several ongoing processes. One or more of these potential transactions may be of larger scale than historical tuck-in acquisitions, and some of these transactions may be significant. There can be no assurance whether we decide to pursue or will be

 

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successful in completing these acquisitions, and we cannot predict the timing of any such transaction. These and other acquisitions of businesses may require us to assume or incur additional debt financing, resulting in additional leverage and complex debt structures. We may pursue acquisitions of a significantly larger scale than in the past. If such acquisitions are consummated, the risk factors we describe below, and for our business generally, may be intensified.

 

Our ability to implement our growth strategy is limited by covenants in our new senior secured credit facilities, indentures and other indebtedness, our financial resources, including available cash and borrowing capacity, and our ability to integrate or identify appropriate acquisition and joint venture candidates.

 

The expense incurred in consummating acquisitions of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in our incurring unanticipated expenses and losses. Furthermore, we may not be able to realize any anticipated benefits from acquisitions or joint ventures. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with our acquisition and joint venture strategy include:

 

    potential disruption of our ongoing business and distraction of management;

 

    unexpected loss of key employees or customers of the acquired company;

 

    conforming the acquired company’s standards, processes, procedures and controls with our operations;

 

    coordinating new product and process development;

 

    hiring additional management and other critical personnel; and

 

    increasing the scope, geographic diversity and complexity of our operations.

 

In addition, we may encounter unforeseen obstacles or costs in the integration of acquired businesses. For example, the preparation of the US GAAP financial statements for Bakelite required significant management resources. Also, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our business. Our acquisition and joint venture strategy may not be successfully received by customers, and we may not realize any anticipated benefits from acquisitions or joint ventures.

 

Our future success depends on our ability to retain our key employees.

 

We are dependent on the services of Craig O. Morrison, our President and Chief Executive Officer, William H. Carter, our Chief Financial Officer and other members of our senior management team, who collectively have over 130 years of experience in the chemical and plastics industries, to remain competitive in our industry. The loss of Mr. Morrison or any other member of our senior management team could have an adverse effect on us. There is a risk that we will not be able to retain or replace these key employees. All of our current key employees are subject to employment conditions or arrangements that contain post employment non-competition provisions. However, these arrangements permit the employees to terminate their employment with little or no notice.

 

We may be required to expend greater time and expense than other companies in dealing with our employees, some of whom are unionized, represented by workers’ councils or are employed subject to local laws that are less favorable to employers than the laws of the United States.

 

As of December 31, 2005, approximately 46% of our employees were unionized or represented by workers’ councils that have collective bargaining agreements. In addition, some of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the United States. Such favorable employment rights require us to expend greater time and expense in making

 

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changes to employees’ terms of employment or making staff reductions. For example, most of our employees in Europe are represented by workers’ councils which must approve any changes in conditions of employment, including salaries and benefits. “Protection against dismissal” claims have been brought by certain of such workers’ councils in connection with Bakelite’s cost-saving initiatives. A significant dispute with our employees may divert management’s attention and otherwise hinder our ability to conduct our business and achieve planned cost savings.

 

We rely on patents and confidentiality agreements to protect our intellectual property. Our failure to protect our intellectual property rights could adversely affect our future performance and growth.

 

Protection of our proprietary processes, methods and compounds and other technology is important to our business. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. We rely on patent, trade secret, trademark and copyright law as well as judicial enforcement to protect such technologies. A majority of our patents relate to the development of new products and processes for manufacturing and use thereof and expire at various times between 2006 and 2026. Some of our technologies are not covered by any patent or patent application. In addition, our patents could be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, pending patent applications may not result in an issued patent, or if patents are issued to us, such patents may not provide meaningful protection against competitors or against competitive technologies.

 

Our production processes and products are specialized. However, we could face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technology. If we were subject to an infringement suit, we may be required to change our processes or products or stop using certain technologies or producing the infringing product entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could cause our customers to seek other products that are not subject to infringement suits. Any infringement suit could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. In some countries we do not apply for patent, trademark or copyright protection. We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, such confidentiality agreements are limited in duration and could be breached, and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or other access by legal means. The failure of our patents or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have an adverse effect on our business by jeopardizing critical intellectual property.

 

If we are unable to access funds generated by our subsidiaries we may not be able to meet our financial obligations.

 

Because Hexion conducts many of its operations through its subsidiaries, Hexion depends on those entities for dividends, distributions and other payments to generate the funds necessary to meet its financial obligations. Legal and contractual restrictions in certain agreements governing current and future indebtedness of Hexion’s subsidiaries, as well as the financial condition and operating requirements of Hexion’s subsidiaries, may limit Hexion’s ability to obtain cash from its subsidiaries. All of Hexion’s subsidiaries are separate and independent legal entities and have no obligation whatsoever to pay any dividends, distributions or other payments to Hexion.

 

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Significant changes in pension fund investment performance or assumptions relating to pension costs may increase the valuation of pension obligations, alter the funded status of pension plans and increase our pension costs.

 

Our funding policy for pension plans is to accumulate plan assets that, over the long run, will approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. A change in the discount rate would result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following financial years. Similarly, changes in the expected return on plan assets assumption can result in significant changes in the net periodic pension cost of the following financial years.

 

One of the Company’s pension plans is currently underfunded and we may have to make significant cash payments to the plan and/or incur a liability to the Pension Benefit Guaranty Corporation. Termination by the Pension Benefit Guaranty Corporation would further increase our pension expense and could result in liens on material amounts of our assets.

 

On April 17, 2006, the Company notified the Pension Benefit Guaranty Corporation, or PBGC, that a legacy Borden Chemical defined benefit pension plan (the “Borden Plan”) was underfunded by approximately $91 million on a termination basis. IRS regulations require us to increase our contributions to the Borden Plan to reduce this underfunding. Based on current IRS regulations and plan provisions, we expect that our total minimum funding requirements for the five years ended in 2010 for the Borden Plan will be approximately $55 million. If the performance of the assets in the Borden Plan does not meet our expectations, if the PBGC requires additional contributions to the Borden Plan as a result of the Hexion Formation or the Hexion Refinancings, if there are changes to IRS regulations or other applicable law, or if other actuarial assumptions are modified, our contributions for those years could be higher than we expect.

 

The need to make these cash contributions may reduce the cash available to meet our other obligations or to meet the needs of our business. In addition, the PBGC may terminate the Borden Plan under limited circumstances, including in the event the PBGC concludes that its risk may increase unreasonably if the Borden Plan continues. In the event the Borden Plan is terminated for any reason while it is underfunded, we could be required to make an immediate payment to the PBGC of all or a substantial portion of the Borden Plan’s underfunding, as calculated by the PBGC based on its own assumptions (which might result in a larger pension obligation than that based on the assumptions we have used to fund the Borden Plan), and the PBGC could assert a lien on material amounts of our assets.

 

In addition, in 2003, the IRS notified the Company that cash balance plans such as the Borden Plan may be required to be amended because of recent ERISA rulings that found cash balance plans to be discriminatory. The IRS indicated that the Borden Plan should continue to operate as currently designed until new guidance is available. Although the effect of any future guidance is not known, it is possible that such guidance may increase our obligations under the Borden Plan.

 

Our equity sponsor controls us and its interests may conflict with or differ from your interests.

 

After the consummation of this offering, our equity sponsor, Apollo, will beneficially own approximately 70.5% of our common stock, assuming the underwriters do not exercise their over-allotment option. If the underwriters exercise in full their over-allotment option, Apollo will beneficially own approximately 67.4% of our common stock. In addition, representatives of Apollo will have the ability to prevent any transaction that requires the approval of directors. As a result, Apollo will have the ability to substantially influence all matters

 

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requiring shareholder approval, including the election of our directors and the approval of significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of our assets. For example, the approval of two-thirds of the members of our board of directors will be required by our amended and restated certificate of incorporation under certain circumstances including, without limitation, amendments to our organizational documents in a manner that adversely affects Apollo. These provisions shall terminate at such time as affiliates of Apollo no longer beneficially own at least one-third of our outstanding common stock and have sold at least one share of our common stock other than in this offering. See “Management—Supermajority Board Approval of Certain Matters.” The interests of Apollo and its affiliates could conflict with or differ from your interests as a holder of our common stock. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which you may otherwise view favorably. Apollo may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. A sale of a substantial number of shares of stock in the future by funds affiliated with our equity sponsor could cause our stock price to decline in the future.

 

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

 

Upon the closing of this offering, affiliates of Apollo will continue to control a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under the New York Stock Exchange rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain New York Stock Exchange corporate governance requirements, including:

 

    the requirement that a majority of the board of directors consist of independent directors;

 

    the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

 

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating/corporate governance and compensation committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

 

Our internal control over financial reporting may not be effective and our independent auditors may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

 

We will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC thereunder (which we refer to as Section 404) as of December 31, 2007. Section 404 requires us to report on, and attest to, the design and effectiveness of our internal control over financial reporting. Prior to the Combinations, Borden Chemical and Resolution Performance had performed the system and process evaluation in an effort to comply with management certification and auditor attestation requirements of Section 404. However, prior to the Combinations, Bakelite and Resolution Specialty were not required to meet these regulations. In the course of our ongoing Section 404 evaluation, we have identified areas of internal controls that need improvement, including closing, tax accounting and consolidation procedures.

 

For example, Bakelite’s original system of financial reporting was designed to comply with German GAAP; accordingly, Bakelite’s management determined that Bakelite did not have sufficient internal controls and

 

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resources relating to the preparation of US GAAP financial statements. As Resolution Specialty began the process of developing a stand-alone infrastructure, Resolution Specialty’s management determined that Resolution Specialty did not have sufficient internal controls and resources relating to the preparation of US GAAP financial statements. In addition, as our international operations have expanded and the complexity of our business has increased, we have determined that, in some instances, local resources are not adequately familiar with US GAAP areas such as income tax accounting. As a result of such determinations, we have utilized additional outside advisors, as appropriate, to assess and to assist with the US GAAP closing and consolidation processes associated with preparing the financial statements included herein, including the conversion of local and German GAAP to US GAAP. While we have added additional resources to assist with the US GAAP closing, tax accounting and consolidation processes, for future reporting periods, such closing and consolidation processes may result in delays in reporting our results.

 

In order to improve our internal controls, we have changed and expanded the roles and responsibilities of key personnel and made changes to certain processes related to financial reporting. As part of the integration of Resolution Specialty and Resolution Performance, we continue the process of consolidating some of the transaction processing and general accounting activities of Resolution Specialty, and Resolution Performance to a lesser extent, into a common shared services transaction processing environment with the Corporate and North American activity related to the former Borden Chemical operation. We have also recently launched a project to consolidate multiple legacy systems and multiple management information and accounting systems. Once fully implemented, this change to a shared services business model (for certain processes) along with a single management information and accounting system is intended to further enhance our internal control over financial reporting and our operating efficiencies. We have also expanded the scope of the services of the international accounting firm that provides tax accounting and compliance services and support to include Resolution Performance, Resolution Specialty and Bakelite. Management has also added additional tax personnel to assist current personnel in monitoring the tax reporting process and continues to evaluate the need for additional tax, US GAAP and financial reporting resource needs based on the Combinations and recent acquisitions.

 

However, as the evaluation process is ongoing, we may identify additional conditions that may be categorized as areas of internal control that need improvement in the future. We cannot be certain as to the timing of completion of our evaluation, documentation, testing and any remediation actions or the impact of the same on our operations. If our remediation actions described above are insufficient and we are not able to obtain reports or institute controls on a timely basis, the chief financial officer or chief executive officer may conclude that our controls are ineffective for purposes of Section 404, our independent auditors may conclude that our assessment process or our internal controls over financial reporting are not effective and we may be subject to sanctions or investigations by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements or our financial statements could change. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations.

 

Risks Relating to This Offering

 

There is no existing public market for our common stock, and we do not know if one will develop, which could impede your ability to sell your shares and depress the market price of our common stock.

 

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock. The failure of an active trading market to develop could affect your ability to sell your shares and depress the market price of your shares. The initial public offering price for our shares of common stock will be determined by negotiations among us, the selling shareholder and the representatives of the underwriters. The initial public offering price of our shares of common stock will be based on numerous factors and may not be indicative of the market price of the common stock that will prevail in the trading market. The market price of your shares may fall below the initial public offering price.

 

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The market price of our common stock may be volatile, which could cause the value of your investment to decline.

 

The market price of our common stock could fluctuate significantly, in which case you may not be able to resell your shares at or above the initial public offering price. Some companies that have had volatile market prices for their securities have had securities class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.

 

The market price of our common stock may fluctuate in response to a number of events, including:

 

    our quarterly operating results;

 

    future announcements concerning our business;

 

    changes in financial estimates and recommendations by securities analysts;

 

    the number of shares to be publicly traded after this offering;

 

    actions of competitors;

 

    our involvement in acquisitions, strategic alliances or joint ventures;

 

    market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

    changes in government and environmental regulation;

 

    arrival and departure of key personnel;

 

    general market, economic and political conditions; and

 

    natural disasters, terrorist attacks and acts of war.

 

In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce the market price of our common stock.

 

You will experience immediate and substantial dilution as the net tangible book deficit per share of common stock will be substantially lower than the initial public offering price.

 

The initial public offering price of the shares of common stock is substantially higher than the net tangible book deficit per share of the outstanding common stock. As a result, if we were liquidated immediately following this offering, you would experience immediate and substantial dilution of $41.03 per share of common stock. Dilution is the difference between the initial public offering price per share and the net tangible book deficit per share of our common stock. See “Dilution”, including the discussion of the effects on dilution from a change in the price of the offering.

 

Future sales or the possibility or perception of future sales of a substantial amount of our common stock could adversely affect the market price of our common stock.

 

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the public market after this offering or the perception that these sales could occur. The sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

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Upon consummation of this offering, there will be 86,330,432 shares of our common stock outstanding (including 954,378 shares related to deferred compensation units). All shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”). Of the remaining shares of common stock outstanding, 66,376,054 will be restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144. We and certain of our shareholders have agreed to a “lock-up,” pursuant to which neither we nor they will sell any shares without the prior consent of Credit Suisse Securities (USA) LLC for 180 days after the date of this prospectus, subject to certain exceptions and extension under certain circumstances. Following the expiration of the applicable lock-up period, all these shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. In addition, Apollo and our other existing shareholders have certain registration rights with respect to the common stock that they will retain following this offering. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.

 

We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.

 

Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

 

We intend to amend and restate our certificate of incorporation and bylaws to incorporate provisions that may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions will include:

 

    a classified board of directors (from and after the first annual meeting of shareholders held after the offering);

 

    the sole power of a majority of the board of directors to fix the number of directors;

 

    limitations on the removal of directors;

 

    the ability of our board of directors to designate one or more series of preferred stock and issue shares of preferred stock without shareholder approval;

 

    the inability of shareholders to act by written consent;

 

    advance notice requirements for nominating directors or introducing other business to be conducted at shareholder meetings; and

 

    the requirement to obtain approval of two-thirds of our directors to approve certain transactions, including a merger.

 

The foregoing factors could impede a merger, takeover or other business combination or discourage a potential investor from making a tender offer for our common stock, which could make it more difficult for a third party to acquire control of our company, even if some of our shareholders consider such a change of control to be beneficial and under certain circumstances, could reduce the market value of our common stock. Such provisions also may have the effect of preventing changes in our management. See “Description of Capital Stock.”

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

This prospectus includes “forward-looking statements” that involve risks and uncertainties. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information and, in particular, appear under the headings “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” When used in this prospectus, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “foresees,” “likely,” “may,” “should,” “goal,” “target” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon information available to us on the date of this prospectus.

 

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this prospectus in the sections captioned” “Prospectus Summary,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such factors may include:

 

    our ability to integrate Borden Chemical, Resolution Performance, Resolution Specialty, Bakelite and our subsequent acquisitions and achieve cost savings;

 

    general economic and business conditions including those influenced by international and geopolitical events such as the wars in Iraq and Afghanistan and any future terrorist attacks;

 

    industry trends;

 

    the highly cyclical nature of the end-use markets in which we participate;

 

    raw material costs and availability;

 

    restrictions contained in our debt agreements;

 

    our substantial leverage, including the inability to generate the necessary amount of cash to service our existing debt and the incurrence of substantial indebtedness in the future;

 

    the possibility of liability for pollution and other damage that is not covered by insurance or that exceeds our insurance coverage;

 

    increased competition in the markets in which we operate;

 

    changes in demand for our products;

 

    the loss of any of our major customers;

 

    our dependence on a limited number of key executives who we may not be able to adequately replace if they leave our company;

 

    changes in, or the failure or inability to comply with, government regulations, agricultural policy and environmental, health and safety requirements;

 

    changes in pension fund investment performance, required pension contributions or assumptions relating to pension costs or expected return on plan assets;

 

    changes in business strategy, development plans or cost savings plans;

 

    the loss of any of our major suppliers or the bankruptcy or financial distress of our customers;

 

    the ability to attain and maintain any price increases for our products;

 

    foreign currency fluctuations and devaluations and political instability in our foreign markets;

 

    the loss of our intellectual property rights;

 

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    availability, terms and deployment of capital; and

 

    other factors over which we have little or no control, including events like hurricanes and other natural disasters, such as Hurricanes Katrina and Rita.

 

There may be other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds from our offering of our common stock, after deducting underwriting discounts and other expenses, of approximately $87 million, assuming the shares are offered at $26.50 per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus. We intend to use all of our net proceeds from the sale of common stock being sold by us together with available cash to repay $100 million of our term loan under our new senior secured credit facilities. The interest rates with respect to term loans under our new senior secured credit facilities are based on, at our option, adjusted LIBOR plus 2.00% or a Dollar base rate plus 0.50%. Our term loan facility has a seven-year term, subject to an earlier maturity date under certain circumstances. We used borrowings from our term loan facility to refinance our previously existing term loan facility, repurchase and redeem notes and preferred stock in the Hexion Refinancings and to pay related fees and expenses. See “Description of Certain Indebtedness—First-Priority Lien Obligations—New Senior Secured Credit Facilities.” Certain of the underwriters or their affiliates are or may become lenders under our new senior secured credit facilities and as such, will or may, as applicable, receive a portion of the proceeds of this offering, which will be used to partially repay term loans thereunder.

 

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, a $1.00 increase (decrease) in the assumed public offering price of $26.50 per share of common stock would decrease (increase) the amount of available cash used to repay $100 million under our term loan on our new senior secured credit facilities by $4 million.

 

On May 31, 2005, we used all of the proceeds that we received from the offering of shares of our Series A Preferred Stock and a portion of the proceeds from borrowings under our May 2005 senior secured credit facilities to declare a special dividend of approximately $550 million (of which $27 million remains to be paid) to our parent, Hexion LLC, which in turn paid a pro rata special dividend to its equity holders, which included Apollo and other investors, including certain members of our management.

 

We will not receive any proceeds for the sale of our common stock by the selling shareholder, including if the underwriters exercise their option to purchase additional shares. In the aggregate, the selling shareholder will receive approximately $383 million of the net proceeds of this offering, or approximately $455 million if the underwriters’ option to purchase additional shares is exercised in full, assuming the shares are offered at $26.50 per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus. J.P. Morgan Securities Inc., an underwriter in this offering, is an affiliate of JPMorgan Chase Bank, N.A., a trustee for a certain New York trust which owns an interest in the selling shareholder. An affiliate of Goldman, Sachs & Co., an underwriter in this offering, owns an interest in the selling shareholder. See “Principal and Selling Shareholders” and “Underwriting.”

 

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DIVIDEND POLICY

 

We do not currently intend to pay any cash dividends on our common stock, and instead intend to retain earnings, if any, for future operations and debt reduction. Our new senior secured credit facilities and the indentures governing our notes impose restrictions on our ability to pay dividends, and thus our ability to pay dividends on our common stock will depend upon, among other things, our level of indebtedness at the time of the proposed dividend and whether we are in default under any of our debt instruments. See “Description of Certain Indebtedness.” Our future dividend policy will also depend on the requirements of any future financing agreements to which we may be a party and other factors considered relevant by our board of directors. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, business opportunities, provision of applicable law and other factors that our board of directors may deem relevant. For a discussion of our cash resources and needs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

On May 31, 2005, we used all of the proceeds that we received from the offering of shares of our Series A Preferred Stock and a portion of the proceeds from borrowings under our May 2005 senior secured credit facilities to declare a special dividend of approximately $550 million (of which $27 million remains to be paid) to our parent, Hexion LLC, which in turn paid a pro rata special dividend to its equity holders, which included Apollo and other investors, including certain members of our management.

 

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CAPITALIZATION

 

The following table sets forth our cash and equivalents and our capitalization as of March 31, 2006 (i) on an actual consolidated basis for Hexion and (ii) on an as adjusted basis giving effect to the Hexion Refinancings, including the application of the net proceeds to the Company therefrom, and the offering, including the application of the net proceeds to partially repay the new senior secured credit facilities. You should read this table in conjunction with “Selected Historical Financial and Other Information,” “Unaudited Pro Forma Financial Information,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and the related notes included elsewhere in this prospectus.

 

     As of March 31, 2006

 
           Adjustments

       
     Actual

    Hexion
Refinancings


   

The

Offering


    As Adjusted (1)

 

Cash and equivalents

   $ 168     $ 6     $ (33 )   $ 141  
    


 


 


 


Debt:

                                

Senior credit facilities (including current maturities)

   $ 496     $ 1,129     $ (100 )   $ 1,525  

Senior secured notes

     967       (343 )     —         624  

Senior unsecured debentures

     440       —         —         440  

Senior subordinated notes

     336       (336 )     —         —    

Industrial revenue bonds

     34       —         —         34  

Other debt and capital leases

     40       —         —         40  

Short-term debt

     27       —         —         27  
    


 


 


 


Total debt

     2,340       450       (100 )     2,690  
    


 


 


 


Preferred Stock:

                                

Series A Preferred Stock, par value $0.01 per share, liquidation preference $350 million actual: 60,000,000 shares authorized, 14,000,000 shares issued and outstanding; as adjusted: 14,000,000 shares authorized, no shares issued and outstanding

     377       (377 )     —         —    
    


 


 


 


Shareholders’ Deficit:

                                

Common stock, par value $0.01 per share: actual 300,000,000 shares authorized, 82,629,906 shares issued and outstanding; as adjusted: 500,000,000 shares authorized, 86,330,432(2) shares issued and outstanding

     1       —         —         1  

Paid-in capital

     504       (20 )     80       564  

Treasury stock

     (296 )     —         —         (296 )

Accumulated other comprehensive loss

     (59 )     —         —         (59 )

Accumulated deficit

     (1,039 )     (51 )     (20 )     (1,110 )
    


 


 


 


Total common stock and other shareholders’ deficit

     (889 )     (71 )     60       (900 )
    


 


 


 


Total capitalization

   $ 1,828     $ 2     $ (40 )   $ 1,790  
    


 


 


 



(1) Reflects the sale of 3,773,585 shares of our common stock by us in the offering at an assumed initial public offering price of $26.50 per common share, which represents the mid-point of the estimated offering price range shown on the cover of this prospectus, and the application of the net proceeds to the Company together with available cash to repay $100 million of our term loan under our new senior secured credit facilities as described further under “Use of Proceeds.”

 

   Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering a $1.00 increase (decrease) in the assumed public offering price of $26.50 per share of common stock would increase (decrease) cash and equivalents by $4 million, paid-in capital by $4 million and total capitalization by $4 million and decrease (increase) total common stock and other shareholders’ deficit by $4 million.

 

(2) Includes 954,378 shares relating to deferred compensation units.

 

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DILUTION

 

Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering will exceed the pro forma net tangible book value per share of common stock after the offering. Our net tangible book deficit as of March 31, 2006 was $1,243, or $15.06 per share of common stock. We have calculated this amount by:

 

    subtracting our total liabilities, minority interest and Series A preferred stock from our total tangible assets; and

 

    dividing the difference by the number of shares of common stock outstanding.

 

If we give effect to the sale of 3,773,585 shares of common stock by us in this offering at the initial public offering price of $26.50 per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us, our pro forma net tangible book deficit as of March 31, 2006 would have been $1,254, or $14.53 per share. This amount represents an immediate dilution of $41.03 per share to new investors. The following table illustrates this dilution per share:

 

     Per Share

 

Assumed initial public offering price

           $ 26.50  

Net tangible book deficit as of March 31, 2006

   $ (15.06 )        

Increase in net tangible book value attributable to this offering

     0.53          
    


       

Pro forma net tangible book deficit after this offering

             (14.53 )
            


Dilution to new investors

           $ 41.03  
            


 

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, a $1.00 increase (decrease) in the assumed public offering price of $26.50 per share of common stock would increase (decrease) the increase in net tangible book value attributable to this offering by $0.05 per share and the dilution to new investors by $0.95 per share and decrease (increase) the pro forma net tangible book deficit after this offering by $0.05 per share.

 

The following table summarizes on the basis described above, as of March 31, 2006 , the difference between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by Hexion LLC and by new investors, at the initial public offering price of $26.50 per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased

    Total
Consideration


   

Average Price
Per Share


(total consideration amount in millions)    Number

   Percent

    Amount

   Percent

   

Hexion LLC(1)(2)

   82,556,847    95.6 %   $ 1.9    1.9 %   $ 0.02

New investors(3)

   3,773,585    4.4       100    98.1     $ 26.50
    
  

 

  

     

Total

   86,330,432    100.0 %   $ 101.9    100.0 %      
    
  

 

  

     

 

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(1) As of March 31, 2006, the number of shares of common stock owned by Hexion LLC was 82,629,906. On May 12, 2006, Hexion LLC contributed 73,059 shares of common stock to Hexion.
(2) Total consideration and average price per share paid by Hexion LLC give effect to the $523 million dividend paid to Hexion LLC through March 31, 2006. This table does not give effect to the $27 million dividend declared but not paid.
(3) Excludes 15,226,415 shares of our common stock (or if the over-allotment option is exercised, 18,076,415) to be sold by Hexion LLC to the new investors in the offering for which we will not receive any net proceeds. After the consummation of this offering, Hexion LLC will beneficially own approximately 77.7% of our common stock (or 74.4% if the underwriters exercise in full their over-allotment option).

 

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, a $1.00 increase (decrease) in the assumed public offering price of $26.50 per share of common stock would increase (decrease) the total consideration paid by new investors by $4 million, the total consideration paid by all stockholders by $4 million and the average price per share by $1.00 per share.

 

The tables above assume no exercise or conversion of the 4,105,148 outstanding stock options at March 31, 2006 with a weighted average exercise price of approximately $6.39 per share, which includes 4,087,128 options to purchase shares of common stock that are in-the-money compared to the midpoint of the estimated offering price range set forth on the cover of this prospectus because the exercise or conversion of such options would have an anti-dilutive effect on the net tangible book value. See “Management.”

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

We derived the unaudited pro forma financial data set forth below by the application of the pro forma adjustments to the historical audited consolidated financial statements of Hexion, appearing elsewhere in this prospectus.

 

The unaudited pro forma balance sheet as of March 31, 2006, gives pro forma effect only to the Hexion Refinancings, including the application of the net proceeds to the Company therefrom and the offering of common stock, including the application of net proceeds to partially repay the new senior secured credit facilities as if the Hexion Refinancings and the offering occurred on March 31, 2006. The unaudited pro forma balance sheet does not give effect to the Akzo Acquisition which is not considered significant per the provisions of Article 11-01(b) of Regulation S-X.

 

The unaudited pro forma statements of operations for the year ended December 31, 2005 and the three months ended March 31, 2005 give pro forma effect to the Hexion Formation, the Hexion Refinancings and the offering and the unaudited pro forma statement of operations for the three months ended March 31, 2006 gives pro forma effect to the Hexion Refinancings and the offering, including the application of the net proceeds to the Company therefrom, as if they occurred on January 1, 2005. The unaudited pro forma statements of operations do not give effect to the Akzo Acquisition, the Rhodia Acquisition, the Rohm and Haas Acquisition or the Brazilian Consumer Divestiture which are not considered significant per the provisions of Article 11-01(b) of Regulation S-X.

 

The pro forma adjustments relating to the Bakelite Transaction and the minority interest acquisitions as part of the Combinations are based on preliminary estimates of the fair value of the consideration provided, estimates of the fair values of assets acquired and liabilities assumed and available information and assumptions. The final purchase price allocations are dependent on whether there are any post-closing adjustments on the finalization of asset and liability valuations. These final valuations will be based on the actual net tangible and intangible assets that existed as of the closing dates of the Bakelite Transaction and the Combinations. Any final adjustment may change the allocations of purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a change to the unaudited pro forma financial information, including the adjustment of goodwill.

 

The unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what our results of operations would actually have been if they had occurred on the date indicated nor do they purport to project our results of operations for any future period.

 

You should read our unaudited pro forma financial information and the accompanying notes in conjunction with all of the historical financial statements and related notes included in this prospectus and other financial information appearing elsewhere in this prospectus, including information contained in “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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HEXION SPECIALTY CHEMICALS, INC.

 

 

Unaudited Pro Forma Balance Sheet

as of March 31, 2006

(dollars in millions)

 

         

Hexion

Refinancings


          The offering

       
    Actual

    Adjustments (1)

    Subtotal

    Adjustments (2)

    Pro Forma

 

Assets

                                       

Current assets:

                                       

Cash and equivalents

  $ 168     $ 6 (a)   $ 174     $ (33 )(a)   $ 141  

Accounts receivable

    684       —         684       —         684  

Inventories

    470       —         470       —         470  

Other current assets

    88       —         88       (13 )(b)     75  
   


 


 


 


 


      1,410       6       1,416       (46 )     1,370  

Property and equipment

    1,440       —         1,440       —         1,440  

Goodwill

    172       —         172       —         172  

Other intangible assets

    182       —         182       —         182  

Other non-current assets

    103       (4 )(b)     99       —         99  
   


 


 


 


 


Total assets

  $ 3,307     $ 2     $ 3,309     $ (46 )   $ 3,263  
   


 


 


 


 


Liabilities, redeemable preferred stock, common stock and other shareholders’ deficit

                                       

Current liabilities:

                                       

Accounts and drafts payable

  $ 547     $ —       $ 547     $ —       $ 547  

Debt payable within one year

    41       11 (c)     52       (1 )(c)     51  

Other current liabilities

    399       —         399       (6 )(d)     393  
   


 


 


 


 


      987       11       998       (7 )     991  
   


 


 


 


 


Other liabilities:

                                       

Long-term debt

    2,299       439 (d)     2,738       (99 )(c)     2,639  

Non-pension postemployment benefit obligations

    115       —         115       —         115  

Deferred income taxes

    135       —         135       —         135  

Other long-term liabilities

    274       —         274       —         274  
   


 


 


 


 


      2,823       439       3,262       (99 )     3,163  
   


 


 


 


 


                                         

Minority interest

    9       —         9       —         9  

Series A Preferred Stock

    377       (377 )(e)     —         —         —    

Shareholders’ deficit:

                                       

Common stock and additional paid-in capital

    505       (20 )(f)     485           80  (e)     565  

Treasury stock and other

    (355 )     —         (355 )     —         (355 )

Accumulated deficit

    (1,039 )     (51 )(g)     (1,090 )     (20 )(f)     (1,110 )
   


 


 


 


 


      (889 )     (71 )     (960 )     60       (900 )
   


 


 


 


 


Total liabilities, redeemable preferred stock, common stock and other shareholders’ deficit

  $ 3,307     $ 2     $ 3,309     $ (46 )   $ 3,263  
   


 


 


 


 


 

See Notes to Unaudited Pro Forma Balance Sheet

 

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Notes to Unaudited Pro Forma Balance Sheet

 

  (1) Set forth below are the estimated sources and uses of funds pertaining to the Hexion Refinancings.

 

Sources


Proceeds from new senior secured credit facilities

   $ 1,625

Synthetic letter of credit facility

     50
        
        
        
        
        
        
    

Total sources

   $ 1,675
    

Uses


Available cash

   $ 6

Redemption of Series A Preferred Stock

     397

Repayment of:

      

Existing Senior Secured Term Loan

     496

8% Senior Secured Notes

     140

9 1/2% Senior Second Secured Notes

     200

13 1/2% Senior Subordinated Notes

     328

Synthetic letter of credit facility

     50

Transaction costs

     58
    

Total uses

   $ 1,675
    

 

 

The Hexion Refinancings will generate net proceeds of $1,609 (net of estimated fees and expenses of $16) to the Company which will be used to repay existing debt of $1,164, pay debt redemption cost of $42 and redeem the Series A Preferred Stock at its accreted amount which is estimated to be $397 as of the redemption date. In addition, the new senior secured credit facilities will also provide for a $50 synthetic letter of credit facility, which will replace the existing letter of credit facility of an equivalent amount. As of March 31, 2006, the Series A Preferred Stock had accreted to $377. It is estimated that an additional amount of $20 will be incurred through the redemption date in respect of a redemption premium, dividends, accretion and fees prior to redemption. The Series A Preferred Stock was redeemed in full for cash on May 12, 2006.

 

  (a) Reflects net cash available from the Hexion Refinancings.

 

  (b) Reflects the write-off of deferred debt issue costs of $20 related to the existing debt repaid from the proceeds of the Hexion Refinancings, offset by the capitalized debt issue cost of $16 related to the new senior secured credit facilities.

 

  (c) Reflects the current portion of the new senior secured credit facilities of $16 reduced by the current portion of the debt of $5 repaid in the Hexion Refinancings.

 

  (d) Reflects the net increase in long-term debt as follows:

 

New senior secured credit facilities

   $ 1,625  

Existing debt repaid

        

Face value

     (1,164 )

Premium

     (11 )

Less: Net change in current portion

     (11 )
    


Net change

   $ 439  
    


 

  (e) Reflects the redemption of Series A Preferred Stock. It is estimated that an additional amount of $20 will be incurred through the redemption date in respect of a redemption premium, dividends, accretion and fees prior to redemption. The Series A Preferred Stock was redeemed in full for cash on May 12, 2006.

 

  (f) Reflects accrued and unpaid Series A Preferred Stock dividends and a redemption premium which total $20 (including accretion of issuance costs).

 

  (g) Reflects the estimated loss on debt redemption of $31 (consisting of redemption cost of $42 less debt premium of $11) and write-off of deferred debt issue cost of $20 related to existing debt repaid from the proceeds of the Hexion Refinancings.

 

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  (2) Set forth below are the estimated sources and uses of funds pertaining to the offering.

 

Sources


Available cash

   $ 13

Offering of common stock

     100
        
    

Total sources

   $ 113
    

Uses


Partial repayment of new senior secured credit facilities

   $ 100

Transaction costs of the offering*

     13
    

Total uses

   $ 113
    

(*) Include $6 accrued as other current liabilities and exclude $7 paid through March 31, 2006.

 

The offering is expected to raise proceeds of $87 (net of estimated fees and expenses) to the Company which will be used together with available cash to repay $100 of the new senior secured credit facilities.

 

  (a) Reflects the payment of a buyout of the Apollo management consulting agreement and the payment of a structuring and advisory fee to Apollo related to the offering and the use of available cash of $13 for the partial repayment of the new senior secured credit facilities.

 

  (b) Reflects the elimination of deferred assets recorded for transaction costs relating to this offering which include $6 recorded in other current liabilities and $7 paid through March 31, 2006.

 

  (c) Reflects the partial repayment of new senior secured credit facilities, of which $1 would have been payable within one year.

 

  (d) Reflects the payment of accrued transaction costs relating to this offering.

 

  (e) Reflects the net proceeds of the offering of common stock by us of $87 reduced by $7 of offering costs paid through March 31, 2006.

 

  (f) Reflects the use of available cash for the payment of a buyout of the Apollo management consulting agreement and the payment of a structuring and advisory fee to Apollo related to the offering.

 

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, a $1.00 increase (decrease) in the assumed public offering price of $26.50 per share of common stock would increase (decrease) cash and equivalents by $4 million and common stock and additional paid-in capital by $4 million and total liabilities, redeemable preferred stock, common stock and other shareholders’ deficit by $4 million.

 

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HEXION SPECIALTY CHEMICALS

 

Unaudited Pro Forma Statement of Operations

For the year ended December 31, 2005

(dollars in millions, except per share data)

 

          Hexion
Formation


    Hexion
Refinancings


          The offering

       
    Actual

                   
          Preacquisition

                   
    Hexion

    Bakelite (1)

    Adjustments (2)

    Adjustments (3)

    Subtotal

    Adjustments (4)

    Pro Forma

 

Net sales

  $ 4,470     $ 261     $ (14 )(a)   $ —       $ 4,717     $  —       $ 4,717  

Cost of sales

    3,808       229       (31 )(a)     —         4,006       —         4,006  
   


 


 


 


 


 


 


Gross profit

    662       32       17       —         711       —         711  

Selling, general & administrative expense

    400       30       (1 )(b)     —         429       2  (a)     431  

Transaction costs

    44       —         —         —         44       —         44  

Other operating (income) expense

    10       1       (1 )(c)     —         10       (3 )(b)     7  
   


 


 


 


 


 


 


Operating income

    208       1       19       —         228       1       229  
   


 


 


 


 


 


 


Interest expense, net

    221       2       (2 )(d)     6  (a)     227       (7 )(c)     220  

Other non-operating (income) expense

    16       —         —         —         16       —         16  
   


 


 


 


 


 


 


Income (loss) from continuing operations before income tax and minority interest

    (29 )     (1 )     21       (6 )     (15 )     8       (7 )

Income tax expense

    48       2       10 (e)     (3 )(b)     57       3 (d)     60  
   


 


 


 


 


 


 


Income (loss) from continuing operations before minority interest

    (77 )     (3 )     11       (3 )     (72 )     5       (67 )

Equity in earnings of investees

    2       —         —         —         2       —         2  

Minority interest in net (income) of consolidated subsidiaries

    (3 )     —         (1 )(f)     —         (4 )     —         (4 )
   


 


 


 


 


 


 


Net income (loss) from continuing operations

    (78 )     (3 )     10       (3 )     (74 )     5       (69 )

Dividends on Series A Preferred Stock

    30       —         —         (30 )(c)     —         —         —    
   


 


 


 


 


 


 


Net income (loss) available to common shareholders before nonrecurring charges directly attributable to the transactions (5)

  $ (108 )   $ (3 )   $ 10     $ 27     $ (74 )   $ 5     $ (69 )
   


 


 


 


 


 


 


Pro Forma loss per share (6)

                                                       

Basic and Diluted

                                                  $ (0.80 )

Pro Forma weighted average number of common shares outstanding (6)

                                                       

Basic and Diluted

                                                    86,330,432  

 

 

 

See Notes to Unaudited Pro Forma Statement of Operations

 

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HEXION SPECIALTY CHEMICALS

 

Unaudited Pro Forma Statement of Operations

For the three months ended March 31, 2006

(dollars in millions, except per share data)

 

          Hexion
Refinancings


          The offering

       
    Actual

                 
                   
    Hexion

    Adjustments (3)

    Subtotal

    Adjustments (4)

    Pro Forma

 

Net sales

  $ 1,245     $ —       $ 1,245     $  —       $ 1,245  

Cost of sales

    1,060       —         1,060       —         1,060  
   


 


 


 


 


Gross profit

    185       —         185       —         185  

Selling, general & administrative expense

    101       —         101       —         101  

Transaction costs

    4       —         4       —         4  

Other operating (income) expense

    (30 )     —         (30 )     (1 )(b)     (31 )
   


 


 


 


 


Operating income

    110       —         110       1       111  
   


 


 


 


 


Interest expense, net

    54       3 (a)     57       (2 )(c)     55  

Other non-operating expense

    1       —         1       —         1  
   


 


 


 


 


Income (loss) from continuing operations before income tax and minority interest

    55       (3 )     52       3       55  

Income tax expense

    19       (1 )(b)     18       1 (d)     19  
   


 


 


 


 


Income (loss) from continuing operations before minority interest

    36       (2 )     34       2       36  

Equity in earnings of investees

    1       —         1       —         1  

Minority interest in net (income) of consolidated subsidiaries

    (2 )     —         (2 )     —         (2 )
   


 


 


 


 


Net income (loss) from continuing operations

    35       (2 )     33       2       35  

Dividends on Series A Preferred Stock

    13       (13 )(c)     —         —         —    
   


 


 


 


 


Net income available to common shareholders before nonrecurring charges directly attributable to the transactions (5)

  $ 22     $ 11     $ 33     $ 2     $ 35  
   


 


 


 


 


Pro Forma earnings per share (6)

                                       

Basic

                                  $ 0.41  

Diluted

                                  $ 0.39  

Pro Forma weighted average number of common shares outstanding (6)

                                       

Basic

                                    86,330,432  

Diluted

                                    89,447,211  

 

 

 

See Notes to Unaudited Pro Forma Statement of Operations

 

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HEXION SPECIALTY CHEMICALS

 

Unaudited Pro Forma Statement of Operations

For the three months ended March 31, 2005

(dollars in millions, except per share data)

 

        Hexion
Formation


    Hexion
Refinancings


          The offering

       
    Actual

                 
          Preacquisition

                 
    Hexion

    Bakelite (1)

  Adjustments (2)

    Adjustments (3)

    Subtotal

    Adjustments (4)

    Pro Forma

 

Net sales

  $ 1,012     $ 193   $ (11 )(a)   $ —       $ 1,194     $ —       $ 1,194  

Cost of sales

    863       165     (11 )(a)     —         1,017       —         1,017  
   


 

 


 


 


 


 


Gross profit

    149       28     —         —         177       —         177  

Selling, general & administrative expense

    86       21     —         —         107       1 (a)     108  

Transaction costs

    7       —       —         —         7       —         7  

Other operating (income) expense

    (3 )     1     (1 )(c)     —         (3 )     (1 )(b)     (4 )
   


 

 


 


 


 


 


Operating income

    59       6     1       —         66       —         66  
   


 

 


 


 


 


 


Interest expense, net

    45       1     9 (d)     2 (a)     57       (2 )(c)     55  

Other non-operating expense

    9       —       —         —         9       —         9  
   


 

 


 


 


 


 


Income (loss) from continuing operations before income tax and minority interest

    5       5     (8 )     (2 )     —         2       2  

Income tax expense

    13       2     (2 )(e)     —   (b)     13       1 (d)     14  
   


 

 


 


 


 


 


Income (loss) from continuing operations before minority interest

    (8 )     3     (6 )     (2 )     (13 )     1       (12 )

Equity in earnings of investees

    —         —       —         —         —         —         —    

Minority interest in net (income) of consolidated subsidiaries

    (2 )     —       1 (f)     —         (1 )     —         (1 )
   


 

 


 


 


 


 


Net income (loss) from continuing operations

    (10 )     3     (5 )     (2 )     (14 )     1       (13 )

Dividends on Series A Preferred Stock

    —         —       —         —         —         —         —    
   


 

 


 


 


 


 


Net income (loss) available to common shareholders before nonrecurring charges directly attributable to the
transactions (5)

  $ (10 )   $ 3   $ (5 )   $ (2 )   $ (14 )   $ 1     $ (13 )
   


 

 


 


 


 


 


Pro Forma loss per share (6)

                                                     

Basic and Diluted

                                                $ (0.15 )

Pro Forma weighted average number of common shares outstanding (6)

                                                     

Basic and Diluted

                                                  86,330,432  

 

 

 

See Notes to Unaudited Pro Forma Statement of Operations

 

 

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Notes to Unaudited Pro Forma Statement of Operations

 

(1) The Bakelite Transaction occurred on April 29, 2005. The historical data with respect to the Resins Business of the Bakelite Group, the predecessor to Bakelite, is presented in the unaudited pro forma statement of operations for the year ended December 31, 2005 and for the three months ended March 31, 2005 and relates to the period from January 1, 2005 to April 29, 2005 and the three month period from January 1, 2005 to March 31, 2005, respectively. From April 30, 2005, data with respect to Bakelite is included in the Hexion historical data. The historical combined statement of operations of Bakelite for the four months ended April 29, 2005 and the three months ended March 31, 2005 has been translated into U.S. dollars at the average exchange rate for the period of 1.3053 and 1.3097 U.S. dollars to one euro, respectively. It should be noted that such translations should not be construed as representations that the U.S. dollar amounts actually represent such euro amounts, or could have been or will be converted into euros at the rate indicated or at all. The historical combined statements of operations of Bakelite are as follows:

 

    

Four months
ended

April 29,
2005


   

Three months
ended

March 31,
2005


Net sales

   200     147

Cost of sales

     176       126
    


 

Gross profit

     24       21

Selling, general and administrative expense

     23       16

Other operating expense

     1       1
    


 

Operating income

     —         4

Interest expense

     1       1
    


 

Income (loss) before income tax

     (1 )     3

Income tax expense

     1       1
    


 

Net income (loss)

   (2 )   2
    


 

 

To conform the presentation of Bakelite’s statements of operations with Hexion’s for the four months ended April 29, 2005 and the three months ended March 31, 2005, Bakelite’s distribution expenses of €6 and €4, respectively, have been included in Cost of sales, and marketing expenses of €12 and €8, respectively, have been included in Selling, general and administrative expense.

 

(2) Reflects the following adjustments:

 

  (a) Elimination of intercompany activity resulted in the reduction of net sales and cost of sales. Additionally, cost of sales reflects an adjustment to reverse an amount which represents the write-up of inventory that was recorded as part of the purchase price allocations for Bakelite and the minority interest exchanges, and subsequently expensed through cost of sales. These entries are summarized as follows:

 

     Year ended
December 31,
2005


    Three months
ended March 31,
2005


 

Sales

                

Elimination of intercompany activity

   $ (14 )   $ (11 )
    


 


Cost of Sales

                

Elimination of intercompany activity

   $ (15 )   $ (11 )

Reverse expensing of inventory write-up

     (16 )     —    
    


 


     $ (31 )   $ (11 )
    


 


 

  (b) Reflects an adjustment to decrease amortization expense resulting from fair value adjustments to amortizable intangible assets.

 

  (c) Reflects the elimination of management fees.

 

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  (d) Represents the new debt issued and the effect of a full year of interest expense related to the debt outstanding as a result of the Hexion Formation:

 

     Year ended
December 31,


    Three months
ended
March 31,


 
     2005

    2005

 

Second-priority senior secured notes

   $ 44     $ 11  

New Floating Rate Notes

     16       4  

Existing Senior Secured Term Loan

     40       10  

8% Senior Secured Notes

     11       3  

9 1/2% Senior Second Secured Notes

     19       5  

13 1/2% Senior Subordinated Notes

     44       11  

All other

     40       9  
    


 


Total cash interest

     214       53  

Amortization of debt issuance cost and debt premium or discount

     7       2  
    


 


Pro forma interest expense

     221       55  

Less historical interest

     (223 )     (46 )
    


 


Net adjustment to interest expense

   $ (2 )   $ 9  
    


 


 

The interest rates in effect at May 23, 2006 were used to compute the pro forma adjustments to interest expense for newly issued variable rate debt, including debt issued in the Borden Transaction. Each one-eighth point change in the assumed interest rates would result in a $1 change in annual interest expense.

 

  (e) The appropriate statutory tax rates of the respective tax jurisdictions to which adjustments relate have been applied.

 

  (f) Reflects the elimination of minority interests in Resolution Performance and Resolution Specialty resulting from the exchange of such interests as part of the Combinations.

 

  (3) Reflects the following adjustments:

 

  (a) Reflects the reduction of interest expense as a result of the Hexion Refinancings

 

    

Year ended
December 31,

2005


    Three months
ended
March 31,


 
       2005

    2006

 

New Senior Secured Credit Facilities

   $ 120     $ 31     $ 31  

Repayment of

                        

Existing Senior Secured Term Loan

     (40 )     (10 )     (9 )

8% Senior Secured Notes

     (11 )     (3 )     (3 )

9 1/2% Senior Second Secured Notes

     (19 )     (5 )     (5 )

13 1/2% Senior Subordinated Notes

     (44 )     (11 )     (11 )
    


 


 


Total net cash interest

     6       2       3  

Change in amortization of debt issuance cost and debt premium or discount

     —         —         —    
    


 


 


Net adjustment to interest expense

   $ 6     $ 2     $ 3  
    


 


 


 

The interest rates in effect at May 23, 2006, including the $1 billion notional amount swap, were used to compute pro forma adjustments to interest expense for newly issued variable rate debt, including the new senior secured credit facilities. Each one-eighth point change in the assumed interest rates would result in $1 change in annual interest expense. See “Description of Certain Indebtedness—First-Priority Lien Obligations—New Senior Secured Credit Facilities.”

 

  (b) The appropriate statutory tax rates of the respective tax jurisdictions to which adjustments relate have been applied.

 

  (c) Reflects the elimination of accretion related to Series A Preferred Stock for the year ended December 31, 2005 and the three months ended March 31, 2006. It is estimated that an additional amount of $20 will be incurred through the redemption date in respect of a redemption premium, dividends, accretion and fees. The Series A Preferred Stock was redeemed in full for cash on May 12, 2006.

 

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(4) Reflects the following adjustments:

 

  (a) Reflects the cost resulting from the modification of existing option agreements.

 

  (b) Reflects the elimination of management fees resulting from the buyout of the Apollo management consulting agreement in connection with the offering. The unaudited pro forma statement of operations does not reflect a one time charge relating to the buyout of the Apollo management consulting agreement or the payment of a $10 fee to Apollo for its structuring and advisory services relating to the offering.

 

  (c) Reflects the reduction of interest expense as a result of partial repayment of new senior secured credit facilities of $100.

 

  (d) The appropriate statutory tax rates of the respective tax jurisdictions to which adjustments relate have been applied.

 

(5) Net income (loss) available to common shareholders does not include estimated nonrecurring charges directly attributable to the transactions of approximately $71, consisting of a loss on debt redemption of $31 (representing redemption cost of $42 less debt premium of $11), write off of unamortized debt issuance costs of $20, payment of $10 for the buy-out of the Apollo management consulting agreement and payment to Apollo of $10 for structuring and advisory services.

 

(6) Pro forma basic and diluted earnings (loss) per common share is computed by dividing earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. The share amounts have, as appropriate, been adjusted for the contribution of 73,059 shares by Hexion LLC, Hexion’s parent company, on May 12, 2006 and the effects of the contribution of the option and deferred compensation plans and the contribution and cancellation of 954,378 shares of the common stock of Hexion by Hexion LLC related to such deferred compensation plan which will occur immediately prior to the offering. The Company has included 954,378 deferred compensation units in its calculation of basic earnings per share in accordance with paragraph 10 of Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share, because all conditions related to the issuance of such shares have been satisfied. Upon the contribution of the option plan to the Company, Hexion LLC options will convert into options denominated in Hexion common stock on a one-for-one basis. Under Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, exchanges of options are considered a modification. However, because the fair value of these options before and after the modification does not change and the original value of the options is already reflected in the historical consolidated financial statements of the Company because it was an award granted by our principal shareholder, there is no impact to the pro forma balance sheet or statements of operations for the periods presented.

 

Since we had a net loss for the year ended December 31, 2005 and for three months ended March 31, 2005, any shares issuable upon the exercise of employee stock options would have an antidilutive effect. Therefore the unaudited pro forma diluted loss per share for each of these periods is the same as the unaudited pro forma basic loss per share. Since we had a net income for the three months ended March 31, 2006, any shares issuable upon the exercise of employee stock options would have a dilutive impact. Therefore the number of shares for the calculation of the unaudited pro forma diluted earnings per share for the three months ended March 31, 2006 has been adjusted to reflect the dilutive effect of 4,087,128 in-the-money stock options outstanding as at March 31, 2006 with a weighted average exercise price of approximately $6.29 per share issued in prior years in shares of Hexion LLC. After the contributions mentioned above, these options will become options for the common stock of Hexion.

 

Unaudited pro forma basic and diluted earnings (loss) per share have been calculated in accordance with the SEC rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any changes in our capital structure. Therefore, pro forma weighted average shares for purposes of the unaudited pro forma basic earnings (loss) per share calculation have been adjusted to reflect the sale of 3,773,585 shares by us in this offering.

 

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SELECTED HISTORICAL FINANCIAL AND OTHER INFORMATION

 

The combination of Borden Chemical, Resolution Performance and Resolution Specialty has been treated, for accounting purposes, as a combination of entities under common control due to Apollo’s controlling interest in each of the companies. The audited consolidated financial statements presented herein reflect the results of operations of each company from the date such company was acquired by Apollo.

 

The following table presents selected historical financial and other data of Hexion. The selected historical financial and other data of Hexion as of December 31, 2004 and 2005, and for the years ended December 31, 2003, 2004 and 2005 has been derived from the audited consolidated financial statements of Hexion, included elsewhere in this prospectus. The selected historical financial and other data of Hexion as of and for the three months ended March 31, 2005 and 2006 have been derived from the unaudited condensed consolidated financial statements of Hexion, included elsewhere in this prospectus and include all adjustments that management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods indicated. Results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the entire year. The financial data of Hexion for the years ended December 31, 2001 and 2002 represent the operating results of Resolution Performance, not included herein, which reflect purchase accounting adjustments following the acquisition of Resolution Performance by Apollo on November 14, 2000. The financial data for Hexion for the years ended December 31, 2003, 2004 and 2005 and the three months ended March 31, 2005, includes:

 

    the results of operations of Resolution Performance for the years ended December 31, 2003, 2004 and 2005 and the three months ended March 31, 2005, which reflect purchase accounting adjustments from the date of acquisition of Resolution Performance by Apollo on November 14, 2000;

 

    the results of operations of Borden Chemical for the period from August 12, 2004 to December 31, 2004, the year ended December 31, 2005 and the three months ended March 31, 2005, on a historical basis (because Borden Chemical is a public reporting registrant as a result of public debt that was outstanding prior to the Borden Transaction and which debt remains outstanding, Borden Chemical has elected to present its financial statements from the date of its acquisition by Apollo on the historical basis of accounting permitted under the SEC’s public debt exemption);

 

    the results of operations of Resolution Specialty for the period from August 2, 2004 to December 31, 2004, the year ended December 31, 2005 and the three months ended March 31, 2005 which reflect purchase accounting adjustments from the date of acquisition of Resolution Specialty by Apollo on August 2, 2004; and

 

    the results of operations of Bakelite for the period from April 30, 2005 to December 31, 2005, which reflect purchase accounting adjustments from the date of the acquisition of Bakelite on April 29, 2005.

 

The financial data for Hexion for the three months ended March 31, 2006 includes the results of the Rhodia Acquisition and Rohm and Haas Acquisition since January 31, 2006 and March 1, 2006, the respective dates of acquisition.

 

You should read this data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all the financial statements and the related notes included elsewhere in this prospectus.

 

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       Year ended December 31,

     Three months
ended March 31,


 
       2001

     2002

     2003

     2004(1)

     2005(2)

     2005

     2006(2)

 
       (dollars in millions)                

Statement of Operations:

                                                                

Net sales

     $ 863      $ 740      $ 782      $ 2,019      $ 4,470      $ 1,012      $ 1,245  

Cost of sales

       695        601        714        1,785        3,808        863        1,060  
      


  


  


  


  


  


  


Gross profit (loss)

       168        139        68        234        662        149        185  
      


  


  


  


  


  


  


Selling, general & administrative expense

       90        82        81        163        400        86        101  

Transaction costs

       —          —          —          56        44        7        4  

Other operating (income) expense(3)

       —          16        10        6        10        (3 )      (30 )
      


  


  


  


  


  


  


Operating income (loss)

       78        41        (23 )      9        208        59        110  
      


  


  


  


  


  


  


Interest expense, net

       70        65        77        117        204        45        54  

Write-off of deferred financing fees

       —          —          —          —          17        —          —    

Other non-operating expense

       14        —          —          5        16        9        1  
      


  


  


  


  


  


  


Income (loss) from continuing operations before income tax and minority interest

       (6 )      (24 )      (100 )      (113 )      (29 )      5        55  

Income tax expense (benefit)

       —          (10 )      (37 )      —          48        13        19  
      


  


  


  


  


  


  


Income (loss) from continuing operations before minority interest

       (6 )      (14 )      (63 )      (113 )      (77 )      (8 )      36  

Earnings from unconsolidated entities, net of taxes

       —          —          —          —          2        —          1  

Minority interest in net (income) loss of consolidated subsidiaries

       1        3        13        8        (3 )      (2 )      (2 )
      


  


  


  


  


  


  


Income (loss) from continuing operations

       (5 )      (11 )      (50 )      (105 )      (78 )      (10 )      35  

Loss from discontinued operations

       —          —          —          —          9        —          —    
      


  


  


  


  


  


  


Net income (loss)

       (5 )      (11 )      (50 )      (105 )      (87 )      (10 )      35  
      


  


  


  


  


  


  


Redeemable preferred stock accretion

       —          —          —          —          30        —          13  
      


  


  


  


  


  


  


Net income (loss) available to common shareholders

     $ (5 )    $ (11 )    $ (50 )    $ (105 )    $ (117 )    $ (10 )    $ 22  
      


  


  


  


  


  


  


Basic and Diluted Per Share Data:

                                                                

Income (loss) from continuing operations

     $ (0.06 )    $ (0.13 )    $ (0.61 )    $ (1.27 )    $ (1.30 )    $ (0.12 )    $ 0.27  

Loss from discontinued operations

         —          —          —          —          (0.11 )      —          —    
      


  


  


  


  


  


  


Net income (loss) available to common shareholders

     $ (0.06 )    $ (0.13 )    $ (0.61 )    $ (1.27 )    $ (1.41 )    $ (0.12 )    $ 0.27  
      


  


  


  


  


  


  


Cash Flow Data:

                                                                

Cash flows (used in) from operating activities

              $ 64      $ (43 )    $ (32 )    $ 171      $ 24      $ 44  

Cash flows (used in) from investing activities

                (45 )      7        (20 )      (354 )      (20 )      (42 )

Cash flows (used in) from financing activities

                (21 )      80        148        219        3        (16 )

Balance Sheet Data (at end of period):

                                                                

Cash and equivalents

     $ 6      $ 5      $ 49      $ 152      $ 183      $ —        $ 168  

Working capital(4)

       142        99        177        433        427        —          423  

Total assets

       1,101        1,179        1,191        2,696        3,209        —          3,307  

Total long-term debt

       581        567        675        1,834        2,303