DEFM14A 1 d358532ddefm14a.htm DEFM14A DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨   Preliminary Proxy Statement
¨   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x   Definitive Proxy Statement
¨   Definitive Additional Materials
¨   Soliciting Material Pursuant to §240.14a-12

Solutia Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x   No fee required.
¨   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

 

  (2)  

Aggregate number of securities to which transaction applies:

 

 

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

  (4)  

Proposed maximum aggregate value of transaction:

 

 

  (5)   Total fee paid:
       
¨   Fee paid previously with preliminary materials.
¨   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount previously paid:

 

 

  (2)  

Form, Schedule or Registration Statement No.:

 

 

  (3)  

Filing Party:

 

 

  (4)  

Date Filed:

 

 

 

 

 


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PROXY STATEMENT/PROSPECTUS

PROPOSED MERGER—YOUR VOTE IS IMPORTANT

 

LOGO

 

LOGO

Dear fellow stockholders of Solutia Inc.:

The boards of directors of Solutia Inc., or “Solutia,” and Eastman Chemical Company, or “Eastman,” have each approved an agreement and plan of merger, entered into on January 26, 2012 and referred to as the “merger agreement,” providing for Solutia to be acquired by Eastman, which transaction is referred to as the “merger.” You are cordially invited to attend a special meeting of Solutia stockholders to be held at 10:00 a.m., local time, on June 29, 2012, at the offices of Kirkland & Ellis LLP, 601 Lexington Avenue, 50th Floor, New York, New York.

At the Solutia special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement, pursuant to which Solutia would be acquired through a merger with a wholly owned subsidiary of Eastman. If the merger contemplated by the merger agreement is completed, each outstanding share of common stock of Solutia outstanding immediately prior to the effective time of the merger, other than shares held by any stockholder who is entitled to exercise and properly exercises appraisal rights with respect to such shares pursuant to the General Corporation Law of the State of Delaware, will be converted into the right to receive (1) $22.00 in cash, without interest, and (2) 0.12 shares of common stock of Eastman. This is referred to as the “merger consideration.” Eastman expects that it may issue up to 15,770,889 shares of Eastman common stock in the merger. The implied value of the stock portion of the merger consideration will fluctuate as the market price of Eastman common stock fluctuates. You should obtain current stock price quotations for Eastman common stock and Solutia common stock before deciding how to vote with respect to the adoption of the merger agreement. Eastman common stock and Solutia common stock are listed for trading on the New York Stock Exchange under the symbols “EMN” and “SOA,” respectively.

At the Solutia special meeting, you also will be asked to consider and vote upon a proposal to approve, on a non-binding, advisory basis, the compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger and a proposal to adjourn the Solutia special meeting, if necessary, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement at the time of the Solutia special meeting.

After careful consideration, the Solutia board of directors unanimously approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and declared that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of Solutia and its stockholders. The Solutia board of directors unanimously recommends that you vote “FOR” the adoption of the merger agreement; “FOR” the approval, on a non-binding, advisory basis, of the compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger; and “FOR” the approval of the adjournment of the Solutia special meeting, if necessary, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement at the time of the Solutia special meeting.

The accompanying document is a proxy statement of Solutia and a prospectus of Eastman, and provides you with information about Solutia, Eastman, the proposed merger and the special meeting of Solutia stockholders. Solutia encourages you to read the entire proxy statement/prospectus carefully.

You may also obtain more information about Solutia and Eastman from documents Solutia and Eastman have filed with the Securities and Exchange Commission.

For a discussion of risk factors you should consider in evaluating the merger agreement you are being asked to adopt, see “Risk Factors” beginning on page 25 of the accompanying proxy statement/prospectus.

Your vote is important. Adoption of the merger agreement requires the approval of the holders of a majority of the outstanding shares of Solutia common stock. The failure of any stockholder to vote will have the same effect as a vote against adopting the merger agreement. Accordingly, whether or not you plan to attend the Solutia special meeting, you are requested to promptly vote your shares by proxy electronically via the Internet, by telephone or by sending in the appropriate paper proxy card as instructed in these materials. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote “FOR” each of the proposals described in the accompanying proxy statement/prospectus.

Granting a proxy will not prevent you from voting your shares in person if you choose to attend the Solutia special meeting.

We thank you for your continued support of Solutia.

Sincerely,

 

LOGO

 

JEFFRY N. QUINN
Chairman of the Board, President and Chief Executive Officer
Solutia Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger described in the accompanying proxy statement/prospectus nor have they approved or disapproved of the issuance of the Eastman common stock in connection with the merger, or determined if the accompanying proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

The accompanying proxy statement/prospectus is dated May 25, 2012 and is first being mailed to Solutia stockholders on or about May 25, 2012.


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SOLUTIA INC.

575 Maryville Centre Drive

St. Louis, Missouri 63141

(314) 674-1000

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 29, 2012

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Solutia Inc., or “Solutia,” will be held at 10:00 a.m., local time, on June 29, 2012, at the offices of Kirkland & Ellis LLP, 601 Lexington Avenue, 50th Floor, New York, New York. Holders of Solutia common stock at the close of business on May 4, 2012 (such date and time, the “record date”) will be asked to:

 

Proposal1.

  consider and vote upon the adoption of the Agreement and Plan of Merger, dated January 26, 2012, as it may be amended from time to time, by and among Solutia, Eastman Chemical Company, or “Eastman,” and Eagle Merger Sub Corporation (the “merger agreement”);

Proposal2.

  consider and vote, on a non-binding, advisory basis, to approve compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger contemplated by the merger agreement; and

Proposal3.

  consider and vote upon the approval of the adjournment of the Solutia special meeting, if necessary, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement at the time of the Solutia special meeting.

Please refer to the attached proxy statement/prospectus and the merger agreement for further information with respect to the business to be transacted at the Solutia special meeting. Solutia expects to transact no other business at the meeting, except for business properly brought before the meeting and any adjournment or postponement thereof. Holders of record of Solutia common stock as of the record date will be entitled to notice of and to vote at the Solutia special meeting with regard to Proposals 1–3 described above.

The Solutia board of directors unanimously recommends that you vote “FOR” the adoption of the merger agreement; “FOR” the approval, on a non-binding, advisory basis, of the compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger; and “FOR” the approval of the adjournment of the Solutia special meeting, if necessary, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement at the time of the Solutia special meeting.

Your vote is important regardless of the number of shares that you own. Whether or not you plan on attending the Solutia special meeting, we urge you to read the proxy statement/prospectus carefully and to please vote your shares as promptly as possible. You may vote your shares by proxy electronically via the Internet, by telephone, by completing and sending in the appropriate paper proxy card or in person at the Solutia special meeting.

All Solutia stockholders as of the record date are cordially invited to attend the Solutia special meeting.

 

By Order of the Board of Directors

LOGO

Miriam Rogers Singer

Vice President and Corporate Secretary

St. Louis, Missouri

May 25, 2012


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates by reference important business and financial information about each of Eastman and Solutia from documents that each company has filed or will file with the Securities and Exchange Commission, or the “SEC,” but that are not being included in or delivered with this proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You may read and copy the documents incorporated by reference in this proxy statement/prospectus, other than certain exhibits to those documents, and other information about each of Eastman and Solutia that is filed with the SEC under the Securities and Exchange Act of 1934, or the “Exchange Act,” at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can also obtain such documents free of charge through the SEC’s website, www.sec.gov, or by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:

 

For information about Eastman Chemical Company:      For information about Solutia Inc.:
By Mail:   

Eastman Chemical Company

P.O. Box 431

Kingsport, Tennessee 37662
Attention: Investor Relations

     By Mail:      Solutia Inc.

575 Maryville Centre Drive

St. Louis, Missouri 63141 Attention: Investor Relations

By Telephone:    (423) 229-4647         By Telephone:      (314) 674-1000  

If you would like to request any documents, please do so by June 25, 2012 in order to receive them before the Solutia special meeting.

For additional information on documents incorporated by reference in this proxy statement/prospectus, please see “Where You Can Find More Information” beginning on page 177. Please note that information contained on the websites of Eastman or Solutia is not incorporated by reference in, nor considered to be part of, this proxy statement/prospectus.


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ABOUT THIS PROXY STATEMENT/PROSPECTUS

Eastman has supplied all information contained in or incorporated by reference into this proxy statement/prospectus relating to Eastman. Solutia has supplied all information contained in or incorporated by reference into this proxy statement/prospectus relating to Solutia. Eastman and Solutia have both contributed to information relating to the merger.

You should rely only on the information contained in or incorporated by reference into this proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in or incorporated by reference into this proxy statement/prospectus. This proxy statement/prospectus is dated May 25, 2012, and is based on information as of May 24, 2012 or such other date as may be noted. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any other date. You should not assume that the information contained in any document incorporated or deemed to be incorporated by reference herein is accurate as of any date other than the date of such document. Any statement contained in a document incorporated or deemed to be incorporated by reference into this proxy statement/prospectus will be deemed to be modified or superseded to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference into this proxy statement/prospectus modifies or supersedes that statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement/prospectus. Neither the mailing of this proxy statement/prospectus to the stockholders of Solutia nor the taking of any actions contemplated hereby by Eastman or Solutia at any time will create any implication to the contrary.

This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction in which or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.


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TABLE OF CONTENTS

 

     Page  

Defined Terms

     1   

Questions and Answers

     2   

Summary

     9   

Summary Historical and Pro Forma Financial Data

     19   

Summary Historical Consolidated Financial Data of Eastman

     19   

Summary Historical Consolidated Financial Data of Solutia

     20   

Unaudited Summary Pro Forma Condensed Combined Financial Information

     22   

Comparative Per Share Data

     23   

Comparative Market Value of Common Stock

     24   

Risk Factors

     25   

Risks Relating to the Merger

     25   

Risks Relating to the Business and Operations of Eastman After the Merger

     29   

Cautionary Statement Regarding Forward-Looking Statements

     31   

Information About Eastman

     32   

Information About Solutia

     33   

Selected Historical Consolidated Financial Data of Eastman

     34   

Selected Historical Consolidated Financial Data of Solutia

     36   

Unaudited Pro Forma Condensed Combined Financial Information

     38   

Comparative Per Share Data

     60   

Comparative Market Value of Common Stock

     61   

Solutia Special Meeting

     62   

Proxy Statement/Prospectus

     62   

Date, Time and Place of the Solutia Special Meeting

     62   

Purpose of the Solutia Special Meeting

     62   

Record Date and Voting

     62   

Vote Required

     62   

Recommendation of the Solutia Board of Directors

     63   

Voting Electronically or by Telephone

     64   

Vote of Solutia’s Directors and Executive Officers

     64   

Revocability of Proxies

     64   

Inspector of Election

     64   

Attending the Solutia Special Meeting

     65   

Voting Procedures

     65   

Proxy Solicitations

     65   

Householding

     66   

Results of the Solutia Special Meeting

     66   

Beneficial Stock Ownership of Solutia’s Directors, Executive Officers and Persons Owning More Than 5% of the Outstanding Shares of Solutia Common Stock

     66   

Proposals Submitted to Solutia Stockholders

     68   

Adoption of the Agreement and Plan of Merger

     68   

Non-Binding Advisory Vote on Golden Parachute Compensation

     68   

Adjournment Proposal

     69   

The Merger

     70   

Effect of the Merger

     70   

Financing for the Merger

     71   

Background of the Merger

     73   

Recommendation of the Solutia Board of Directors and Solutia’s Reasons for the Merger

     89   

Opinions of Financial Advisors

     95   

Presentations by Solutia’s Consultants

     117   

Certain Unaudited Eastman Forecasts and Other Information

     119   

Certain Unaudited Solutia Forecasts

     121   

Interests of Certain Persons in the Merger

     123   


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Equity Awards Held by Executive Officers and Directors

     123   

Payments to Solutia Executive Officers Contingent Upon the Merger

     125   

Golden Parachute Compensation

     127   

Board of Directors and Management of Eastman After the Merger

     129   

Solutia Director and Officer Indemnification and Continuation of Insurance

     129   

Regulatory Approvals

     130   

New York Stock Exchange Listing of Eastman Common Stock; Deregistration of Solutia Common Stock After the Merger

     131   

Exchange of Shares of Solutia Common Stock

     131   

Distributions with Respect to Unexchanged Shares of Solutia Common Stock

     131   

Fractional Shares

     131   

Lost, Stolen or Destroyed Certificates

     132   

Appraisal Rights

     132   

Litigation Related to the Merger

     136   

Accounting Treatment of the Merger

     137   

Material U.S. Federal Income Tax Consequences

     137   

The Merger Agreement

     143   

The Merger

     143   

Effective Time; Closing

     143   

Merger Consideration

     144   

Withholding

     146   

Dividends and Distributions

     146   

Conditions to the Completion of the Merger

     146   

Reasonable Best Efforts to Obtain Solutia Stockholder Approval

     148   

Non-Solicitation of Alternative Proposals

     148   

Financing Covenant; Solutia Cooperation

     151   

Regulatory Matters; Third-Party Consents

     152   

Termination

     152   

Solutia Termination Fee

     153   

Expenses

     154   

Conduct of Business Pending the Merger

     154   

Additional Covenants

     156   

Governance of Surviving Corporation

     156   

Indemnification; Directors’ and Officers’ Insurance

     156   

Employee Matters

     156   

Representations and Warranties

     157   

Amendment and Waiver

     159   

Governing Law and Venue; Waiver of Jury Trial

     159   

Specific Performance

     159   

Description of Eastman Capital Stock

     160   

Authorized Capital Stock

     160   

Certain Provisions Affecting Control of Eastman

     160   

Transfer Agent and Registrar

     163   

Comparison of Rights of Holders of Eastman Common Stock and Solutia Common Stock

     164   

Legal Matters

     175   

Experts

     175   

Eastman

     175   

Solutia

     175   

Submissions of Solutia Stockholder Proposals

     176   

Where You Can Find More Information

     177   

Eastman

     177   

Solutia

     178   


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     Page  

Annex A – The Merger Agreement

     A-1   

Annex B – Opinion of Deutsche Bank Securities Inc., Financial Advisor to Solutia

     B-1   

Annex C – Opinion of Moelis & Company LLC, Financial Advisor to Solutia

     C-1   

Annex D – Opinion of Perella Weinberg Partners LP, Financial Advisor to the Solutia Board

     D-1   

Annex E – Section 262 of the Delaware General Corporation Law

     E-1   


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DEFINED TERMS

This proxy statement/prospectus generally avoids the use of technical defined terms, but a few frequently used terms may be helpful for you to have in mind at the outset. Unless otherwise specified or if the context so requires, this proxy statement/prospectus refers to:

 

   

the transaction pursuant to which Eastman’s wholly owned subsidiary, Merger Sub, will merge with and into Solutia, and Solutia will become an indirect wholly owned subsidiary of Eastman, and the conversion of shares of, and adjustment of warrants to acquire, Solutia common stock into rights to receive cash and shares of Eastman common stock, as the “merger”;

 

   

the Agreement and Plan of Merger, dated January 26, 2012 (as it may be amended from time to time), by and among Solutia, Eastman and Merger Sub, pursuant to which the merger will be completed, as the “merger agreement”;

 

   

the (1) $22.00 in cash, without interest, and (2) 0.12 shares of Eastman common stock to be paid by Eastman in exchange for each share of Solutia common stock pursuant to the terms of the merger agreement, as the “merger consideration”;

 

   

Eastman Chemical Company, a Delaware corporation, as “Eastman”;

 

   

the board of directors of Eastman as the “Eastman board of directors”;

 

   

the amended and restated bylaws of Eastman as the “Eastman Bylaws”;

 

   

the amended and restated certificate of incorporation of Eastman as the “Eastman Charter”;

 

   

the common stock, par value $0.01 per share, of Eastman as “Eastman common stock”;

 

   

Eagle Merger Sub Corporation, a Delaware corporation and a wholly owned subsidiary of Eastman, as “Merger Sub”;

 

   

Solutia Inc., a Delaware corporation, as “Solutia”;

 

   

the board of directors of Solutia as the “Solutia board of directors”;

 

   

the second amended and restated bylaws of Solutia as the “Solutia Bylaws”;

 

   

the second amended and restated certificate of incorporation of Solutia as the “Solutia Charter”;

 

   

the common stock, par value $0.01 per share, of Solutia as “Solutia common stock”;

 

   

the Solutia Inc. Management Long-Term Incentive Plan, as amended, and the Solutia Non-Employee Director Stock Compensation Plan, together, as the “Solutia Equity Plans”; and

 

   

the General Corporation Law of the State of Delaware, as the “DGCL.”

 

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QUESTIONS AND ANSWERS

The questions and answers below highlight only selected information from this proxy statement/prospectus. They do not contain all of the information that may be important to you. The Solutia board of directors is soliciting proxies from its stockholders to vote at a special meeting of Solutia stockholders, to be held at 10:00 a.m., local time, on June 29, 2012, at the offices of Kirkland & Ellis LLP, 601 Lexington Avenue, 50th Floor, New York, New York, and any adjournment or postponement of that meeting. You should read carefully this entire proxy statement/prospectus and the additional documents incorporated by reference into this proxy statement/prospectus to fully understand the matters to be acted upon and the voting procedures for the Solutia special meeting.

 

Q: Why have I received this proxy statement/prospectus?

 

A: The boards of directors of Solutia and Eastman have each approved a merger agreement, entered into on January 26, 2012, providing for Solutia to be acquired by Eastman. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A, which we encourage you to review.

In order to complete the merger Solutia stockholders must vote to adopt the merger agreement.

This document is being delivered to you as both a proxy statement of Solutia and a prospectus of Eastman. It is a proxy statement because the Solutia board of directors is soliciting proxies from its stockholders to vote on the adoption of the merger agreement at a special meeting of Solutia stockholders as well as the other matters set forth in the notice of the meeting and described in this proxy statement/prospectus, and your proxy will be used at the meeting or at any adjournment or postponement of the meeting. It is a prospectus because Eastman will issue Eastman common stock to Solutia stockholders in the merger. On or about May 25, 2012, Solutia intends to begin to deliver to its stockholders of record as of the close of business on May 4, 2012 printed versions of these materials.

Your vote is important. The Solutia board of directors encourages you to vote as soon as possible.

 

Q: What is the merger transaction upon which I am being asked to vote?

 

A: Holders of Solutia common stock as of the record date are being asked to vote to adopt the merger agreement, pursuant to which Merger Sub will merge with and into Solutia, with Solutia surviving as a wholly owned subsidiary of Eastman.

IF SOLUTIA STOCKHOLDERS FAIL TO ADOPT THE MERGER AGREEMENT, THE MERGER CANNOT BE COMPLETED.

 

Q: What will I receive for my shares of Solutia common stock in the merger?

 

A: Subject to certain limitations set forth in the merger agreement, Solutia stockholders will receive the following in exchange for each share of Solutia common stock in the merger:

 

   

$22.00 in cash, without interest, and

 

   

0.12 shares of Eastman common stock.

The implied value of the stock portion of the merger consideration will fluctuate as the market price of Eastman common stock fluctuates. You should obtain current stock price quotations for Eastman common stock and Solutia common stock before deciding how to vote with respect to the adoption of the merger agreement. Eastman common stock and Solutia common stock are listed for trading on the New York Stock Exchange under the symbols “EMN” and “SOA,” respectively.

 

Q: Why is Solutia proposing the merger?

 

A:

After careful consideration, the Solutia board of directors unanimously approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and declared that the merger

 

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  agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of Solutia and its stockholders. In the course of reaching its decision to approve the merger agreement, the Solutia board of directors considered a number of factors in its deliberations, including the following factors, the order of which does not necessarily reflect their relative significance:

 

   

the implied value of the merger consideration of $27.65 per share of Solutia common stock as of the close of trading on January 26, 2012 represented an attractive valuation for Solutia. This implied value represented a premium of approximately 42% to the closing price per share of Solutia common stock of $19.51 on January 26, 2012, the last trading day prior to the approval of the merger by the Solutia board of directors, and premiums of approximately 52.8% and 70.7%, respectively, to the one-month and six-month trailing average closing prices of Solutia common stock as of the close of trading on January 26, 2012;

 

   

that most of the merger consideration will be paid in cash, giving holders of Solutia common stock an opportunity to realize certain value for a significant portion of their investment immediately upon completion of the merger;

 

   

that a portion of the merger consideration will be paid in shares of Eastman common stock and, as a result, holders of Solutia common stock will have the opportunity to participate in any future earnings or growth of the combined company and future appreciation in the value of Eastman common stock following the merger should they decide to retain the Eastman common stock payable in the merger; and

 

   

as a result of the market and execution risks associated with Solutia’s long-range plan, the merger consideration will enable Solutia stockholders to realize a substantial portion of Solutia’s potential future value without the market or execution risks associated with continued operation as a stand-alone company.

For additional detail on these and other factors, please see “The Merger—Recommendation of the Solutia Board of Directors and Solutia’s Reasons for the Merger” beginning on page 89.

 

Q: Why is Eastman entering into the merger?

 

A: After careful consideration, the Eastman board of directors determined that the merger agreement is advisable and in the best interests of Eastman and its stockholders and approved the merger agreement. In making this determination, the Eastman board of directors consulted with Eastman’s management and with its financial and legal advisors and considered a number of factors. The decision of the Eastman board of directors was based upon a number of potential benefits of the merger and other factors that the Eastman board of directors believed would contribute to the success of Eastman after the merger, including the following factors, the order of which does not necessarily reflect their relative significance:

 

   

the potential to grow Eastman’s core businesses by acquiring access to complementary and adjacent key end markets, including, among others, the automotive and architectural industries, as well as Solutia’s technological and business capabilities;

 

   

the potential for Eastman to further increase its growth and investment in the Asia Pacific region, leveraging the trend of the growing middle class in that region with a preference for buying premium products;

 

   

the potential to increase the focus of Eastman’s business on sustainability by acquiring Solutia’s portfolio of sustainable products that promote energy efficiency and safety; and

 

   

the potential to increase Eastman’s stockholder value through enhanced revenue opportunities and cost saving opportunities.

The foregoing discussion summarizes material information and factors considered by the Eastman board of directors in its consideration of the merger but is not intended to be exhaustive and may not include all of

 

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the factors considered by the Eastman board of directors. The Eastman board of directors reached the decision to approve the merger agreement in light of these and other factors that the Eastman board of directors felt were appropriate. In view of the variety of factors and the quality and amount of information considered, the Eastman board of directors as a whole did not find it practicable to and did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination but conducted an overall analysis of the transaction. Individual members of the Eastman board of directors may have given different relative considerations to different factors.

After considering all of the relevant factors, as well as the form and amount of consideration to be paid, the Eastman board of directors concluded that, on balance, the potential benefits of the merger to Eastman and its stockholders outweighed the associated risks.

This discussion of the reasons why the Eastman board of directors approved the merger agreement and certain information presented in this section is forward-looking in nature and, therefore, the information should be read in light of the factors discussed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 31.

 

Q: When is the merger expected to be completed?

 

A: Eastman and Solutia expect the merger to be completed by mid-2012. However, Eastman and Solutia cannot be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

As more fully described in this proxy statement/prospectus and in the merger agreement, the completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. These conditions include, among others, the adoption of the merger agreement by Solutia stockholders, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the “HSR Act,” and clearance of the merger under the antitrust or competition laws of the European Union, China, South Korea, and the Ukraine, the absence of any law or regulation that prohibits the completion of the merger and the approval of the shares of Eastman common stock to be issued in the merger for listing on the New York Stock Exchange. Each party’s obligation to complete the merger is also subject to the material accuracy of the representations and warranties of the other party in the merger agreement and the compliance in all material respects with covenants of the other party in the merger agreement and the absence of a material adverse effect (as defined in the merger agreement) on the other party. The merger agreement does not include a financing condition.

 

Q: Are there risks associated with the merger that I should consider in deciding how to vote?

 

A: Yes. There are a number of risks related to the merger and the other transactions contemplated by the merger agreement that are discussed in this proxy statement/prospectus and in the documents incorporated by reference or referred to in this proxy statement/prospectus. Please read with particular care the detailed description of the risks described in “Risk Factors” beginning on page 25 and in Solutia’s and Eastman’s respective SEC filings referred to in “Where You Can Find More Information” beginning on page 177.

 

Q: What will happen to my future dividends?

 

A: Solutia has agreed that, until the completion of the merger, it will not pay any dividends other than the dividend that was paid on March 15, 2012.

After the merger, Eastman currently expects to pay quarterly cash dividends consistent with its practice before the merger, although any dividends are subject to declaration by the Eastman board of directors.

 

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Q: What are the tax consequences to Solutia stockholders of the merger?

 

A: The exchange of the merger consideration for Solutia common stock in the merger will be a taxable transaction under the U.S. Internal Revenue Code of 1986, or the “Code,” and may also be taxable under state, local and non-U.S. income and other tax laws. Please carefully review the information under “The Merger—Material U.S. Federal Income Tax Consequences” beginning on page 137 for a description of the material U.S. federal income tax consequences of the merger and of owning Eastman common stock received in the merger to U.S. holders and non-U.S. holders (in each case, as defined in “The Merger—Material U.S. Federal Income Tax Consequences”). The tax consequences to you will depend on your own situation. We urge you to consult your tax advisors as to the specific tax consequences to you of the merger and your receipt of the merger consideration, including the applicability and effect of U.S. federal, state, local and non-U.S. income and other tax laws in light of your particular circumstances.

 

Q: When and where is the Solutia special meeting?

 

A: The Solutia special meeting will be held at 10:00 a.m., local time, on June 29, 2012, at the offices of Kirkland & Ellis LLP, 601 Lexington Avenue, 50th Floor, New York, New York.

 

Q: What matters are to be voted on at the Solutia special meeting?

 

A: At the Solutia special meeting, holders of Solutia common stock as of the close of business on May 4, 2012 (the “record date”) will be asked to:

 

  Proposal 1. consider and vote upon the adoption of the merger agreement;

 

  Proposal 2. consider and vote, on a non-binding, advisory basis, to approve compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger contemplated by the merger agreement; and

 

  Proposal 3. consider and vote upon the approval of the adjournment of the Solutia special meeting, if necessary, to solicit additional proxies if there are not sufficient votes to adopt the merger agreement at the time of the Solutia special meeting.

 

Q: What is a quorum?

 

A: In order for business to be conducted at the Solutia special meeting, a quorum must be present (other than with respect to Proposal 3, the proposal related to adjournments, for which a quorum is not required). The quorum requirement for holding the Solutia special meeting and transacting business at the Solutia special meeting is a majority of the outstanding shares of Solutia common stock as of the record date that are present or represented at the Solutia special meeting. The shares may be present in person or represented by proxy at the Solutia special meeting. Both abstentions and broker non-votes are counted as present for the purpose of determining the presence of a quorum.

Broker non-votes may occur because certain beneficial holders of shares of Solutia common stock hold their shares in “street name” through a broker, bank or other nominee. Under the rules of the New York Stock Exchange, brokers, banks and other nominees are not permitted to exercise voting discretion on any of the proposals to be voted upon at the Solutia special meeting. Therefore, if a beneficial holder of shares of Solutia common stock does not give the broker, bank or other nominee specific voting instructions on Proposals 1, 2 or 3, the holder’s shares of Solutia common stock will not be voted on those proposals and a broker non-vote will occur. Broker non-votes will have the same effect as a vote against Proposal 1 and will have no effect on the voting results of Proposals 2 or 3.

 

Q: Who can vote at the Solutia special meeting?

 

A: Holders of record at the close of business as of the record date of Solutia common stock will be entitled to notice of and to vote at the Solutia special meeting. Each of the shares of Solutia common stock issued and outstanding on the record date is entitled to one vote at the Solutia special meeting with regard to each of the proposals described above.

 

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Q: Why am I being asked to consider and vote upon a proposal to approve, on a non-binding, advisory basis, the compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger?

 

A: Under SEC rules, Solutia is required to seek a non-binding, advisory vote with respect to the compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger, or “golden parachute” compensation.

 

Q: What will happen if Solutia stockholders do not approve the golden parachute compensation?

 

A: Approval of the compensation that may be paid or become payable to Solutia’s named executive officers that is based on or otherwise relates to the merger is not a condition to completion of the merger. The vote is an advisory vote and will not be binding on Solutia. Therefore, if the merger agreement is adopted by Solutia stockholders and the merger is completed, this compensation, including amounts that Solutia is contractually obligated to pay, could still be payable regardless of the outcome of the advisory vote, subject only to the conditions applicable thereto.

 

Q: What stockholder approvals are needed?

 

A: Proposal 1 requires the affirmative vote of a majority of the outstanding shares of Solutia common stock entitled to vote at the Solutia special meeting to be approved. Proposals 2 and 3 require the affirmative vote of a majority of the votes cast at the Solutia special meeting by holders of Solutia common stock to be approved.

As of May 4 , 2012, the record date for determining stockholders of Solutia entitled to vote at the Solutia special meeting, there were 122,837,608 shares of Solutia common stock outstanding and entitled to vote at the Solutia special meeting, held by approximately 3,334 holders of record.

 

Q: Are Eastman stockholders voting on the merger?

 

A: No. No vote of Eastman stockholders is required to complete the merger.

 

Q: If I beneficially own restricted shares of Solutia common stock as of the record date issued pursuant to any Solutia Equity Plan, will I be able to vote on the matters to be voted upon at the Solutia special meeting?

 

A: Yes. Holders who beneficially own restricted shares of Solutia common stock as of the record date issued pursuant to any Solutia Equity Plan may vote on the adoption of the merger agreement and on the other matters to be voted on at the Solutia special meeting.

 

Q: Will any other matters be presented for a vote at the Solutia special meeting?

 

A: Solutia is not aware of any other matters that will be presented for a vote at the Solutia special meeting. However, if any other matters properly come before the Solutia special meeting, the proxies will have the discretion to vote upon such matters in accordance with their best judgment.

 

Q: Who can attend the Solutia special meeting?

 

A: You are entitled to attend the Solutia special meeting only if you are a Solutia stockholder of record or a beneficial owner as of the record date, or you hold a valid proxy for the Solutia special meeting.

If you are a Solutia stockholder of record and wish to attend the Solutia special meeting, please so indicate on the appropriate proxy card or as prompted by the telephone or Internet voting system. Your name will be verified against the list of Solutia stockholders of record prior to your being admitted to the Solutia special meeting.

 

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If a broker, bank or other nominee is the record owner of your shares of Solutia common stock, you will need to have proof that you are the beneficial owner to be admitted to the Solutia special meeting. A recent statement or letter from your bank or broker confirming your ownership as of the record date, or presentation of a valid proxy from a broker, bank or other nominee that is the record owner of your shares of Solutia common stock, would be acceptable proof of your beneficial ownership.

You should be prepared to present photo identification for admittance. If you do not provide photo identification or comply with the other procedures outlined above upon request, you may not be admitted to the Solutia special meeting.

Regardless of whether you intend to attend the Solutia special meeting, you are encouraged to vote your shares of Solutia common stock as promptly as possible. Voting your shares will not impact your ability to attend the Solutia special meeting.

 

Q: How do I vote my shares?

 

A: You may vote your shares of Solutia common stock by proxy electronically via the Internet, by telephone, by sending in the appropriate paper proxy card or in person at the Solutia special meeting. You can specify how you want your shares of Solutia common stock voted on each proposal by indicating your vote on each proposal via the Internet or telephone, marking the appropriate boxes on the appropriate proxy card or voting in person at the Solutia special meeting. Please review the voting instructions on the proxy card and read the entire text concerning the proposals in this proxy statement/prospectus prior to voting.

 

     Whether you vote your proxy electronically via the Internet, by telephone or by mail, Solutia will treat your proxy the same way. The individuals appointed as proxy holders will be Jeffry N. Quinn, Solutia’s Chairman of the Board, President and Chief Executive Officer, and Paul J. Berra, III, Solutia’s Senior Vice President, Legal and Governmental Affairs and General Counsel. The shares of Solutia common stock represented by valid proxies that Solutia receives in time for the Solutia special meeting will be voted as specified in such proxies. Valid proxies include all proxies submitted electronically via the Internet and by telephone and all properly executed, written paper proxy cards received pursuant to this solicitation that are not later revoked. Executed but unvoted proxy cards will be voted in accordance with the recommendations of the Solutia board of directors.

 

Q: How do I vote if my shares of Solutia common stock are held in “street name” by a broker, bank or other nominee?

 

A: If you hold your shares of Solutia common stock in “street name,” you have the right to direct your broker, bank or other nominee how to vote the shares. You should complete a voting instruction card provided to you by your broker, bank or other nominee or provide your voting instructions electronically via the Internet or by telephone, if made available by your broker, bank or other nominee. If you wish to vote in person at the meeting, you must first obtain from the holder of record a proxy issued in your name.

 

Q: If my shares of Solutia common stock are held in “street name,” will my broker, bank or other nominee vote my shares for me?

 

A: If you hold your shares of Solutia common stock in “street name” and do not provide voting instructions to your broker, bank or other nominee, your shares will not be voted on the proposals described above because your broker, bank or other nominee does not have discretionary authority to vote on these proposals. You should follow the directions your broker, bank or other nominee provides. Shares of Solutia common stock that are not voted because you do not properly instruct your broker, bank or other nominee will have the effect of a vote against Proposal 1. Shares of Solutia common stock that are not voted because you do not properly instruct your broker, bank or other nominee will have no effect on the outcome of Proposal 2 or 3.

 

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Q: Can I change my vote after I have delivered my proxy?

 

A: Yes. You can change your vote at any time before your proxy is voted at the Solutia special meeting. If you are a holder of record you can do so by:

 

   

filing a written notice of revocation with Solutia’s Corporate Secretary, 575 Maryville Centre Drive, St. Louis, Missouri 63141;

 

   

submitting a new proxy electronically via the Internet or by telephone at a later date (in which case only the last proxy is counted);

 

   

submitting a new written proxy card before the Solutia special meeting (in which case only the last proxy card received is counted); or

 

   

attending the Solutia special meeting and voting in person. Attendance at the Solutia special meeting will not in and of itself constitute a revocation of a proxy.

 

     If you hold shares of Solutia common stock registered in the name of a broker, bank or other nominee, you may change your vote only by submitting new voting instructions to your broker, bank or other nominee. If the Solutia special meeting is postponed or adjourned, it will not affect the ability of stockholders of record as of the record date to exercise their voting rights or to revoke any previously granted proxy using the methods described above.

 

Q: What if I do not vote?

 

A: If you fail to respond with a vote on Proposal 1, or if you respond and indicate that you are abstaining from voting on such proposal, it will have the same effect as a vote against Proposal 1. If you fail to respond with a vote on Proposal 2 or 3, or if you respond and indicate that you are abstaining from voting on Proposal 2 or 3, it will have no effect on the outcome of Proposal 2 or 3.

 

Q: What if I receive more than one proxy card?

 

A: If you receive more than one proxy card, your shares of Solutia common stock are registered in more than one name or are registered in different accounts. Please complete, date, sign and return each appropriate proxy card to ensure that all your shares are voted.

 

Q: What do I need to do now?

 

A: After carefully reading and considering the information contained in this proxy statement/prospectus, please respond by completing, signing and dating the appropriate proxy card or voting instruction card and returning in the enclosed postage-paid envelope, or, if available, by submitting your voting instruction electronically via the Internet or by telephone, as soon as possible so that your shares of Solutia common stock may be represented and voted at the Solutia special meeting. In addition, you may also vote your shares in person at the Solutia special meeting. If you hold shares registered in the name of a broker, bank or other nominee, that broker, bank or other nominee has enclosed, or will provide, instructions for directing your broker, bank or other nominee how to vote those shares.

 

Q: Should I send in my stock certificates (or evidence of shares in book-entry form) with my proxy card?

 

A: No. Please do NOT send your Solutia stock certificates (or evidence of shares in book-entry form) with your proxy card.

 

Q: Who can help answer my questions?

 

A: If you have any questions about the Solutia special meeting, the matters to be voted upon, including the merger, or questions about how to submit your proxy, or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card or voting instruction card, you should contact MacKenzie Partners at proxy@mackenziepartners.com (e-mail), call toll-free: (800) 322-2885 or call collect: (212) 929-5500.

 

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SUMMARY

This summary highlights selected information described in more detail elsewhere in this proxy statement/prospectus and the documents incorporated herein by reference and may not contain all of the information that is important to you. To understand the merger and the other matters to be voted on by Solutia stockholders at the Solutia special meeting more fully, and to obtain a more complete description of the terms of the merger agreement, you should carefully read this entire proxy statement/prospectus, including the Annexes, and the documents to which Eastman and Solutia refer you. You may obtain the information incorporated by reference into this proxy statement/prospectus without charge by following the instructions in the section entitled “Where You Can Find More Information” beginning on page 177. We have included page references parenthetically to direct you to a more complete description of the topics presented in this summary.

The Companies

Eastman Chemical Company (See page 32)

Eastman Chemical Company

200 South Wilcox Drive

Kingsport, Tennessee 37662

(423) 229-2000

Eastman Chemical Company is a global chemical company which manufactures and sells a broad portfolio of chemicals, plastics, and fibers. Eastman began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company’s photographic business and became a public company, incorporated in Delaware, on December 31, 1993. Eastman has 19 manufacturing sites in 10 countries and equity interests in joint ventures that supply chemicals, plastics, and fibers products to customers throughout the world. Eastman’s headquarters and largest manufacturing site are located in Kingsport, Tennessee.

Additional information about Eastman is included in documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 177.

Merger Sub

Eagle Merger Sub Corporation

c/o Eastman Chemical Company

200 South Wilcox Drive

Kingsport, Tennessee 37662

(423) 229-2000

Eagle Merger Sub Corporation, a Delaware corporation, is a wholly owned subsidiary of Eastman. Merger Sub was formed by Eastman solely to complete the merger. Merger Sub has not commenced any operations, has only nominal assets and has no liabilities or contingent liabilities, nor any outstanding commitments other than as set forth in the merger agreement. In the merger, Merger Sub will merge with and into Solutia, and Merger Sub will cease to exist.

Solutia Inc. (See page 33)

Solutia Inc.

575 Maryville Centre Drive

St. Louis, Missouri 63141

(314) 674-1000

 

 

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Solutia Inc. is a global manufacturer of performance materials and specialty chemicals used in a broad range of consumer and industrial applications including interlayers and aftermarket film for automotive and architectural glass; chemicals that promote safety and durability in tires; and encapsulants, coatings and specialty chemicals used in a variety of electronic, industrial and energy solutions. To serve its customers, Solutia utilizes a global infrastructure consisting of 26 manufacturing facilities, six technical centers and approximately 30 sales offices globally, collectively staffed by approximately 3,400 employees located in the United States, Europe, Latin America and Asia Pacific.

Additional information about Solutia and its subsidiaries is included in documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 177.

The Merger

The boards of directors of Solutia and Eastman have each approved a merger agreement, entered into on January 26, 2012, providing for Solutia to be acquired by Eastman. At the Solutia special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement, pursuant to which Solutia would be acquired through a merger with a wholly owned subsidiary of Eastman.

The effect of the merger will be that Solutia will be acquired by Eastman and shares of Solutia common stock will no longer be publicly traded.

Solutia stockholders are receiving this proxy statement/prospectus in connection with Solutia’s solicitation of proxies for its special meeting of stockholders.

The Merger Agreement (See page 143)

A copy of the merger agreement is attached as Annex A to this proxy statement/prospectus. Eastman and Solutia encourage you to read the entire merger agreement carefully because it is the principal document governing the merger.

Merger Consideration (See page 144)

At the effective time of the merger, each share of Solutia common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Solutia as treasury stock and shares held by holders properly exercising appraisal rights under the DGCL) will be cancelled and converted automatically into the right to receive, in accordance with the terms of the merger agreement, (1) $22.00 in cash, without interest, and (2) 0.12 shares of Eastman common stock. Eastman expects that it may issue up to 15,770,889 shares of Eastman common stock in the merger.

Merger Consideration Value (See page 61)

Based on the closing price of Eastman common stock on the New York Stock Exchange on January 26, 2012, the last trading day prior to the public announcement of the merger, the merger consideration represented approximately $27.65 in value for each share of Solutia common stock. Based on the closing price of Eastman common stock on the New York Stock Exchange on May 23, 2012, the latest practicable date before the date of this proxy statement/prospectus, the merger consideration represented approximately $27.52 in value for each share of Solutia common stock. Eastman will not issue any fractional shares of Eastman common stock in the merger. Holders of Solutia common stock who would otherwise be entitled to a fractional share of Eastman common stock will receive a cash payment in lieu of fractional shares.

 

 

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The Solutia Board of Directors’ Reasons for the Merger (See page 89)

In the course of reaching its decision to approve the merger agreement, the Solutia board of directors considered a number of factors in its deliberations. Those factors are described in “The Merger—Recommendation of the Solutia Board of Directors and Solutia’s Reasons for the Merger” beginning on page 89.

Opinions of Solutia’s Financial Advisors (See page 95)

At the January 26, 2012 meeting of the Solutia board of directors, Deutsche Bank Securities Inc., or “Deutsche Bank,” in its capacity as financial advisor to Solutia, delivered its oral opinion to the Solutia board of directors, subsequently confirmed in writing as of the same date, to the effect that, as of the date of such opinion, and based upon and subject to the assumptions, limitations, qualifications and conditions described in Deutsche Bank’s opinion, the merger consideration of (1) $22.00 in cash, without interest, and (2) 0.12 shares of Eastman common stock per share to be received in the merger by holders of Solutia common stock (other than in respect of shares owned by Solutia as treasury stock and shares held by Solutia stockholders properly exercising appraisal rights under the DGCL) was fair, from a financial point of view, to such holders.

The full text of Deutsche Bank’s written opinion, dated January 26, 2012, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Deutsche Bank in connection with the opinion, is included in this proxy statement/prospectus as Annex B and is incorporated herein by reference. Deutsche Bank’s opinion was addressed to, and for the use and benefit of, the Solutia board of directors in connection with and for purposes of its evaluation of the merger. Deutsche Bank’s opinion does not constitute a recommendation as to how any holder of Solutia common stock should vote with respect to the merger. Deutsche Bank’s opinion was limited to the fairness, from a financial point of view, of the consideration to be paid in respect of each share of Solutia common stock and does not address any other aspect of the merger or the merger agreement. Deutsche Bank expressed no opinion as to the underlying business decision of Solutia to engage in the merger or the relative merits of the merger as compared to any alternative transactions or business strategies.

At the January 26, 2012 meeting of the Solutia board of directors, Moelis & Company LLC, or “Moelis,” in its capacity as financial advisor to Solutia, delivered its oral opinion to the Solutia board of directors, subsequently confirmed in writing as of the same date, to the effect that, as of the date of such opinion, and based upon and subject to the conditions and limitations set forth in Moelis’ written opinion, the merger consideration of (1) $22.00 in cash, without interest, and (2) 0.12 shares of Eastman common stock per share to be received in the merger by holders of Solutia common stock was fair, from a financial point of view, to such holders.

The full text of Moelis’ written opinion, dated January 26, 2012, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is included in this proxy statement/prospectus as Annex C and is incorporated into this proxy statement/prospectus by reference. Moelis’ opinion was addressed to, and for the use and benefit of, the Solutia board of directors in connection with and for purposes of its evaluation of the merger. Moelis’ opinion is limited solely to the fairness, from a financial point of view, of the merger consideration pursuant to the merger agreement to the holders of Solutia common stock as of the date of the opinion and does not address Solutia’s underlying business decision to effect the merger or the relative merits of the merger as compared to any alternative business strategies or transactions that might be available to Solutia. Moelis’ opinion does not constitute a recommendation to any stockholder of Solutia as to how such stockholder should vote with respect to the merger or any other matter.

 

 

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Opinion of the Solutia Board of Directors’ Financial Advisor (See page 108)

On January 26, 2012, Perella Weinberg Partners LP, or “Perella Weinberg,” in its capacity as financial advisor to the Solutia board of directors, rendered its opinion to the Solutia board of directors to the effect that, as of such date, and based upon and subject to the various assumptions, qualifications and limitations set forth in the opinion, the merger consideration of (1) $22.00 in cash, without interest, and (2) 0.12 shares of Eastman common stock per share to be received in the merger by holders of Solutia common stock (other than in respect of shares owned by Solutia as treasury stock and shares held by Solutia stockholders properly exercising appraisal rights under the DGCL) was fair, from a financial point of view, to such holders.

The full text of Perella Weinberg’s written opinion, dated January 26, 2012, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Perella Weinberg, is included in this proxy statement/prospectus as Annex D. The opinion does not address the underlying business decision of Solutia to enter into the merger agreement or the relative merits of the merger as compared with any other strategic alternative which may be available to Solutia. The opinion was not intended to be and does not constitute a recommendation to any holder of Solutia common stock as to how such holder should act with respect to the proposed merger or any other matter. Perella Weinberg provided its opinion only for the information and assistance of the Solutia board of directors in its capacity as such and in connection with, and for the purposes of its evaluation of, the merger.

Treatment of Solutia Stock Options and Other Equity-Based Awards (See page 145)

Treatment of Solutia Stock Options

At the effective time of the merger, each outstanding option to acquire shares of Solutia common stock issued under any Solutia Equity Plan, whether or not then vested or exercisable, will be cancelled and terminated in exchange for the right to receive, in cash, the amount by which the cash value of the merger consideration (using the five-day average trading price of Eastman common stock ending on (and including) the trading day that is two days prior to the merger) exceeds the exercise price for such option.

Treatment of Solutia Restricted Stock

At the effective time of the merger, restrictions on any restricted shares of Solutia common stock issued under any Solutia Equity Plan will lapse and such shares will be fully vested, and the holder thereof will be entitled to receive, for each such restricted share of Solutia common stock, the merger consideration.

Treatment of Solutia Restricted Stock Unit Awards

At the effective time of the merger, each restricted stock unit issued under any Solutia Equity Plan will be converted into a vested right to receive, in cash, the value of the merger consideration (using the five-day average trading price of Eastman common stock ending on (and including) the trading day that is two days prior to the merger).

Treatment of Solutia Performance Share Awards and Performance Share Unit Awards

At the effective time of the merger, restrictions on any performance share award or performance share unit award granted under any Solutia Equity Plan will lapse and such performance share award or performance share unit award will become vested based on no greater than the performance results for the applicable performance period according to the relevant award provisions, and the holder thereof will be entitled to receive, in the case of each performance share award in the form of restricted stock, the merger consideration and, in the case of each performance share unit award in the form of restricted stock units, the cash value of the merger consideration

 

 

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(using the five-day average trading price of Eastman common stock ending on (and including) the trading day that is two trading days prior to the merger).

Treatment of Solutia Warrants (See page 145)

At the effective time of the merger, each warrant issued under the Warrant Agreement, dated February 28, 2008, between Solutia and the warrant agent named therein, whether or not then vested or exercisable, will be converted into a warrant to acquire, upon exercise, on substantially the same terms and conditions as were applicable to such warrant immediately prior to the effective time of the merger, the merger consideration.

Treatment of Rights under Solutia Rights Agreement (page 71)

Solutia’s Rights Agreement, dated as of July 27, 2009, between Solutia and the rights agent named therein, as amended (the “Solutia Rights Agreement”), provides that it, and the rights issued thereunder, will terminate immediately prior to the effective time of the merger. As a result, no consideration will be paid, or is payable, to holders of any such rights.

Interests of Solutia Directors and Executive Officers in the Merger (See page 123)

You should be aware that Solutia’s executive officers and directors have economic interests in the merger that are different from, or in addition to, those of Solutia stockholders generally. These interests include, but are not limited to: the treatment of equity awards held by Solutia’s executive officers and directors (including the acceleration and payment with respect to unvested stock options, restricted stock, restricted stock units and performance share awards), the potential acceleration of the prorated annual incentives to Solutia’s executive officers at the target level for the year in which the merger is completed, the potential acceleration of supplemental retirement benefits, the potential acceleration with respect to the prorated vesting for Solutia’s named executive officers and full vesting for all of Solutia’s other executive officers of the phantom stock units granted for the year in which the merger is completed, the potential payment of severance and other benefits to Solutia’s executive officers, the potential payment of tax gross-ups to certain of Solutia’s executive officers and the continuation of certain rights to indemnification and of coverage under directors’ and officers’ liability insurance policies following the completion of the merger. The Solutia board of directors was aware of and considered those interests, among other matters, in reaching its decision to approve and adopt the merger agreement and recommend that Solutia stockholders adopt the merger agreement.

Conditions to the Completion of the Merger (See page 146)

Eastman and Solutia currently expect to complete the merger in mid-2012, subject to receipt of required stockholder and regulatory approvals and the satisfaction or waiver of the other conditions to the merger. As more fully described in this proxy statement/prospectus and in the merger agreement, each party’s obligation to complete the merger depends on a number of conditions being satisfied or, where legally permissible, waived, including the following:

 

   

the adoption by the Solutia stockholders of the merger agreement;

 

   

the authorization of the shares of Eastman common stock to be issued in the merger for listing on the New York Stock Exchange;

 

   

the expiration or termination of the applicable waiting period under the HSR Act and the clearance of the merger under certain applicable foreign antitrust or competition laws;

 

   

the effectiveness of the registration statement (of which this proxy statement/prospectus is a part) relating to the issuance of the shares of Eastman common stock to be issued in the merger; and

 

   

the absence of any legal injunction, restraint, or prohibition on the completion of the merger.

 

 

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The obligation of Eastman and Merger Sub to complete the merger is subject to the following additional conditions:

 

   

the accuracy of the representations and warranties of Solutia, subject to certain materiality standards as described under “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 146, and the receipt of a certificate signed on behalf of Solutia by its Chief Executive Officer or Chief Financial Officer to that effect;

 

   

the performance by Solutia in all material respects of its obligations under the merger agreement and receipt of a certificate signed on behalf of Solutia by its Chief Executive Officer or Chief Financial Officer to that effect; and

 

   

the absence of a material adverse effect on Solutia.

The obligation of Solutia to complete the merger is subject to the following additional conditions:

 

   

the accuracy of the representations and warranties of Eastman and Merger Sub, subject to certain materiality standards as described under “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 146, and the receipt of a certificate signed on behalf of Eastman and Merger Sub by the Chief Executive Officer or Chief Financial Officer of Eastman to that effect;

 

   

the performance by Eastman and Merger Sub in all material respects of their obligations under the merger agreement and receipt of a certificate signed on behalf of Eastman and Merger Sub by the Chief Executive Officer or Chief Financial Officer of Eastman to that effect; and

 

   

the absence of a material adverse effect on Eastman.

Regulatory Approvals Required to Complete the Merger (See page 152)

Eastman and Solutia have agreed to cooperate and use reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the merger agreement. For an acquisition transaction meeting certain size thresholds, such as the merger, the HSR Act requires the parties to file notification and report forms with the Antitrust Division of the United States Department of Justice, or the “DOJ,” and the Federal Trade Commission, or the “FTC,” and to observe specified waiting period requirements before completing the merger. Eastman and Solutia have filed the required notifications with the Antitrust Division of the DOJ and the FTC. The waiting period under the HSR Act expired on March 28, 2012.

In addition, under the antitrust or competition laws of the European Union, China, South Korea, and the Ukraine, Eastman and Solutia cannot complete the merger until they file certain required notifications and report forms with the relevant antitrust or competition governmental entities and, where applicable, receive clearance (including the passage of applicable waiting periods) from such governmental entities to complete the merger. South Korea, China and the Ukraine cleared the merger on March 23, 2012, April 16, 2012 and April 25, 2012, respectively. The parties expect to receive clearance to complete the merger from the European Commission on May 25, 2012.

Financing (See page 71)

Eastman’s obligation to complete the merger is not conditioned upon its obtaining financing to pay the cash portion of the merger consideration. In connection with the merger, Eastman has entered into financing arrangements, consisting of a Term Loan Agreement and a Bridge Loan Agreement (each as defined herein), which together provide for commitments in an aggregate amount of $3.5 billion, the proceeds of one or both of

 

 

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which Eastman expects to use to fund, in part, the cash portion of the merger consideration and to pay a portion of the fees and expenses related to the merger, which may include the repayment of outstanding borrowings of Solutia.

Termination of the Merger Agreement (See page 152)

Eastman and Solutia may terminate the merger agreement at any time before the effective time of the merger, whether before or after Solutia stockholders have voted in favor of adoption of the merger agreement, by mutual written consent of Eastman and Solutia duly authorized by each of their respective boards of directors.

In addition, either Eastman or Solutia may terminate the merger agreement at any time before the effective time of the merger by written notice to the other party:

 

   

whether before or after Solutia stockholders have voted in favor of adoption of the merger agreement, if the merger has not been completed on or before October 1, 2012; provided, however, that if all of the conditions to closing have been satisfied or are then capable of being satisfied (other than those that are satisfied by having obtained the required antitrust clearances or there being no effective injunctions preventing the completion of the transactions contemplated in the merger agreement), such termination date may be extended by Eastman or Solutia from time to time by written notice to the other party up to a date not beyond October 31, 2012 (however, such right to terminate the merger agreement will not be available to any party whose breach of any covenant or agreement in the merger agreement has been the primary cause that resulted in the failure to complete the merger by such date);

 

   

if the merger agreement has been submitted to Solutia stockholders for adoption at a duly convened stockholders meeting and such stockholders have not adopted the merger agreement upon a vote taken thereof;

 

   

if any governmental entity of competent jurisdiction enacts or issues any final and non-appealable law or order or takes any final and non-appealable action enjoining or otherwise prohibiting completion of the merger; provided that the right to terminate the merger agreement in accordance with the foregoing will not be available to any party who failed to comply with its obligations to use its reasonable best efforts to cause the transactions contemplated by the merger agreement to be completed; or

 

   

if there is a material breach by the non-terminating party of any of its representations, warranties, covenants, or agreements contained in the merger agreement that has not been cured by such party within the earlier of the termination date as described above and twenty business days after such party’s receipt of written notice of such breach from the other party but only so long as the other party is not in material breach of its representations, warranties, covenants or agreements contained in the merger agreement.

In addition, at any time before the effective time of the merger (1) Eastman may terminate the merger agreement by written notice to Solutia if, prior to adoption by the Solutia stockholders of the merger agreement at a duly convened stockholders meeting, the Solutia board of directors or any committee thereof makes a change of recommendation that Solutia stockholders vote in favor of the adoption of the merger agreement, and (2) Solutia may terminate the merger agreement by written notice to Eastman at any time prior to adoption by Solutia stockholders of the merger agreement at a duly convened stockholders meeting, in order to approve, adopt, recommend, accept, or enter into an acquisition agreement relating to a superior proposal, subject to payment by Solutia to Eastman of a termination fee of $102 million.

Restrictions on Alternative Transactions (See page 148)

The merger agreement contains detailed provisions prohibiting Solutia from seeking an alternative transaction to the merger. Under these “no solicitation” provisions, Solutia has agreed that, from the time of the

 

 

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execution of the merger agreement until the completion of the merger or the termination of the merger agreement, it will not, will not authorize or permit any of its subsidiaries and their respective officers, directors, or employees, and will use its reasonable best efforts to cause its investment banks, attorneys or other advisors or representatives not to:

 

   

initiate, solicit or knowingly encourage the submission of, or (other than informing persons of the “non-solicitation” provision), participate or engage in any negotiations or discussions with respect to, any acquisition proposal (as defined in the merger agreement);

 

   

disclose or furnish any nonpublic information or data to any person concerning Solutia in connection with any acquisition proposal or afford any person access to the properties, books or records of Solutia or its subsidiaries in connection with any acquisition proposal except as required by law, pursuant to a request by any governmental entity or if the Solutia board of directors determines in good faith, after consultation with its financial advisors and outside counsel that such acquisition proposal is or would reasonably be expected to lead to a superior proposal; or

 

   

enter into or execute, or propose to enter into or execute, any acquisition agreement.

Notwithstanding these restrictions, Solutia and its subsidiaries, officers, directors, employees, investment banks, attorneys and other advisors or representatives will be permitted under certain circumstances, prior to the receipt of the Solutia stockholder approval of the proposal to adopt the merger agreement, to furnish non-public information with respect to Solutia and its subsidiaries to a person making an acquisition proposal that did not otherwise result from a breach of the foregoing “no solicitation” provisions and participate in discussions and negotiations including making counter proposals with respect to such acquisition proposal received by Solutia if the Solutia board of directors (or a duly authorized committee thereof) determines in good faith (after consultation with financial advisors and outside legal counsel) that such proposal is or could reasonably be expected to lead to a superior proposal.

Further, the Solutia board of directors may, at any time after the date of the merger agreement and prior to the adoption of the merger agreement by Solutia stockholders, solely in response to a superior proposal that did not result from a breach of the non-solicitation covenants of the merger agreement, effect a change of recommendation and terminate the merger agreement and concurrently approve, adopt, recommend, accept or enter into an acquisition agreement related to a superior proposal if and to the extent that the Solutia board of directors (or a duly authorized committee thereof) determines in good faith, after consultation with its financial advisor and outside counsel, that failing to take any such action would be reasonably likely to be inconsistent with the directors’ obligations under applicable law, and if certain other conditions which are described elsewhere in this proxy statement/prospectus are satisfied. In such an event, Solutia may be required to pay Eastman a termination fee of $102 million.

Further, at any time after the date of the merger agreement and prior to the adoption of the merger agreement by Solutia stockholders, in contexts not involving an acquisition proposal, the Solutia board of directors may effect a change of its recommendation in favor of adoption of the merger agreement if the Solutia board of directors (or a duly authorized committee thereof) determines in good faith, after consultation with its financial advisor and outside counsel, that failure to take such action would be reasonably likely to be inconsistent with the directors’ obligations under applicable law. In such an event, Solutia may be required to pay Eastman a termination fee of $102 million.

Expenses and Termination Fee Relating to the Merger (See page 153)

Generally, all fees and expenses incurred in connection with the merger agreement will be paid by the party incurring those expenses. Eastman will pay the filing fees in connection with all filings pursuant to the HSR Act.

 

 

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Following termination of the merger agreement under specified circumstances, Solutia may be required to pay Eastman a termination fee of $102 million.

Accounting Treatment of the Merger (See page 137)

The merger will be accounted for by Eastman as a business combination under the acquisition method of accounting.

Material U.S. Federal Income Tax Consequences (See page 137)

The exchange of the merger consideration for Solutia common stock in the merger will be a taxable transaction under the Code and may also be taxable under state, local and non-U.S. income and other tax laws. Please carefully review the information under “The Merger—Material U.S. Federal Income Tax Consequences” beginning on page 137 for a description of the material U.S. federal income tax consequences of the merger and of owning Eastman common stock received in the merger to U.S. holders and non-U.S. holders. The tax consequences to you will depend on your situation. We urge you to consult your tax advisors as to the specific tax consequences to you of the merger and your receipt of the merger consideration, including the applicability and effect of U.S. federal, state, local and non-U.S. income and other tax laws in light of your particular circumstances.

Legal Proceedings Related to the Merger (See page 136)

Since the announcement on January 27, 2012 of the execution of the merger agreement, Solutia, Eastman, Merger Sub and the members of the Solutia board of directors have been named as defendants in several putative class action complaints challenging the proposed merger. The lawsuits generally allege, among other things, that the merger fails to properly value Solutia, that the individual defendants breached their fiduciary duties in approving the merger agreement and that those breaches were aided and abetted by Eastman. The lawsuits seek, among other things, injunctive relief to enjoin the defendants from completing the merger on the agreed–upon terms, monetary relief and attorneys’ fees and costs. On May 3, 2012, Solutia, Eastman, Merger Sub and the members of the Solutia board of directors entered into a memorandum of understanding with certain of the plaintiffs to provide for the settlement of all claims brought in the putative class action lawsuits.

Comparison of the Rights of Holders of Eastman Common Stock and Solutia Common Stock (See page 164)

As a result of the completion of the merger, holders of Solutia common stock, restricted shares of Solutia common stock, and certain performance share awards will become holders of Eastman common stock, and holders of warrants to acquire Solutia common stock will become holders of warrants to acquire the merger consideration, which includes Eastman common stock. Each of Eastman and Solutia is a Delaware corporation governed by the DGCL, but the rights of Eastman stockholders currently are, and from and after the merger will be, governed by the Eastman Charter and the Eastman Bylaws, while the rights of Solutia stockholders are currently governed by the Solutia Charter and the Solutia Bylaws. This proxy statement/prospectus includes summaries of the material differences between the rights of Solutia stockholders and Eastman stockholders arising because of difference in the charters and bylaws of the two companies.

Appraisal Rights in Connection with the Merger (See page 132)

Pursuant to Section 262 of the DGCL, holders of Solutia common stock who do not vote in favor of adoption of the merger agreement and who comply with the applicable requirements of Section 262 of the DGCL have the right to seek appraisal of the fair value of their shares of Solutia common stock, as determined by the Delaware Court of Chancery, if the merger is completed. The “fair value” of your shares of Solutia common stock as determined by the Delaware Court of Chancery may be more or less than, or the same as, the value of the merger consideration per share that you are otherwise entitled to receive under the terms of the merger

 

 

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agreement. Holders of Solutia common stock who wish to preserve any appraisal rights they may have must so advise Solutia by submitting a demand for appraisal in the form described in this proxy statement/prospectus prior to the vote to adopt the merger agreement, and must otherwise follow the procedures prescribed by Section 262 of the DGCL. A person having a beneficial interest in shares of Solutia common stock held of record in the name of another person, such as a broker, bank or other nominee, must act promptly to cause the record holder to follow the steps summarized in this proxy statement/prospectus and in a timely manner to perfect appraisal rights. In view of the complexity of Section 262 of the DGCL, Solutia stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors.

Solutia Special Meeting (See page 62)

The Solutia special meeting will be held at 10:00 a.m., local time, on June 29, 2012, at the offices of Kirkland & Ellis LLP, 601 Lexington Avenue, 50th Floor, New York, New York.

Holders of record of Solutia common stock at the close of business on the record date will be entitled to notice of and to vote at the Solutia special meeting with regard to Proposals 1–3. On the record date there were 122,837,608 shares of Solutia common stock outstanding and entitled to vote at the Solutia special meeting, held by approximately 3,334 holders of record. Each share of Solutia common stock issued and outstanding on the record date is entitled to one vote on each proposal to be voted upon at the Solutia special meeting.

As of the record date, Solutia’s directors and executive officers, and their affiliates, as a group, owned and were entitled to vote 1,073,375 shares of Solutia common stock, or approximately 0.8% of the outstanding shares of Solutia common stock. Solutia currently expects that its directors and executive officers will vote their shares “FOR” Proposals 1, 2 and 3, but none of Solutia’s directors or executive officers have entered into any agreement obligating them to do so.

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

Summary Historical Consolidated Financial Data of Eastman

The following table presents summary historical consolidated financial data for Eastman as of and for the fiscal years ended December 31, 2011, 2010, 2009, 2008 and 2007 and as of March 31, 2012 and for the three months ended March 31, 2012 and 2011. The information should be read in conjunction with Eastman’s consolidated financial statements and the related notes thereto and the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in its current report on Form 8-K filed on May 16, 2012 and its quarterly report on Form 10-Q for the three months ended March 31, 2012 which are incorporated by reference into this proxy statement/prospectus. During 2012, Eastman elected to change its method of accounting for actuarial gains and losses for its pension and other postretirement benefit plans as described in Note 2, “Accounting Methodology Change for Pension and Other Postretirement Benefit Plans” to the Company’s consolidated financial statements in its current report on Form 8-K filed on May 16, 2012. The new method has been retrospectively applied to the financial results for all periods presented. The information as of December 31, 2009, 2008 and 2007 and for the fiscal years ended December 31, 2008 and 2007 should be read in conjunction with Eastman’s consolidated financial statements and related notes thereto, which do not give effect to the change in accounting for pension and other postretirement obligations, which have previously been filed with, and are available from, the SEC but which are not incorporated by reference into this proxy statement/prospectus.

 

(Dollars in millions, except per share amounts)

 

Operating Data

 

Three Months Ended March 31,

    Year Ended December 31,  
    2012     2011     2011     2010     2009     2008     2007  
    (unaudited)     (audited)     (audited)     (audited)     (unaudited)     (unaudited)  

Sales

  $ 1,821      $ 1,758      $ 7,178     $ 5,842     $ 4,396     $ 5,936     $ 5,513  

Operating earnings (1)

    264        314        937       844       276       221       808  

Earnings from continuing operations (2)

    159        201        606       416       111       140       514  

Earnings (loss) from discontinued operations (3)

    —          9        9       9       (22     (37     (113

Gain (loss) from disposal of discontinued operations (3)

    (1     30        31                   18       (11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $ 158      $ 240      $ 646     $ 425     $ 89     $ 121     $ 390  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

             

Earnings from continuing operations

  $ 1.15      $ 1.42      $ 4.34     $ 2.88     $ 0.77     $ 0.93     $ 3.10  

Earnings (loss) from discontinued operations (3)

    —          0.28        0.29       0.07       (0.16     (0.13     (0.75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $ 1.15      $ 1.70      $ 4.63     $ 2.95     $ 0.61     $ 0.80     $ 2.35  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

             

Earnings from continuing operations

  $ 1.13      $ 1.39      $ 4.24     $ 2.81     $ 0.76     $ 0.92     $ 3.06  

Earnings (loss) from discontinued operations (3)

    (0.01     0.27        0.28       0.07       (0.15     (0.12     (0.74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $ 1.12      $ 1.66      $ 4.52     $ 2.88     $ 0.61     $ 0.80     $ 2.32  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statement of Financial Position Data

             

Current assets

  $ 2,264        $ 2,302     $ 2,047     $ 1,735     $ 1,423     $ 2,293  

Net properties

    3,136          3,107       3,219       3,110       3,198       2,846  

Total assets

    6,191          6,184       5,986       5,515       5,281       6,009  

Current liabilities

    997          1,114       1,070       800       832       1,122  

Long-term borrowings

    1,444          1,445       1,598       1,604       1,442       1,535  

Total liabilities

    4,166          4,314       4,359       4,002       3,728       3,927  

Total stockholders’ equity

    2,025          1,870       1,627       1,513       1,553       2,082  

Dividends declared per share

  $ 0.260      $ 0.235      $ 0.990     $ 0.895     $ 0.880     $ 0.880     $ 0.880  

 

(1) Operating earnings for 2009 included an asset impairment charge of $179 million primarily for a discontinued Beaumont, Texas, industrial gasification project.

 

 

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(2) Earnings from continuing operations for 2010 included a charge of $115 million before tax for the early repayment of debt.
(3) In first quarter 2011, Eastman completed the sale of the polyethylene terephthalate (“PET”) business, related assets at the Columbia, South Carolina site, and technology of its Performance Polymers segment. Performance Polymers segment operating results are presented as discontinued operations for all periods presented and are therefore not included in results from continuing operations in accordance with accounting principles generally accepted in the United States (“GAAP”).

Summary Historical Consolidated Financial Data of Solutia

The following table presents summary historical consolidated financial data for Solutia as of and for the twelve months ended December 31, 2011, 2010 and 2009, as of and for the ten months ended December 31, 2008, as of and for the two months ended February 29, 2008, as of and for the twelve months ended December 31, 2007 and as of and for the three months ended March 31, 2012 and 2011. The information should be read in conjunction with Solutia’s consolidated financial statements and the related notes thereto and the information under the heading “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” set forth in its annual report on Form 10-K for the fiscal year ended December 31, 2011 and its quarterly report on Form 10-Q for the three months ended March 31, 2012, which are incorporated by reference into this proxy statement/prospectus. The information as of December 31, 2009 and 2008, February 29, 2008 and December 31, 2007 and for the ten months ended December 31, 2008, the two months ended February 29, 2008 and the twelve months ended December 31, 2007 should be read in conjunction with Solutia’s consolidated financial statements and related notes thereto, which have previously been filed with, and are available from, the SEC but which are not incorporated by reference into this proxy statement/prospectus.

 

                 Successor (1)          Predecessor (1)  

(Dollars and shares in millions,

except per share amounts)

   Three Months Ended
March 31,
    Twelve Months Ended
December 31,
    Ten
Months
Ended
December  31,
   

 

  Two
Months
Ended
February  29,
    Twelve
Months

Ended
December  31,
 
         2012             2011         2011     2010     2009     2008    

 

  2008     2007  
     (unaudited)     (audited)          (audited)  

Net sales

   $ 498      $ 509      $ 2,097     $ 1,950     $ 1,618     $ 1,705         $ 321     $ 1,612  

Gross profit

   $ 158      $ 162      $ 634     $ 608     $ 477     $ 364         $ 92     $ 372  

As percent of net sales

     32     32     30     31     29     21         29     23

Operating income (2)

   $ 76      $ 105      $ 404     $ 331     $ 242     $ 118         $ 48     $ 129  

As percent of net sales

     15     21     19     17     15     7         15     8

Income (loss) from continuing operations before taxes

   $ 53      $ 74      $ 297     $ 122     $ 83     $ 1         $ 1,463     $ (263

Income (loss) from continuing operations (3)

   $ 54      $ 66      $ 267     $ 91     $ 66     $ (14       $ 1,249     $ (277

Income (loss) from discontinued operations, net of tax

   $ —        $ —        $ —        $ (9   $ (175   $ (649       $ 205     $ 72  

Net income attributable to noncontrolling interest

   $ 1      $ 1      $ 5     $ 4     $ 4     $ 5         $ —        $ 3  

Net income (loss) attributable to Solutia

   $ 53      $ 65      $ 262     $ 78     $ (113   $ (668       $ 1,454     $ (208

 

 

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                 Successor (1)          Predecessor (1)  

(Dollars and shares in millions,

except per share amounts)

   Three Months Ended
March 31,
    Twelve Months Ended
December 31,
     Ten
Months
Ended
December  31,
   

 

  Two
Months
Ended
February  29,
    Twelve
Months

Ended
December  31,
 
         2012             2011         2011     2010     2009      2008    

 

  2008     2007  
     (unaudited)     (audited)          (audited)  

Per Share Data:

                     

Basic earnings (loss) per share from continuing operations attributable to Solutia (3)

   $ 0.44      $ 0.54      $ 2.19     $ 0.73     $ 0.58      $ (0.25       $ 11.95     $ (2.68

Basic weighted average shares outstanding

     121.2        119.4        119.8       118.9       106.5        74.7           104.5       104.5  

Diluted earnings (loss) per share from continuing operations attributable to Solutia (3)

   $ 0.43      $ 0.54      $ 2.16     $ 0.73     $ 0.58      $ (0.25       $ 11.95     $ (2.68

Diluted weighted average shares outstanding

     122.6        121.2        121.3       120.0       106.7        74.7           104.5       104.5  

Dividends declared per share

   $ —        $ —        $ 0.0375     $ —        $ —         $ —            $ —        $ —     

Financial Position—Continuing Operations:

                     

Total assets

   $ 3,564        $ 3,525     $ 3,532     $ 3,236      $ 3,216         $ 3,629     $ 1,802  

Liabilities not subject to compromise

   $ 2,537        $ 2,573     $ 2,758     $ 2,604      $ 2,895         $ 3,306     $ 2,005  

Liabilities subject to compromise

   $ —          $ —        $ —        $ —         $ —            $ —        $ 1,922  

Long-term debt (4)

   $ 1,338        $ 1,337     $ 1,463     $ 1,264      $ 1,359         $ 1,796     $ 359  

Equity (deficit)

   $ 1,027        $ 927     $ 739     $ 600      $ 529         $ 1,043     $ (1,589

Other Data from Continuing Operations:

                     

Working capital (5)

   $ 424        $ 373     $ 388     $ 476      $ 307         $ 466     $ (532

Interest expense (6)

   $ 23      $ 28      $ 101     $ 139     $ 121      $ 140         $ 21     $ 134  

Income tax expense (7)

   $ (1   $ 8      $ 30     $ 31     $ 17      $ 15         $ 214     $ 14  

Depreciation and amortization

   $ 30      $ 32      $ 125     $ 117     $ 107      $ 89         $ 11     $ 58  

Cash used for property, plant and equipment purchases

   $ 27      $ 17      $ 105     $ 66     $ 44      $ 82         $ 15     $ 99  

Employees

     3,420          3,400       3,300       3,400        3,700           3,700       3,700  

 

(1) Solutia’s emergence from bankruptcy resulted in its becoming a new reporting entity on March 1, 2008, which has a new capital structure, a new basis in the identifiable assets and liabilities and no retained earnings or accumulated losses. Accordingly, the financial data on or after March 1, 2008 (“Successor”) is not comparable to the financial data prior to this date (“Predecessor”).
(2) Operating income includes net (gains) charges that affect comparability of ($20) million in 2011, $26 million in 2010, $32 million in 2009, $102 million in the ten months ended December 31, 2008, ($2) million in the two months ended February 29, 2008 and $41 million in 2007.
(3) Income (loss) from continuing operations includes net (gains)/charges that affect comparability of ($19) million in 2011, or ($0.16) per share in 2011; $101 million, or $0.84 per share in 2010; $67 million, or $0.63 per share in 2009; $79 million, or $1.06 per share in the ten months ended December 31, 2008; ($1,233) million, or ($11.80) per share in the two months ended February 29, 2008; $326 million, or $3.12 per share in 2007; and $4 million, or $0.04 per share in 2006.
(4) As of December 31, 2007, long-term debt excludes $659 million of debt classified as subject to compromise in accordance with ASC 852 Reorganizations, as a result of Solutia’s Chapter 11 bankruptcy filing in 2003.

 

 

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(5) Working capital is defined as total current assets less total current liabilities.
(6) Interest expense includes the recognition of interest on allowed secured claims as approved by the Bankruptcy Court of $8 million in 2007. In addition, interest expense in all periods is affected by interest expense allocated to discontinued operations and in all periods prior to Solutia’s emergence from bankruptcy for unrecorded contractual interest expense on unsecured debt subject to compromise.
(7) Income tax expense includes an increase (decrease) in valuation allowances of $(39) million in 2011, $19 million in 2010, $20 million in 2009, $2 million in the ten months ended December 31, 2008, $(252) million in the two months ended February  29, 2008 and $82 million in 2007.

Unaudited Summary Pro Forma Condensed Combined Financial Information

The following table presents unaudited summary pro forma combined financial information about Eastman’s consolidated balance sheet and statements of operations, after giving effect to the merger. The information under “Summary Pro Forma Condensed Combined Earnings Information” in the table below gives effect to the merger as if it had been completed on January 1, 2011. The information under “Summary Pro Forma Condensed Combined Financial Position Information” in the table below assumes the merger had been completed on March 31, 2012. This unaudited summary pro forma condensed combined financial information was prepared using the acquisition method of accounting with Eastman considered the acquirer of Solutia. Accordingly, the merger consideration has been allocated to assets and liabilities of Solutia based upon their estimated fair values as of the date of completion of the merger. Any amount of the merger consideration that is in excess of the estimated fair values of assets acquired and liabilities assumed in the merger will be recorded as goodwill in Eastman’s statement of financial position after the completion of the merger.

The unaudited summary pro forma condensed combined financial information has been derived from and should be read in conjunction with the more detailed unaudited pro forma condensed combined financial statements (the “Statements”) appearing elsewhere in this proxy statement/prospectus and the accompanying notes to the Statements. In addition, the Statements were based on and should be read in conjunction with the historical consolidated financial statements and related notes of each of Eastman and Solutia as of and for the applicable periods, which have been incorporated in this proxy statement/prospectus by reference. See “Where You Can Find More Information” beginning on page 177 and “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 38.

The unaudited summary pro forma condensed combined financial information is being provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of Eastman would have been had the merger occurred on the dates assumed, nor are they necessarily indicative of Eastman’s future consolidated results of operations or consolidated financial position. The unaudited summary pro forma condensed combined financial information is based upon currently available information and estimates and assumptions that Eastman management believes are reasonable as of the date hereof. Any of the factors underlying these estimates and assumptions may change or prove to be materially different, and the estimates and assumptions may not be representative of facts existing at the closing date of the merger. The following includes adjustment for Eastman’s change in accounting for pension and other postretirement benefit (“OPEB”) plans as discussed in footnote 2 to the unaudited pro forma condensed combined financial statements.

 

Summary Pro Forma Condensed Combined Earnings Information:     
(Dollars in millions, except per share amounts)   Three Month Ended
March 31, 2012
     Year Ended
December 31, 2011
 

Sales

  $ 2,319       $ 9,275   

Operating earnings

    352         1,242   

Earnings from continuing operations before nonrecurring items and income taxes

    311         1,074   

Earnings from continuing operations before nonrecurring items

  $ 217       $ 748   

 

 

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(Dollars in millions, except per share amounts)   Three Month Ended
March 31, 2012
     Year Ended
December 31, 2011
 

Basic earnings per share

    

Earnings from continuing operations before nonrecurring items(1)

  $ 1.43       $ 4.84   

Diluted earnings per share

    

Earnings from continuing operations before nonrecurring items(1)

  $ 1.40       $ 4.74   

Summary Pro Forma Condensed Combined Financial Position Information:

    
(Dollars in millions)   As of
March 31, 2012
        

Total assets

  $ 11,889      

Long-term borrowings

    4,824      

Total stockholders’ equity

    2,718      

 

(1) For a discussion of such nonrecurring items, see Note 4 of the notes to the accompanying Unaudited Pro Forma Condensed Combined Financial Statements.

Comparative Per Share Data

The following table shows, for the year ended December 31, 2011, and the three months ended March 31, 2012, historical and pro forma equivalent per share data for Solutia common stock and historical and pro forma combined per share data for Eastman common stock. The information in the table is derived from each of Solutia’s and Eastman’s respective historical consolidated financial statements incorporated by reference herein, as well as the unaudited pro forma condensed combined financial information included elsewhere herein.

The pro forma equivalent information shows the effect of the merger from the perspective of an owner of Solutia common stock. The information was computed by multiplying the pro forma combined income from continuing operations per share and Eastman’s historical cash dividends declared per share for the year ended December 31, 2011 and the three months ended March 31, 2012, respectively, and pro forma combined book value per share as of March 31, 2012 by the exchange ratio of the stock portion of the merger consideration of 0.12 shares of Eastman common stock for each share of Solutia common stock. These computations exclude any potential benefit to Solutia stockholders from receiving any amount of cash as a component of the merger consideration.

The pro forma combined data below is presented for illustrative purposes only. The pro forma adjustments to the statement of earnings data are based on the assumption that the merger was completed on January 1, 2011, and the pro forma adjustments to the statement of financial position data are based on the assumption that the merger was completed on March 31, 2012.

Either company’s actual historical financial condition and results of operations may have been different had the companies always been combined. You should not rely on this information as being indicative of the historical financial condition and results of operations that would have actually been achieved or of the future results of Eastman after the completion of the merger.

You should read the information below together with the historical financial statements and related notes of each of Eastman and Solutia, which are incorporated by reference in this proxy statement/prospectus, and with

 

 

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the information under the heading “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 38.

 

     Solutia Common Stock      Eastman Common Stock  
     Historical      Pro Forma
Equivalent
     Historical      Pro Forma
Combined
 

Income from Continuing Operations Per Share

           

Basic

           

Year Ended December 31, 2011

   $ 2.19       $ 0.58       $ 4.34       $ 4.84 (1) 

Three Months Ended March 31, 2012

   $ 0.44       $ 0.17       $ 1.15       $ 1.43   

Diluted

           

Year Ended December 31, 2011

   $ 2.16       $ 0.57       $ 4.24       $ 4.74 (1) 

Three Months Ended March 31, 2012

   $ 0.43       $ 0.17       $ 1.13       $ 1.40   

Cash Dividends Declared Per Share

           

Year Ended December 31, 2011

   $ 0.0375       $ 0.12       $ 0.990       $ 0.990   

Three Months Ended March 31, 2012

   $       $ 0.03       $ 0.260       $ 0.260   

Book Value Per Share

           

March 31, 2012

   $ 8.29       $ 2.14       $ 14.69       $ 17.81   

 

(1) For a discussion of certain nonrecurring items excluded from pro forma combined income from continuing operations per share, see Note 4 of the notes to the accompanying Unaudited Pro Forma Condensed Consolidated Financial Statements.

Comparative Market Value of Common Stock

Eastman common stock and Solutia common stock are listed for trading on the New York Stock Exchange under the symbols “EMN” and “SOA,” respectively. The following table shows the closing prices per share of Eastman common stock and Solutia common stock as reported on January 26, 2012, the final trading day prior to the public announcement of the merger, and on May 23, 2012, the latest practicable date prior to the date of this proxy statement/prospectus. This table also shows the implied value of the merger consideration for each share of Solutia common stock, which was calculated by multiplying the closing price of Eastman common stock on the relevant date by the exchange ratio of the stock portion of the merger consideration of 0.12 shares of Eastman common stock for each share of Solutia common stock and adding the per share cash consideration of $22.00, without interest. These computations do not include any potential benefit to Solutia stockholders from receiving any amount of cash as a component of merger consideration.

 

     Closing Price of Eastman
Common Stock
     Closing Price of
Solutia  Common Stock
     Implied Value of
Merger  Consideration
 

As of January 26, 2012

   $ 47.12       $ 19.51       $ 27.65   

As of May 23, 2012

   $ 45.99       $ 27.38       $ 27.52   

The market price of Eastman common stock and Solutia common stock will fluctuate prior to the Solutia special meeting and before the merger is completed, which will affect the implied value of the merger consideration paid to Solutia stockholders. You should obtain current market quotations for the shares before making any decisions with respect to the merger.

 

 

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RISK FACTORS

In addition to the other information included in and incorporated by reference into this proxy statement/prospectus, including the matters addressed under the caption “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 31, you should carefully read and consider the following risk factors in evaluating the proposals to be voted on at the Solutia special meeting and in determining whether to vote for adoption of the merger agreement. If the merger agreement is adopted by Solutia stockholders and all of the other conditions to the completion of the merger are satisfied or waived, and the merger is completed, holders of Solutia common stock will become holders of Eastman common stock and will be subject to the risks and uncertainties of a holder thereof. Please also refer to the additional risk factors of each of Eastman and Solutia identified in the periodic reports and other documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 177.

Risks Relating to the Merger

The parties may be unable to satisfy the conditions to the completion of the merger and the merger may not be completed.

Completion of the merger is conditioned on, among other things, the adoption of the merger agreement by Solutia stockholders, the expiration or termination of the applicable waiting period under the HSR Act and the clearance of the merger under certain applicable foreign antitrust or competition laws, the absence of any law or regulation that prohibits the completion of the merger, and the approval of the shares of Eastman common stock to be issued in the merger for listing on the New York Stock Exchange. Each party’s obligation to close the merger is also subject to the material accuracy of the representations and warranties of the other party in the merger agreement and the compliance in all material respects with covenants of the other party in the merger agreement and the absence of a material adverse effect (as defined in the merger agreement) on the other party.

Although Solutia and Eastman have agreed in the merger agreement to use reasonable best efforts to complete the merger as promptly as practicable, these and other conditions to the completion of the merger may fail to be satisfied. In addition, satisfying the conditions to and completion of the merger may take longer, and could cost more, than Solutia and Eastman expect.

Failure to complete the merger could negatively affect the stock price and the future business and financial results of Solutia.

 

Solutia and Eastman may not receive the necessary stockholder or regulatory approvals or satisfy the other conditions required for the completion of the merger. If the merger is not completed for any reason, Solutia will be subject to several risks, including the following:

 

   

Solutia may be required to pay significant transaction costs related to the merger, including under certain circumstances a termination fee of up to $102 million payable to Eastman, and many of Solutia’s costs relating to the merger (such as legal, accounting, and a portion of Solutia’s financial advisory fees) are payable by Solutia whether or not the merger is completed;

 

   

The current market price of Solutia common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a decline in the market price of Solutia common stock;

 

   

There may be substantial disruption to Solutia’s business and a distraction of its management and employees from day-to-day operations, because matters related to the merger (including integration planning) may require substantial commitments of time and resources that could otherwise have been devoted to other opportunities that could have been beneficial; and

 

   

Solutia could not realize the benefits expected to result from the merger and Solutia would continue to face the risks that it currently faces as an independent company.

 

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If the merger is not completed, the risks described above may materialize and materially adversely affect Solutia’s business, financial results, financial condition, and stock price.

Solutia is subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the pending merger on Solutia employees and customers may have an adverse effect on Solutia. These uncertainties may impair Solutia’s ability to attract, retain, and motivate key personnel until the merger is completed and could cause customers and others that deal with Solutia to defer decisions concerning Solutia, or to seek to change existing business relationships with Solutia. If key employees depart because of uncertainty about their future roles and the potential complexities of integration, Solutia’s business, or Eastman’s business following the merger, could be harmed.

In addition, the merger agreement restricts Solutia from making acquisitions or dispositions, making capital expenditures in excess of a specified amount, and taking other specified actions without the consent of Eastman until the merger occurs. These restrictions may prevent Solutia from pursuing attractive business opportunities or addressing other developments that may arise prior to the completion of the merger or from executing its business strategies.

The merger agreement limits Solutia’s ability to pursue alternatives to the merger and contains provisions that could affect the decisions of a third party considering making an alternative acquisition proposal to the merger.

The merger agreement prohibits Solutia from soliciting, initiating, or encouraging alternative merger or acquisition proposals from any third party. Under the terms of the merger agreement, Solutia will be required to pay to Eastman a termination fee of up to $102 million if the merger agreement is terminated under certain circumstances. This termination fee would be payable in certain circumstances involving Solutia accepting a different acquisition proposal or its board of directors recommending a different acquisition proposal to its stockholders prior to their vote. These provisions could affect the decision by a third party to make a competing acquisition proposal, including the structure, pricing, and terms proposed by a third party seeking to acquire or merge with Solutia.

There may be a long delay between the receipt of Solutia stockholder adoption of the merger agreement and the closing of the merger, during which time Solutia will lose the ability to consider and pursue alternative acquisition proposals that might otherwise be superior to the proposal in the merger agreement and more beneficial to Solutia stockholders.

Following the adoption of the merger agreement by the holders of Solutia common stock, the merger agreement prohibits Solutia from taking any actions to review, consider, or recommend any alternative acquisition proposals, including those that could be superior to the proposal in the merger agreement and more beneficial to Solutia stockholders. Given the potentially long delay between stockholder approval and satisfaction of all other conditions precedent to the completion of the merger, including the receipt of all required antitrust clearances, the time during which Solutia could be prevented from reviewing, considering, or recommending such proposals could be significant.

Because the market value of the Eastman common stock that Solutia stockholders will receive in the merger may fluctuate, Solutia stockholders cannot be sure of the market value of the Eastman common stock to be issued upon completion of the merger.

Solutia stockholders will receive a fixed number of shares of Eastman common stock in the merger as the stock portion of the merger consideration rather than a number of shares with a particular fixed market value. The market values of Eastman common stock and Solutia common stock at the time of the merger may vary significantly from their respective values on the date the merger agreement was executed, the date of this proxy statement/prospectus, or the date on which Solutia stockholders vote on the adoption of the merger agreement. Because this exchange ratio of the stock portion of the merger consideration will not be adjusted to reflect any

 

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changes in the market value of Eastman common stock or Solutia common stock, the market value of Eastman common stock issued in the merger and Solutia common stock surrendered in the merger may be higher or lower than the values of such shares on such earlier dates. Stock price changes may result from a variety of factors, including changes in businesses and operations, and other factors that are beyond the control of Eastman and Solutia, including changes in business prospects, regulatory considerations, and general and industry specific market and economic conditions.

Officers and directors of Solutia have certain interests in the merger that are different from, or in addition to, the interests of Solutia stockholders. These interests may be perceived to have affected their decision to support or approve the merger.

Solutia’s executive officers and directors have economic interests in the merger that may be different from, or in addition to, those of Solutia stockholders generally. These interests include, but are not limited to: the treatment of equity awards held by Solutia’s executive officers and directors (including the acceleration and payment with respect to unvested stock options, restricted stock, restricted stock units and performance share awards), the potential acceleration of the prorated annual incentives to Solutia’s executive officers at the target level for the year in which the merger is completed, the potential acceleration of supplemental retirement benefits, the potential acceleration with respect to the prorated vesting for Solutia’s named executive officers and full vesting for all of Solutia’s other executive officers of the phantom stock units granted for the year in which the merger is completed, the potential payment of severance and other benefits to Solutia’s executive officers, the potential payment of tax gross-ups to certain of Solutia’s executive officers, and the continuation of certain rights to indemnification and of coverage under directors’ and officers’ liability insurance policies following completion of the merger. The Solutia board of directors was aware of and considered those interests, among other matters, in reaching its decision to approve and adopt the merger agreement and recommend that Solutia stockholders adopt the merger agreement.

Eastman is required to obtain various U.S. and foreign regulatory consents, approvals and clearances to complete the merger, which consents, approvals and clearances may be subject to Eastman’s compliance with certain conditions.

Under the antitrust or competition laws of the United States, the European Union, China, South Korea, and the Ukraine, Eastman and Solutia cannot complete the merger until they file certain required notifications and report forms with the relevant antitrust or competition governmental entities and, where applicable, receive clearance (including the passage of applicable waiting periods) from such governmental entities to complete the merger. These required consents, approvals, and clearances may not be obtained. In deciding whether to grant antitrust or regulatory clearances, the relevant governmental entities will consider the effect of the merger on competition within their relevant jurisdiction. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs or place restrictions on the conduct of Eastman’s business after the completion of the merger. The merger agreement may require Eastman and Solutia to comply with conditions imposed by regulatory entities. Regulators may impose conditions, terms, obligations or restrictions and such conditions, terms, obligations or restrictions may have the effect of delaying completion of the merger, imposing additional material costs on or materially limiting the revenues of Eastman after the completion of the merger, or otherwise reducing the anticipated benefits to Eastman of the merger. In addition, such conditions, terms, obligations or restrictions may result in the delay or abandonment of the merger.

In the United States, completion of the merger requires that the parties file notification and report forms with the FTC and DOJ and observe specified waiting period requirements before completing the merger, and may require approvals by other governmental agencies as well. Eastman and Solutia have filed the required notifications with the Antitrust Division of the DOJ and the FTC. The waiting period under the HSR Act expired on March 28, 2012.

Outside of the United States, the parties have filed notification and reports forms in the European Union, China, South Korea, and the Ukraine. South Korea, China and the Ukraine cleared the merger on March 23, 2012, April 16, 2012 and April 25, 2012, respectively. The parties expect to receive clearance to complete the merger from the European Commission on May 25, 2012.

 

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The merger may be completed on different terms from those contained in the merger agreement.

Prior to the completion of the merger, the parties may, under certain circumstances, amend or alter the terms of the merger agreement, including with respect to, among other things, the merger consideration to be received by Solutia stockholders, assets to be acquired, or any covenants or agreements with respect to the parties’ respective operations during the pendency thereof (certain of these changes, including those with respect to the merger consideration to be received by Solutia stockholders, may be made only prior to the requisite stockholder approval). Any such amendments or alterations may have negative consequences to Solutia stockholders including, among other things, reducing the cash available for Eastman’s or Solutia’s operations or to meet respective obligations or restricting or limiting assets or operations of either of Eastman or Solutia, any of which could also have a material adverse effect on such company’s business, financial condition, and results of operations.

The unaudited pro forma financial information in this proxy statement/prospectus may not necessarily reflect Eastman’s operating results and financial condition following the merger.

The unaudited pro forma financial information included in this proxy statement/prospectus is derived from Eastman’s and Solutia’s separate historical consolidated financial statements. The preparation of this pro forma information is based upon available information and certain assumptions and estimates that Eastman and Solutia currently believe are reasonable, including certain assumptions with respect to the price of Eastman common stock, the value of the assets and liabilities of Solutia being acquired, and the expected amount of and expected interest rates on Eastman’s outstanding debt at the closing of the merger. These assumptions and estimates may not prove to be accurate, and this pro forma financial information does not necessarily reflect what Eastman’s results of operations and financial position would have been had the merger been completed if these assumptions were accurate, or occurred during the period presented, or what Eastman’s results of operations or financial position will be in the future.

Putative shareholder class action complaints have been filed against Eastman, Solutia and Solutia’s board of directors, as well as against Merger Sub, challenging the proposed merger, and an unfavorable judgment or ruling in these lawsuits could prevent or delay the completion of the merger and result in substantial costs.

Since the announcement on January 27, 2012 of the signing of the merger agreement, Solutia, Eastman, Merger Sub and the members of the Solutia board of directors have been named as defendants in several putative class action complaints challenging the proposed merger. The lawsuits generally allege, among other things, that the proposed merger fails to properly value Solutia, that the individual defendants breached their fiduciary duties in approving the merger agreement and that those breaches were aided and abetted by Eastman. The lawsuits seek, among other things, injunctive relief to enjoin the defendants from completing the merger on the agreed–upon terms, monetary relief and attorneys’ fees and costs. For an update on the current status of the lawsuits, including information regarding the Memorandum of Understanding that was entered into by the parties to the Delaware actions on May 3, 2012, please see “The Merger—Litigation Related to the Merger” beginning on page 136.

One of the conditions to the closing of the merger is that no injunction preventing the completion of the merger and the other transactions contemplated by the merger agreement shall be in effect and that no statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any governmental entity that prohibits or makes illegal the completion of the merger. Consequently, if the plaintiffs secure injunctive or other relief prohibiting, delaying, or otherwise adversely affecting the defendants’ ability to complete the merger, then such injunctive or other relief may prevent the merger from becoming effective within the expected time frame or at all. If completion of the merger is prevented or delayed, it could result in substantial costs to Solutia and Eastman. In addition, Solutia and Eastman could incur significant costs in connection with the lawsuits, including costs associated with the indemnification of Solutia’s directors and officers.

 

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Risks Relating to the Business and Operations of Eastman After the Merger

Eastman may not realize the expected benefits of the merger because of integration difficulties and other challenges.

The success of the merger will depend, in part, on Eastman’s ability to realize the anticipated revenue, cost, tax, and other synergies from integrating Solutia’s business with its existing business. The integration process may be complex, costly, and time-consuming. The difficulties of integrating the operations of Solutia’s business could include, among others:

 

   

failure to implement Eastman’s business plan for the combined business;

 

   

unanticipated issues in integrating logistics, information, communications, and other systems;

 

   

lost sales and customers as a result of certain customers of either of the two companies deciding not to do business with Eastman after the merger;

 

   

loss of key Solutia employees with knowledge of Solutia’s historical business and operations;

 

   

unanticipated changes in applicable laws and regulations;

 

   

negative impacts on Eastman’s internal control over financial reporting; and

 

   

other unanticipated issues, expenses, or liabilities that could impact, among other things, Eastman’s ability to realize any expected synergies on a timely basis, or at all.

Eastman may not accomplish the integration of Solutia’s business smoothly, successfully, or within the anticipated costs or time frame. The diversion of the attention of management from Eastman’s current operations to the integration effort and any difficulties encountered in combining operations could prevent Eastman from realizing the full benefits anticipated to result from the merger and could adversely affect its business. In addition, the integration efforts could divert the focus and resources of the management of Eastman and Solutia from other strategic opportunities and operational matters during the integration process.

Any delay in completing the merger may substantially reduce the benefits that Eastman expects to obtain from the merger.

In addition to obtaining the required governmental clearances and approvals, the merger is subject to a number of other conditions beyond the control of Eastman and Solutia that may prevent, delay, or otherwise materially adversely affect its completion. Eastman and Solutia cannot predict whether or when the conditions required to complete the merger will be satisfied. The requirements for obtaining the required clearances and approvals could delay the effective time of the merger for a significant period of time or prevent it from occurring. Any delay in completing the merger may materially adversely affect the synergies and other benefits that Eastman expects to achieve if the merger and the integration of the companies’ respective businesses are completed within the expected timeframe.

Eastman will incur substantial additional indebtedness in connection with the merger.

In connection with entering into the merger agreement, on February 29, 2012, Eastman entered into a $1.2 billion five-year Term Loan Agreement and a $2.3 billion Bridge Loan Agreement with the lenders and other parties to those agreements. Eastman intends to use this financing from the Term Loan Agreement and, in certain circumstances, the Bridge Loan Agreement, to pay, in part, the cash portion of the merger consideration and a portion of the fees and expenses related to the merger, which may include the repayment of certain outstanding borrowings of Solutia. In addition, Eastman expects to offer new debt securities prior to or following the completion of the merger. The commitments of the lenders under the Bridge Loan Agreement will be reduced on a dollar-for-dollar basis by any proceeds Eastman receives from any offering of debt securities it may undertake.

 

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As a result, Eastman will incur additional indebtedness that will be substantially greater than its indebtedness prior to the merger. This new indebtedness will increase the risks Eastman now faces with its current indebtedness.

Each of the Term Loan Agreement and the Bridge Loan Agreement contains certain customary representations, warranties and covenants. Each of the Term Loan Agreement and the Bridge Loan Agreement also contains a financial covenant that will require Eastman to comply with a leverage ratio specified in the applicable agreement. These operating restrictions and financial covenants may limit Eastman’s ability to finance future operations or capital needs or engage in other transactions that may be in the best interests of Eastman stockholders in the future.

As a result of the merger, Eastman’s goodwill, indefinite-lived intangible assets, and other intangible assets in its statement of financial position will increase. If its goodwill, indefinite-lived intangible assets, or other intangible assets become impaired in the future, Eastman would be required to record a significant, non-cash charge to earnings, which would also reduce its stockholders’ equity.

Under GAAP, goodwill and indefinite-lived intangible assets are reviewed for impairment on an annual basis (or more frequently if events or circumstances indicate that their carrying value may not be recoverable) and other intangible assets if events or circumstances indicate that their carrying value may not be recoverable. If Eastman’s goodwill, indefinite-lived intangible assets, or other intangible assets are determined to be impaired in the future, Eastman will be required to record a significant, non-cash charge to earnings during the period in which the impairment is determined.

The price of Eastman common stock may be affected by factors different from those affecting the price of Solutia common stock.

The businesses of Eastman and Solutia differ in many respects, including product offerings and relationships with customers and suppliers, and, accordingly, the results of operations of Eastman after the merger and the market price of shares of Eastman common stock after the merger may be affected by factors different from those currently affecting the independent results of operations of Solutia. For a discussion of the businesses of Eastman and Solutia and of certain factors to consider in connection with their respective businesses, see the documents incorporated by reference into this proxy statement/prospectus and referred to under the section “Where You Can Find More Information” beginning on page 177.

Solutia stockholders who become stockholders of Eastman will have their rights as stockholders governed by Eastman’s corporate governance documents.

As a result of the completion of the merger, holders of Solutia common stock, restricted shares of Solutia common stock and certain performance share awards will become holders of Eastman common stock, and holders of warrants to acquire Solutia common stock will become holders of warrants to acquire the merger consideration, which includes Eastman common stock, and their rights as Eastman stockholders will be governed by Eastman’s corporate governance documents, including the Eastman Charter and the Eastman Bylaws, and the DGCL. As a result, there will be material differences between the current rights of Solutia stockholders and the rights they can expect to have as Eastman stockholders. Please see “Comparison of Rights of Holders of Eastman Common Stock and Solutia Common Stock” beginning on page 164.

Solutia stockholders will have a reduced ownership and voting interest in Eastman after the merger and, as a result, will be able to exert less influence over management.

Following the merger, each Solutia stockholder will become a stockholder of Eastman with a percentage ownership of Eastman after the merger that is much smaller than the stockholder’s percentage ownership of Solutia. It is expected that the former stockholders of Solutia as a group will own approximately 10% of the outstanding shares of Eastman common stock immediately after the completion of the merger. Because of this, Solutia stockholders will have substantially less influence on the management and policies of Eastman after the merger than they now have with respect to the management and policies of Solutia.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

A number of the statements made or incorporated by reference in this proxy statement/prospectus are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are all statements, other than statements of historical fact. In some cases, forward-looking statements can be identified by terminology such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would,” and similar expressions or expressions of the negative of these terms. These statements include statements regarding the intent, belief or current expectations of each of Eastman and Solutia and their respective subsidiaries, their directors and their officers with respect to, among other things, future events, including the merger, the respective financial results and financial trends expected to impact each of Eastman and Solutia prior to the completion of the merger, or if the merger is not completed, and expected to impact Eastman thereafter, assuming the merger is completed.

Forward-looking statements are based upon certain underlying assumptions, including any assumptions mentioned with the specific statements, as of the date such statements were made. Such assumptions are in turn based upon internal estimates and analyses of market conditions and trends, management plans and strategies, economic conditions and other factors. Forward-looking statements and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, those set forth under “Risk Factors” beginning on page 25, and those set forth under “Risk Factors” or any similar heading in the documents incorporated by reference herein.

Eastman and Solutia caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this proxy statement/prospectus in the case of forward-looking statements contained in this proxy statement/prospectus, or the dates of the documents incorporated by reference in this proxy statement/prospectus in the case of forward-looking statements made in those incorporated documents. Except as may be required by law, neither Eastman nor Solutia has any obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise.

Eastman and Solutia expressly qualify in their entirety all forward-looking statements attributable to Eastman or Solutia or any person acting on either of their respective behalf by the cautionary statements contained or referred to in this section.

 

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INFORMATION ABOUT EASTMAN

Eastman Chemical Company is a global chemical company which manufactures and sells a broad portfolio of chemicals, plastics, and fibers. Eastman began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company’s photographic business and became a public company, incorporated in Delaware, on December 31, 1993. Eastman has 19 manufacturing sites in 10 countries and equity interests in joint ventures that supply chemicals, plastics, and fibers products to customers throughout the world. Eastman’s headquarters and largest manufacturing site are located in Kingsport, Tennessee.

Additional information about Eastman is included in the documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 177.

 

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INFORMATION ABOUT SOLUTIA

Solutia Inc. is a global manufacturer of performance materials and specialty chemicals used in a broad range of consumer and industrial applications including interlayers and aftermarket film for automotive and architectural glass; chemicals that promote safety and durability in tires; and encapsulants, coatings and specialty chemicals used in a variety of electronic, industrial and energy solutions. To serve its customers, Solutia utilizes a global infrastructure consisting of 26 manufacturing facilities, six technical centers and approximately 30 sales offices globally, collectively staffed by approximately 3,400 employees located in the United States, Europe, Latin America and Asia Pacific.

Additional information about Solutia is included in the documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 177.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF EASTMAN

The following table presents selected historical consolidated financial data for Eastman as of and for the fiscal years ended December 31, 2011, 2010, 2009, 2008 and 2007 and as of March 31, 2012 and for the three months ended March 31, 2012 and 2011. The information should be read in conjunction with Eastman’s consolidated financial statements and the related notes thereto and the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in its current report on Form 8-K filed on May 16, 2012 and its quarterly report on Form 10-Q for the three months ended March 31, 2012, which are incorporated by reference into this proxy statement/prospectus. During 2012, Eastman elected to change its method of accounting for actuarial gains and losses for its pension and other postretirement benefit plans as described in Note 2, “Accounting Methodology Change for Pension and Other Postretirement Benefit Plans” to the Company’s consolidated financial statements in its current report on Form 8-K filed on May 16, 2012. The new method has been retrospectively applied to the financial results for all periods presented. The information as of December 31, 2009, 2008 and 2007 and for the fiscal years ended December 31, 2008 and 2007 should be read in conjunction with Eastman’s consolidated financial statements and related notes thereto, which do not give effect to the change in accounting for pension and postretirement obligations, which have previously been filed with, and are available from, the SEC but which are not incorporated by reference into this proxy statement/prospectus.

 

(Dollars in millions, except per share amounts)  
Operating Data   Three Months
Ended March 31,
     Year Ended December 31,  
    2012      2011      2011      2010      2009     2008     2007  
    (unaudited)      (audited)      (audited)      (audited)     (unaudited)     (unaudited)  

Sales

    $1,821      $ 1,758      $ 7,178      $ 5,842      $ 4,396     $ 5,936     $ 5,513  

Operating earnings (1)

    264        314        937        844        276       221       808  

Earnings from continuing operations (2)

    159        201        606        416        111       140       514  

Earnings (loss) from discontinued operations (3)

    —           9        9        9        (22     (37     (113

Gain (loss) from disposal of discontinued operations (3)

    (1)         30        31        —          —         18       (11
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net earnings

    $158      $ 240      $ 646      $ 425      $ 89     $ 121     $ 390  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share

                 

Earnings from continuing operations

    $1.15      $ 1.42      $ 4.34      $ 2.88      $ 0.77     $ 0.93     $ 3.10  

Earnings (loss) from discontinued operations (3)

    —           0.28        0.29        0.07        (0.16     (0.13     (0.75
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net earnings

    $1.15      $ 1.70      $ 4.63      $ 2.95      $ 0.61     $ 0.80     $ 2.35  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per share

                 

Earnings from continuing operations

    $1.13      $ 1.39      $ 4.24      $ 2.81      $ 0.76     $ 0.92     $ 3.06  

Earnings (loss) from discontinued operations (3)

    (0.01)         0.27        0.28        0.07        (0.15     (0.12     (0.74
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net earnings

    $1.12      $ 1.66      $ 4.52      $ 2.88      $ 0.61     $ 0.80     $ 2.32  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Statement of Financial Position Data

                 

Current assets

    $2,264         $ 2,302      $ 2,047      $ 1,735     $ 1,423     $ 2,293  

Net properties

    3,136           3,107        3,219        3,110       3,198       2,846  

Total assets

    6,191           6,184        5,986        5,515       5,281       6,009  

Current liabilities

    997           1,114        1,070        800       832       1,122  

Long-term borrowings

    1,444           1,445        1,598        1,604       1,442       1,535  

Total liabilities

    4,166           4,314        4,359        4,002       3,728       3,927  

Total stockholders’ equity

    2,025           1,870        1,627        1,513       1,553       2,082  

Dividends declared per share

    $0.260      $ 0.235       $ 0.990      $ 0.895      $ 0.880     $ 0.880     $ 0.880  

 

(1) Operating earnings for 2009 included an asset impairment charge of $179 million primarily for a discontinued Beaumont, Texas, industrial gasification project.

 

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(2) Earnings from continuing operations for 2010 included a charge of $115 million before tax for the early repayment of debt.
(3) In first quarter 2011, Eastman completed the sale of the PET business, related assets at the Columbia, South Carolina site, and technology of its Performance Polymers segment. Performance Polymers segment operating results are presented as discontinued operations for all periods presented and are therefore not included in results from continuing operations in accordance with GAAP.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SOLUTIA

The following table presents selected historical consolidated financial data for Solutia as of and for the twelve months ended December 31, 2011, 2010 and 2009, as of and for the ten months ended December 31, 2008, as of and for the two months ended February 29, 2008, as of and for the twelve months ended December 31, 2007 and as of and for the three months ended March 31, 2012 and 2011. The information should be read in conjunction with Solutia’s consolidated financial statements and the related notes thereto and the information under the heading “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” set forth in its annual report on Form 10-K for the fiscal year ended December 31, 2011 and its quarterly report on Form 10–Q for the three months ended March 31, 2012, which are incorporated by reference into this proxy statement/prospectus. The information as of December 31, 2009 and 2008, February 29, 2008 and December 31, 2007 and for the ten months ended December 31, 2008, the two months ended February 29, 2008 and the twelve months ended December 31, 2007 should be read in conjunction with Solutia’s consolidated financial statements and related notes thereto, which have previously been filed with, and are available from, the SEC but which are not incorporated by reference into this proxy statement/prospectus.

 

                Successor (1)          Predecessor (1)  

(Dollars and shares in
millions, except per share
amounts)

  Three Months
Ended
March 31,
    Twelve Months Ended December 31,     Ten Months
Ended
December 31,
         Two Months
Ended
February 29,
    Twelve
Months
Ended
December 31,
 
        2012             2011             2011             2010             2009         2008          2008     2007  
    (unaudited)     (audited)          (audited)  

Net sales

  $ 498      $ 509      $ 2,097     $ 1,950     $ 1,618     $ 1,705         $ 321     $ 1,612  

Gross profit

  $ 158      $ 162      $ 634     $ 608     $ 477     $ 364         $ 92     $ 372  

As percent of net sales

    32     32     30     31     29     21         29     23

Operating income (2)

  $ 76      $ 105      $ 404     $ 331     $ 242     $ 118         $ 48     $ 129  

As percent of net sales

    15     21     19     17     15     7         15     8

Income (loss) from continuing operations before taxes

  $ 53      $ 74      $ 297     $ 122     $ 83     $ 1         $ 1,463     $ (263

Income (loss) from continuing operations (3)

  $ 54      $ 66      $ 267     $ 91     $ 66     $ (14       $ 1,249     $ (277

Income (loss) from discontinued operations, net of tax

  $ —        $ —        $ —        $ (9   $ (175   $ (649       $ 205     $ 72  

Net income attributable to noncontrolling interest

  $ 1      $ 1      $ 5     $ 4     $ 4     $ 5         $ —        $ 3  

Net income (loss) attributable to Solutia

  $ 53      $ 65      $ 262     $ 78     $ (113   $ (668       $ 1,454     $ (208

Per Share Data:

                   

Basic earnings (loss) per share from continuing operations attributable to Solutia (3)

  $ 0.44      $ 0.54      $ 2.19     $ 0.73     $ 0.58     $ (0.25       $ 11.95     $ (2.68

Basic weighted average shares outstanding

    121.2        119.4        119.8       118.9       106.5       74.7           104.5       104.5  

Diluted earnings (loss) per share from continuing operations attributable to Solutia (3)

  $ 0.43      $ 0.54      $ 2.16     $ 0.73     $ 0.58     $ (0.25       $ 11.95     $ (2.68

Diluted weighted average shares outstanding

    122.6        121.2        121.3       120.0       106.7       74.7           104.5       104.5  

Dividends declared per share

  $ —        $ —        $ 0.0375     $ —        $ —        $ —            $ —        $ —     

 

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                Successor (1)          Predecessor (1)  

(Dollars and shares in
millions, except per share
amounts)

  Three Months
Ended
March 31,
    Twelve Months Ended December 31,     Ten Months
Ended
December 31,
         Two Months
Ended
February 29,
    Twelve
Months
Ended
December 31,
 
        2012             2011             2011             2010             2009         2008          2008     2007  
    (unaudited)     (audited)          (audited)  

Financial Position—Continuing Operations:

                   

Total assets

  $ 3,564        $ 3,525     $ 3,532     $ 3,236     $ 3,216         $ 3,629     $ 1,802  

Liabilities not subject to compromise

  $ 2,537        $ 2,573     $ 2,758     $ 2,604     $ 2,895         $ 3,306     $ 2,005  

Liabilities subject to compromise

  $ —          $ —        $ —        $ —        $ —            $ —        $ 1,922  

Long-term debt (4)

  $ 1,338        $ 1,337     $ 1,463     $ 1,264     $ 1,359         $ 1,796     $ 359  

Equity (deficit)

  $ 1,027        $ 927     $ 739     $ 600     $ 529         $ 1,043     $ (1,589

Other Data from Continuing Operations:

                   

Working capital (5)

  $ 424        $ 373     $ 388     $ 476     $ 307         $ 466     $ (532

Interest expense (6)

  $ 23      $ 28      $ 101     $ 139     $ 121     $ 140         $ 21     $ 134  

Income tax expense (7)

  $ (1   $ 8      $ 30     $ 31     $ 17     $ 15         $ 214     $ 14  

Depreciation and amortization

  $ 30      $ 32      $ 125     $ 117     $ 107     $ 89         $ 11     $ 58  

Cash used for property, plant and equipment purchases

  $ 27      $ 17      $ 105     $ 66     $ 44     $ 82         $ 15     $ 99  

Employees

    3,420          3,400       3,300       3,400       3,700           3,700       3,700  

 

(1) Solutia’s emergence from bankruptcy resulted in its becoming a new reporting entity on March 1, 2008, which has a new capital structure, a new basis in the identifiable assets and liabilities and no retained earnings or accumulated losses. Accordingly, the financial data on or after March 1, 2008 (“Successor”) is not comparable to the financial data prior to this date (“Predecessor”).
(2) Operating income includes net (gains) charges that affect comparability of ($20) million in 2011, $26 million in 2010, $32 million in 2009, $102 million in the ten months ended December 31, 2008, ($2) million in the two months ended February 29, 2008 and $41 million in 2007.
(3) Income (loss) from continuing operations includes net (gains)/charges that affect comparability of ($19) million in 2011, or ($0.16) per share in 2011; $101 million, or $0.84 per share in 2010; $67 million, or $0.63 per share in 2009; $79 million, or $1.06 per share in the ten months ended December 31, 2008; ($1,233) million, or ($11.80) per share in the two months ended February 29, 2008; $326 million, or $3.12 per share in 2007; and $4 million, or $0.04 per share in 2006.
(4) As of December 31, 2007, long-term debt excludes $659 million of debt classified as subject to compromise in accordance with ASC 852 Reorganizations, as a result of Solutia’s Chapter 11 bankruptcy filing in 2003.
(5) Working capital is defined as total current assets less total current liabilities.
(6) Interest expense includes the recognition of interest on allowed secured claims as approved by the Bankruptcy Court of $8 million in 2007. In addition, interest expense in all periods is affected by interest expense allocated to discontinued operations and in all periods prior to Solutia’s emergence from bankruptcy for unrecorded contractual interest expense on unsecured debt subject to compromise.
(7) Income tax expense includes an increase (decrease) in valuation allowances of $(39) million in 2011, $19 million in 2010, $20 million in 2009, $2 million in the ten months ended December 31, 2008, $(252) million in the two months ended February 29, 2008 and $82 million in 2007.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The accompanying Unaudited Pro Forma Condensed Combined Statement of Financial Position (the “Pro Forma Balance Sheet”) as of March 31, 2012 combines the historical consolidated statements of financial position of Eastman and Solutia, giving effect to the merger as if it had been completed on March 31, 2012. The accompanying Unaudited Pro Forma Condensed Combined Statements of Earnings (the “Pro Forma Income Statements”) for the three months ended March 31, 2012 and the year ended December 31, 2011 combine the historical consolidated statements of earnings of Eastman and Solutia, giving effect to the merger as if it had been completed on January 1, 2011, the beginning of the earliest period presented.

The accompanying unaudited pro forma condensed combined financial statements (the “Statements”) and related notes were prepared using the acquisition method of accounting with Eastman considered the acquirer of Solutia. Accordingly, the merger consideration to be paid in the merger has been allocated to assets and liabilities of Solutia based upon their estimated fair values as of the date of completion of the merger. Any amount of the merger consideration that is in excess of the estimated fair values of assets acquired and liabilities assumed will be recorded as goodwill in Eastman’s statement of financial position after the completion of the merger. As of the date of this proxy statement/prospectus, Eastman has not completed the detailed valuation work necessary to arrive at the required estimates of the fair value of the Solutia assets to be acquired and the liabilities to be assumed and the related allocation of purchase price, nor has it identified all adjustments necessary to conform Solutia’s accounting policies to Eastman’s accounting policies. A final determination of the fair value of Solutia’s assets and liabilities will be based on the actual net tangible and intangible assets and liabilities of Solutia that exist as of the date of completion of the merger and, therefore, cannot be made prior to that date. Additionally, a portion of the merger consideration to be paid by Eastman to complete the merger will be determined based on the trading price of Eastman common stock at the time of the completion of the merger. Accordingly, the accompanying unaudited pro forma purchase price allocation is preliminary and is subject to further adjustments as additional information becomes available and as additional analyses are performed. The preliminary unaudited pro forma purchase price allocation has been made solely for the purpose of preparing the accompanying Statements. The preliminary purchase price allocation was based on reviews of publicly disclosed allocations for other acquisitions in the chemical industry, Eastman’s historical experience, data that was available through the public domain and Eastman’s due diligence review of Solutia’s business. Until the merger is completed, both companies are limited in their ability to share information with the other. Upon completion of the merger, valuation work will be performed. Increases or decreases in the fair value of relevant statement of financial position amounts will result in adjustments to the statement of financial position and/or statements of earnings until the purchase price allocation is finalized. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation included in the accompanying Statements.

Eastman expects to incur significant costs and achieve significant revenue and other synergies in connection with integrating the operations of Eastman and Solutia. The accompanying Statements do not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies, or any revenue, tax, or other synergies expected to result from the merger. In addition, certain nonrecurring items, such as estimated transaction costs directly attributable to the merger, have been excluded from pro forma earnings from continuing operations before nonrecurring items. See Note 4, following Adjustments to Unaudited Pro Forma Condensed Combined Statements of Earnings. However, the estimated transaction costs are reflected in the accompanying Pro Forma Balance Sheet as a decrease to both cash and to retained earnings.

The accompanying Statements and related notes are being provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of Eastman would have been had the merger occurred on the dates assumed, nor are they necessarily indicative of Eastman’s future consolidated results of operations or consolidated financial position. The Statements are based upon currently available information and estimates and assumptions that Eastman management believes are

 

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reasonable as of the date hereof. Any of the factors underlying these estimates and assumptions may change or prove to be materially different, and the estimates and assumptions may not be representative of facts existing at the closing date of the merger.

On May 16, 2012, Eastman filed a Current Report on Form 8-K to retrospectively adjust certain Items of Eastman’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 to reflect Eastman management’s adoption of an accounting methodology change for Eastman’s pension and other postretirement benefit (“OPEB”) plans actuarial gains and losses, the adoption of amended accounting guidance related to the presentation of other comprehensive income that became effective for reporting periods beginning on or after December 15, 2011 and to include certain other disclosures not material to Eastman’s historical financial condition, results of operations or liquidity. Eastman’s historical financial information for the year ended December 31, 2011 presented in these Statements reflects all adjustments to financial statement line items as presented in the Current Report on Form 8-K. Additionally, both Eastman’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 and these Statements present Eastman’s financial position and results of operations after application of this change in accounting principle.

The accompanying Statements have been developed from and should be read in conjunction with the unaudited interim consolidated financial statements of Eastman and Solutia contained in their respective Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 2012, the audited consolidated financial statements of Eastman contained in its Current Report on Form 8-K filed May 16, 2012 and the audited consolidated financial statements of Solutia contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, each of which is incorporated by reference in this proxy statement/prospectus.

Solutia’s historical consolidated financial statements presented herein have not been retrospectively adjusted for the change in accounting methodology for pension and OPEB plans actuarial gains and losses adopted by Eastman during the first quarter of 2012. To present the pro forma information for each company on a comparable basis, the column “Effect of Accounting Change—Solutia” has been added to the accompanying Statements to reflect the impact of such change on the historical consolidated financial statements of Solutia. Additionally, the historical consolidated financial statements of Solutia presented herein have been adjusted by condensing and disaggregating certain line items in order to conform with Eastman’s financial statement presentation.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

For the three months ended March 31, 2012

 

(Dollars in millions, except per share amounts)    Historical
Eastman
     Historical
Solutia
    Effect of
Accounting
Change -
Solutia
    Adjusted
Solutia
(After
Accounting
Change)
    Pro Forma
Adjustments
    Pro
Forma

Combined
 

Sales

   $ 1,821       $ 498      $        $ 498      $          $ 2,319   

Cost of sales

     1,390         340        (2     338        5        (a )      1,733   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

     431         158        2        160        (5       586   

Selling, general and administrative expenses

     126         75        (1     74        6        (a )   
              (20     (b     186   

Research and development expenses

     41         8          8            49   

Other operating income

             (1       (1         (1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Operating earnings

     264         76        3        79        9          352   

Net interest expense

     19         23          23        2        (c )      44   

Other charges (income), net

     1         1          1        (5     (b )      (3
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Earnings from continuing operations before nonrecurring items and income taxes

     244         52        3        55        12          311   

Provision for income taxes from continuing operations

     85         (1     1        0        (4     (d )   
              12        (d )   
              1        (b )(d)      94   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Earnings from continuing operations before nonrecurring items(1)

   $ 159       $ 53      $ 2      $ 55      $ 3        $ 217   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Basic earnings per share

               

Earnings from continuing operations before nonrecurring items(1)

   $ 1.15       $ 0.44      $ 0.02      $ 0.46          $ 1.43   

Diluted earnings per share

               

Earnings from continuing operations before nonrecurring items(1)

   $ 1.13       $ 0.43      $ 0.02      $ 0.45          $ 1.40   

Shares (in millions) used for earnings per share calculation

               

Basic

     137.3         121.2          121.2        (106.5     (e )      152.0   

Diluted

     140.7         122.6          122.6        (107.9     (e )      155.4   

 

(1) As indicated in the introductory paragraphs to these Statements and Note 4 hereof, certain nonrecurring items directly attributable to the merger have been excluded from pro forma earnings from continuing operations before nonrecurring items.

 

The accompanying notes are an integral part of these

unaudited pro forma condensed combined financial statements.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

For the year ended December 31, 2011

 

(Dollars in millions, except per share amounts)    Historical
Eastman
    Historical
Solutia
    Effect of
Accounting
Change -
Solutia
    Adjusted
Solutia
(After
Accounting
Change)
    Pro Forma
Adjustments
    Pro
Forma

Combined
 

Sales

   $ 7,178      $ 2,097      $        $ 2,097      $          $ 9,275   

Cost of sales

     5,609        1,463        36        1,499        21        (a )      7,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

     1,569        634        (36     598        (21       2,146   

Selling, general and administrative expenses

     481        240        16        256        26        (a )      763   

Research and development expenses

     159        24          24            183   

Asset impairments and restructuring charges (gains), net

     (8     19          19            11   

Other operating income

            (53       (53         (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Operating earnings

     937        404        (52     352        (47       1,242   

Net interest expense

     76        101          101        3        (c )      180   

Early debt extinguishment costs

            4          4        (4     (f )        

Other charges (income), net

     (19     7          7            (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Earnings from continuing operations before nonrecurring items and income taxes

     880        292        (52     240        (46       1,074   

Provision for income taxes from continuing operations

     274        30        (14     16        (13     (d )   
             49        (d     326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Earnings from continuing operations before nonrecurring items(1)

   $ 606      $ 262      $ (38   $ 224      $ (82     $ 748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Basic earnings per share

              

Earnings from continuing operations before nonrecurring items(1)

   $ 4.34      $ 2.19      $ (0.32   $ 1.87          $ 4.84   

Diluted earnings per share

              

Earnings from continuing operations before nonrecurring items(1)

   $ 4.24      $ 2.16      $ (0.31   $ 1.85          $ 4.74   

Shares (in millions) used for earnings per share calculation

              

Basic

     139.7        119.8          119.8        (105.1     (e )      154.4   

Diluted

     143.1        121.3          121.3        (106.6     (e )      157.8   

 

(1) As indicated in the introductory paragraphs to these Statements and Note 4 hereof, certain nonrecurring items directly attributable to the merger have been excluded from pro forma earnings from continuing operations before nonrecurring items.

 

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION

March 31, 2012

 

(Dollars in millions, except per share amounts)   Historical
Eastman
    Historical
Solutia
    Effect of
Accounting
Change -
Solutia
    Adjusted
Solutia (After
Accounting
Change)
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Assets

             

Current assets

             

Cash and cash equivalents

  $ 569      $ 108      $        $ 108      $ (667     (g )    $ 10   

Short-term time deposits

    80        —            —          (80     (g )      —     

Trade receivables, net

    740        221          221            961   

Miscellaneous receivables

    68        74          74        (8     (h )      134   

Inventories

    768        384          384        96        (i )      1,248   

Other current assets

    39        29          29        11        (j )      79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total current assets

    2,264        816          816        (648       2,432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Properties

             

Properties and equipment at cost

    8,479        1,239          1,239        (141       9,577   

Less: Accumulated depreciation

    5,343        286          286        (286       5,343   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net properties

    3,136        953          953        145        (k )      4,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Goodwill

    408        789          789        1,239        (l )      2,436   

Identifiable intangible assets

    100        916          916        899        (m )      1,915   

Other noncurrent assets

    283        90          90        499        (n )      872   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total assets

  $ 6,191      $ 3,564      $        $ 3,564      $ 2,134        $ 11,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Liabilities and Stockholders’ Equity

             

Current liabilities

             

Payables and other current liabilities

  $ 846      $ 396      $        $ 396      $ (9     (o )   
            (23     (o )    $ 1,210   

Borrowings due within one year

    151        —            —          120        (p )      271   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total current liabilities

    997        396          396        88          1,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Long-term borrowings

    1,444        1,338          1,338        2,042        (p )      4,824   

Deferred income tax liabilities

    223        183          183        339        (q )      745   

Post-employment obligations

    1,395        287          287            1,682   

Other long-term liabilities

    107        343          343        (11     (r )      439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities

    4,166        2,547          2,547        2,458          9,171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stockholders’ equity

             

Common stock ($0.01 par value per share)

    2        1          1        (1     (s )      2   

Additional paid-in capital

    918        1,672          1,672        (936     (s )      1,654   

Retained earnings

    2,882        (388     (174     (562     519        (s )      2,839   

Accumulated other comprehensive loss

    153        (248     174        (74     74        (s )      153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
    3,955        1,037        —          1,037        (344       4,648   

Less: Treasury stock at cost

    1,930        20          20        (20     (s )      1,930   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total stockholders’ equity

    2,025        1,017        —          1,017        (324       2,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities and stockholders’ equity

  $ 6,191      $ 3,564      $ —        $ 3,564      $ 2,134        $ 11,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

The accompanying notes are an integral part of these

unaudited pro forma condensed combined financial statements.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

NOTE 1. DESCRIPTION OF THE TRANSACTION

As previously disclosed, Eastman entered into the merger agreement with Solutia and Merger Sub. Pursuant to the merger agreement, at the closing of the merger, Merger Sub will merge with and into Solutia, with Solutia surviving the merger and becoming an indirect wholly-owned subsidiary of Eastman. At the closing of the merger, each outstanding share of Solutia common stock (other than shares owned by Solutia as treasury stock, shares owned by Eastman or Merger Sub or shares held by holders properly exercising appraisal rights under the Delaware General Corporation Law) will be cancelled and converted automatically into the right to receive (subject to certain limitations set forth in the merger agreement) (1) $22.00 in cash, without interest, and (2) 0.12 shares of Eastman common stock.

In addition, at the effective time of the merger: (i) each outstanding option to acquire shares of Solutia common stock issued under any of the Solutia Equity Plans, whether or not then vested or exercised, will be cancelled and terminated in exchange for the right to receive, in cash, the amount by which the cash value of the merger consideration (using the five-day average trading price of Eastman’s common stock ending on (and including) the trading day that is two trading days prior to the merger) exceeds such option’s exercise price; (ii) restrictions on any restricted shares of Solutia common stock issued under any Solutia Equity Plan will lapse and such shares will be fully vested, and the holder thereof will be entitled to receive, for each such restricted share of Solutia common stock, the merger consideration; (iii) each restricted stock unit issued under any Solutia Equity Plan will be converted into a vested right to receive, in cash, the value of the merger consideration (using the five-day average trading price of Eastman’s common stock ending on (and including) the trading day that is two trading days prior to the merger); and (iv) restrictions on any performance share award or performance share unit award granted under any Solutia Equity Plan (a “Performance Share”) will lapse and such Performance Share will become vested based on no greater than the performance results for the applicable performance period according to the relevant award provisions, and the holder thereof will be entitled to receive, in the case of Performance Shares in the form of restricted stock, the merger consideration and, in the case of Performance Shares in the form of restricted stock units, the cash value of the merger consideration (using the five-day average trading price of Eastman common stock ending on (and including) the trading day that is two trading days prior to the merger).

Also at the effective time of the merger, each warrant issued under the Warrant Agreement, dated February 28, 2008, between Solutia and the warrant agent named therein, whether or not then vested or exercisable, will be converted into a warrant to acquire, upon exercise, on substantially the same terms and conditions as were applicable to such warrant immediately prior to the effective time of the merger, the merger consideration. The warrants were considered when calculating the merger consideration, but were determined to be “de minimis” and therefore not included in these Statements.

Based on the estimated number of shares of Solutia common stock and Eastman common stock outstanding on May 10, 2012, Solutia stockholders will own approximately 10% of the outstanding shares of Eastman common stock upon closing of the merger.

 

NOTE 2. BASIS OF PRO FORMA PRESENTATION

The Statements have been derived from the historical consolidated financial statements of Eastman and Solutia that are incorporated by reference into this proxy statement/prospectus. Certain financial statement line items included in Solutia’s historical presentation have been disaggregated or condensed to conform to corresponding financial statement line items included in Eastman’s historical presentation. These include: net income attributable to noncontrolling interest, which has been presented within the caption other charges (income), net; current assets of discontinued operations, which have been condensed into other current assets; accrued liabilities and current liabilities of discontinued operations, which have been condensed into payables

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

and other current liabilities; and environmental remediation, non-current liabilities of discontinued operations, and noncontrolling interest which have been condensed into other long-term liabilities. Additionally, for the year ended December 31, 2011, certain components of other operating income, net, and selling and general administrative costs relating to asset impairment or restructuring charges have been presented within the caption asset impairment and restructuring charges (gains), net. There were no material charges of this nature for Solutia during first quarter 2012. The reclassification of these items had no significant impact on the historical total assets, total liabilities, or stockholders’ equity reported by Eastman or Solutia, respectively. The reclassifications also did not significantly impact the historical earnings from continuing operations. Additionally, sales between Eastman and Solutia were considered immaterial for adjustment to sales and earnings from continuing operations before nonrecurring items. Additionally, the Pro Forma Income Statements and Pro Forma Balance Sheet present changes to financial statement line items of Solutia giving effect to the retrospective application of the accounting methodology change for pension and OPEB plans actuarial gains and losses adopted by Eastman.

Additionally, as part of its financial due diligence review of Solutia, Eastman performed certain procedures for the purpose of identifying any material differences in significant accounting policies between Eastman and Solutia, and any accounting adjustments that would be required in connection with adopting uniform policies. Procedures performed by Eastman involved a review of Solutia’s publicly disclosed summary of significant accounting policies, including those disclosed in Solutia’s 2011 Annual Report on Form 10-K and preliminary discussion with Solutia management regarding Solutia’s significant accounting policies to identify material adjustments. While Eastman expects to engage in additional discussion with Solutia’s management and continue to evaluate the impact of Solutia’s accounting policies on its historical results after completion of the merger, based on the completed procedures, Eastman management does not believe there are any differences in the accounting policies of Solutia and Eastman that will result in material adjustments to the Eastman’s consolidated financial statements as a result of conforming Solutia’s accounting policies to those of Eastman.

The merger is reflected in the Statements as an acquisition of Solutia by Eastman using the acquisition method of accounting, in accordance with business combination accounting guidance under accounting principles generally accepted in the United States (“GAAP”). Under these accounting standards, the total estimated purchase price will be calculated as described in Note 3 to the Statements, and the assets acquired and the liabilities assumed will be measured at estimated fair value. For the purpose of measuring the estimated fair value of the assets acquired and liabilities assumed, Eastman has applied the accounting guidance under GAAP for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The fair value measurements utilize estimates based on key assumptions in connection with the merger, including historical and current market data. The unaudited pro forma adjustments included herein are preliminary and will be revised at the time of the merger as additional information becomes available and as valuation work is performed. The final purchase price allocation will be determined after the completion of the merger, and the final allocations may differ materially from those presented.

 

NOTE 3. ESTIMATE OF CONSIDERATION EXPECTED TO BE TRANSFERRED

Based on the closing price per share of Eastman common stock on the New York Stock Exchange on May 10, 2012 (the most recent practicable date) of $50.00 and the number of shares of Solutia common stock, options to purchase Solutia common stock, restricted shares of Solutia common stock, Solutia restricted stock units, Solutia performance share awards, and Solutia performance share unit awards outstanding at March 31, 2012, the total merger consideration would have been approximately $3.5 billion, consisting of $2.7 billion of cash and 14.7 million shares of Eastman common stock. Changes in the share price of Eastman common stock, or the number of shares of Solutia common stock, restricted shares of Solutia common stock, Solutia restricted stock units, Solutia performance share awards, and Solutia performance share unit awards at the closing of the

 

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merger could result in material differences in the merger consideration and, thus, the purchase price and related purchase price allocation in the merger. At the effective time of the merger, each outstanding share of Solutia common stock (other than shares owned by Solutia as treasury stock and shares held by holders properly exercising appraisal rights under the Delaware General Corporation Law) will be cancelled and converted automatically into the right to receive (subject to certain limitations set forth in the merger agreement) (1) $22.00 in cash, without interest, and (2) 0.12 shares of Eastman common stock.

The following is a preliminary estimate of the merger consideration to be paid by Eastman in the merger, including consideration to be paid to holders of options to purchase Solutia common stock, restricted shares of Solutia common stock, Solutia restricted stock units, Solutia performance share awards, and Solutia performance share unit awards pursuant to the provisions above:

 

(Dollars in millions)    Cash
Consideration
     Equity
Consideration
     Total  

To holders of Solutia common stock, including restricted shares

   $ 2,698       $ 736       $ 3,434   

To holders of outstanding Solutia stock incentive-based compensation

     24         —           24   
  

 

 

    

 

 

    

 

 

 

Total consideration

   $ 2,722       $ 736       $ 3,458   
  

 

 

    

 

 

    

 

 

 

Also at the effective time of the merger, each warrant issued under the Warrant Agreement, dated February 28, 2008, between Solutia and the warrant agent named therein, whether or not then vested or exercisable, will be converted into a warrant to acquire, upon exercise, on substantially the same terms and conditions as were applicable to such warrant immediately prior to the effective time of the merger, the merger consideration. The warrants were considered when calculating the merger consideration, but were determined to be “de minimis” and therefore not included in these Statements.

Because Solutia’s 382 Rights Agreement has been amended by Solutia to provide that such agreement, and the rights issued thereunder, will terminate immediately prior to the effective time of the merger without any consideration for such rights being paid or payable to the holders thereof, no value was attributed to such rights in these Statements.

The estimated value of the merger consideration reflected in these Statements does not purport to represent the actual value of the total merger consideration that will be received by Solutia’s stockholders and other equity holders when the merger is completed. In accordance with GAAP, the fair value of equity securities issued as part of the merger consideration will be measured on the closing date of the merger at the then-current market price. This requirement will likely result in a per share value component different from the $50.00 assumed in these Statements and that difference may be material. For example, an increase or decrease by 10% in the price of Eastman common stock on the closing date of the merger from the price of Eastman common stock assumed in these Statements would increase or decrease the value of the merger consideration by approximately $75 million, which would be reflected in these Statements as an equivalent increase or decrease to goodwill.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The allocation of the preliminary purchase price to the fair values of assets to be acquired and liabilities to be assumed in the merger includes unaudited pro forma adjustments to reflect the expected fair values of Solutia’s assets and liabilities at the completion of the merger. The allocation of the preliminary purchase price is as follows (in millions):

 

Current assets

   $ 923   

Properties

     1,098   

Goodwill

     2,028   

Identifiable intangible assets

     1,815   

Other noncurrent assets

     585   
  

 

 

 

Total assets

   $ 6,449   

Current liabilities

     (396

Long-term borrowings

     (1,443

Other liabilities and noncontrolling interest

     (1,152
  

 

 

 

Total liabilities

     (2,991
  

 

 

 

Estimated purchase price

   $ 3,458   
  

 

 

 

The preliminary purchase price allocation was based on reviews of publicly disclosed allocations for other acquisitions in the chemical industry, Eastman’s historical experience, other available public information and Eastman’s financial due diligence review of Solutia’s business. The analysis was performed at an aggregate level and was based on estimates that are reflective of market participant assumptions including the amount, timing, and realization of future cash flows. Eastman utilized the income, market, or cost approach (or a combination thereof) for the preliminary valuation of assets, as appropriate, and utilized valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to Eastman in the principal or most advantageous market for the asset. Eastman management estimated the fair market value of fixed-rate debt based on observable market prices. For all other liabilities, the carrying value was determined to be a reasonable approximation of fair value based on information available to Eastman management.

With respect to properties to be acquired in the merger, Solutia has a number of manufacturing and distribution sites and related facilities, owns land and leases sites that include leasehold improvements, and owns machinery and equipment for use in its manufacturing operations. Eastman management believes that it is probable that the fair value of the property, plant and equipment differs from that on Solutia’s March 31, 2012 consolidated statement of financial position. In this assessment, Eastman management considered Eastman’s experience in recent acquisitions as well as other acquisitions in the chemical industry. Eastman management estimated the fair value adjustment of approximately 15% above current book value considering the valuation of such assets at fair value upon Solutia’s emergence from bankruptcy in 2008, the length of time since Solutia’s bankruptcy, and Solutia’s depreciation policies and practices.

With respect to the intangible assets to be acquired in the merger, Solutia owns the rights to a number of trade names and trademarks that are both business-to-business and business-to-consumer in nature, including Saflex®, Llumar®, and Skydrol®. Certain of these trade names and trademarks are associated with products that Eastman management believes have a leading market share in each of their respective categories. Solutia also owns significant technology related to many of its products protected by a number of existing patents, pending patents, and trade secrets. This intellectual property is of significant importance to Solutia’s operations and continued success. In addition to these intangible assets, Solutia has a number of valuable customer relationships in industries such as automotive tires and aviation, many of which were developed over a number of years of providing consistent quality products and services.

 

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With respect to goodwill expected to be recognized in the merger, Eastman management believes that the predominant portion of the goodwill expected to result from the merger relates to Solutia as a going concern and the fair value of expected synergies from combining the Eastman and Solutia businesses. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of Solutia than if those assets and businesses were to be acquired separately. The synergies from the combination of Eastman and Solutia are expected to be in the form of both increased revenues and decreased costs. Revenue synergies are expected to arise from Eastman acquiring access to complementary and adjacent key end-use markets, including automotive and architectural, and the potential for Eastman to increase its revenues and earnings in the Asia Pacific region. Cost synergies are expected to arise from reduction of corporate costs, raw material cost and procurement savings, and manufacturing and supply chain processes efficiency improvements and cost reductions across a larger business. Other relevant elements of goodwill are expected to include work force and technology and customers expected post-merger. The accompanying Statements do not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies, or any revenue, tax, or other synergies expected to result from the merger.

With respect to probable loss contingencies considered in the preparation of the preliminary purchase price allocation, based on the information available to Eastman at the time of preparation of the Statements, Eastman management concluded that the fair value of probable loss contingencies, including those related to legal and environmental matters, is not expected to be significantly different from the loss contingencies recognized on Solutia’s historical statement of financial position. While estimation of fair value would require significant knowledge of complex legal matters and strategies, which cannot occur prior to the closing date of the merger, nothing came to Eastman’s attention during its legal, business, or financial due diligence review of Solutia that indicated to Eastman a material difference between Solutia’s estimate of the probable loss for contingencies and estimates Eastman might make. Accordingly, Solutia’s estimate of probable losses for contingencies, prepared as prescribed under GAAP and with full and unrestricted access to all relevant information, was used in preparing the preliminary purchase price allocation without adjustment.

Eastman has made preliminary allocation estimates based on limited access to information and will not have sufficient information to make final allocations until after completion of the merger. The final determination of the purchase price allocation is anticipated to be completed as soon as practicable after completion of the merger. Eastman anticipates that the valuations of the acquired assets and liabilities will include, but not be limited to, inventory, fixed assets, customer relationships, technology know how, trade names and other potential intangible assets. The valuations will consist of physical appraisals, discounted cash flow analyses, or other appropriate valuation techniques to determine the fair value of the assets acquired and liabilities assumed.

The final merger consideration, and amounts allocated to assets acquired and liabilities assumed in the merger could differ materially from the preliminary amounts presented in these Statements. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the merger from those preliminary valuations presented in these Statements would result in a dollar-for-dollar corresponding increase in the amount of goodwill that will result from the merger. In addition, if the value of the acquired assets is higher than the preliminary indication, it may result in higher amortization and depreciation expense than is presented in these Statements. See Note 4(a) for the effects of changes in estimated fair value of properties and amortizable intangible assets to be acquired in the merger on the calculation of pro forma depreciation and amortization expense.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

NOTE 4. ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma adjustments included in the Statements are as follows:

Adjustments to Unaudited Pro Forma Condensed Combined Statements of Earnings

(a) Depreciation and amortization

The adjustment to depreciation and amortization expense recorded in cost of sales and selling, general and administrative expenses is a result of the fair market value adjustments of $145 million and $713 million and estimated remaining useful lives of 12 years and 20 years for depreciable properties and amortizable intangible assets to be acquired, respectively. See Note 4(m) for the detail of the identifiable intangible assets expected to be acquired in the merger and the preliminary purchase price allocation applicable thereto.

The preliminary estimated useful lives and fair value adjustments of the Solutia assets to be acquired in the merger were determined in accordance with the procedures described in Note 3 hereof. With other assumptions held constant, a 10% increase in the fair value adjustment for properties and amortizable intangible assets as calculated would increase annual pro forma depreciation expense by approximately $1 million and amortization expense by $3 million, respectively. With other assumptions held constant, a decrease of one year in the estimated remaining weighted average useful lives of properties and amortizable intangible assets would increase annual pro forma depreciation expense by $1 million and amortization expense by $2 million, respectively.

The pro forma depreciation and amortization expense adjustments have been allocated to cost of sales and selling, general, and administrative expenses, respectively, as follows (in millions):

 

     Three Months Ended March 31, 2012  
     Cost of Sales      Selling, General, and
Administrative
Expenses
     Total  

Pro forma depreciation adjustment

   $ 3       $ —         $ 3   

Pro forma amortization adjustment

     2         6         8   
  

 

 

    

 

 

    

 

 

 

Total adjustment

   $ 5       $ 6       $ 11   
  

 

 

    

 

 

    

 

 

 

 

     Year Ended December 31, 2011  
     Cost of Sales      Selling, General, and
Administrative
Expenses
     Total  

Pro forma depreciation adjustment

   $ 11       $ 1       $ 12   

Pro forma amortization adjustment

     10         25         35   
  

 

 

    

 

 

    

 

 

 

Total adjustment

   $ 21       $ 26       $ 47   
  

 

 

    

 

 

    

 

 

 

 

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(b) Transaction related expenses

Transaction related expenses recognized by Eastman and Solutia during first quarter 2012 and their related tax effects have been eliminated from the Pro Forma Income Statement, as these items are directly attributable to the merger and will not have an ongoing impact. No material transaction costs were expensed or accrued by either Eastman or Solutia in their actual 2011 historical financial statements. The expenses historically recognized by Eastman and Solutia and their respective Pro Forma Income Statement line items are as follows (in millions):

 

     Three Months Ended March 31, 2012  
       Eastman          Solutia          Total    

Selling, general, and administrative expenses

   $ 9       $ 11       $ 20   

Other charges (income), net

     5         —           5   
  

 

 

    

 

 

    

 

 

 

Total expenses

     14         11         25   

Less: income tax benefit

     1         —           1   
  

 

 

    

 

 

    

 

 

 

Net earnings impact

   $ 13       $ 11       $ 24   
  

 

 

    

 

 

    

 

 

 

(c) Net interest expense

The unaudited pro forma adjustment to net interest expense is calculated as follows (in millions):

 

     Three Months Ended
March 31, 2012
    Year Ended
December 31, 2011
 

Reduction in Solutia’s total interest expense

   $ (25   $ (105

Interest expense from expected additional indebtedness

     26        105   

Reduction in interest income

     1        3   
  

 

 

   

 

 

 

Total adjustment

   $ 2      $ 3   
  

 

 

   

 

 

 

The unaudited pro forma adjustment of $2 million for the three months ended March 31, 2012 reflects a reduction in Solutia’s total interest expense of $25 million as a result of the expected refinancing of Solutia’s outstanding debt in connection with the completion of the merger. Additional pro forma interest expense of $26 million assumes the expected incurrence by Eastman of an additional $3,500 million of indebtedness in connection with the merger with a weighted average interest rate of 3.0%, as described below, and also includes amortization of $1 million of new financing costs of $18 million. The unaudited pro forma adjustment of $3 million for the year ended December 31, 2011 reflects a reduction in Solutia’s total interest expense of $105 million as a result of the expected refinancing of Solutia’s outstanding debt in connection with the completion of the merger and additional pro forma interest expense of $105 million related to the expected incurrence by Eastman of additional debt discussed above, including amortization of $3 million of new financing costs. The reduction in interest income for both periods, contributing to higher net interest expense, is due to lower average cash balances as a result of the expected use of cash on hand to pay a portion of the cash portion of the merger consideration and transaction-related costs.

Eastman has entered into certain definitive agreements providing for this financing, including the Term Loan Agreement and the Bridge Loan Agreement as discussed under the heading “The Merger—Financing for the Merger” beginning on page 71. These Statements have assumed that Eastman will complete an offering of debt securities based on current market conditions and, as a result, will not borrow any amounts under the Bridge Loan Agreement. See Note 4(p) for additional detail concerning estimated long-term debt. Unaudited pro forma interest expense includes estimates for variable rate interest costs as well as the amortization of financing costs and fees.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The weighted average interest rate of 3.0% was calculated based upon the expected composition and interest rates of this additional indebtedness as follows (dollars in millions):

 

     Amount      Index      Expected
Interest Rate
 

Term Loan

   $ 1,200         1-month LIBOR         1.75

5 Year Notes

     1,000         5-year Treasury         2.70

10 Year Notes

     1,000         10-year Treasury         4.00

30 Year Notes

     300         30-year Treasury         5.30
  

 

 

    

 

 

    

 

 

 
   $ 3,500         
  

 

 

       

A 0.125% change in the interest rate on expected borrowings would change annual pro forma interest expense by approximately $4 million. In addition, if Eastman does not obtain financing on the terms as anticipated in these Statements and borrows under the Bridge Loan Agreement, it would be subject to interest expense and costs different from those assumed in these Statements. Specifically, Eastman expects that borrowings under the Bridge Loan Agreement would be at an interest rate of 1.75% per annum. Any such borrowings under the Bridge Loan Agreement, if made, would be classified as a component of current liabilities.

(d) Income tax expense

The unaudited pro forma adjustment to income tax expense is calculated as follows (in millions):

 

     Three Months Ended
March 31, 2012
    Year Ended
December 31, 2011
 

Benefit due to additional depreciation and amortization

   $ (3   $ (13

Benefit due to additional interest expense

     (1     (1

Additional tax due to elimination of early debt extinguishment costs

     —          1   

Additional tax due to elimination of historically recognized transaction related costs

     1        —     

Increase to eliminate net benefits from changes in valuation allowances

     12        49   
  

 

 

   

 

 

 

Total adjustment

   $ 9      $ 36   
  

 

 

   

 

 

 

To calculate the pro forma adjustment to income tax expense due to additional depreciation and amortization for the three months ended March 31, 2012, Solutia’s first quarter 2012 blended global statutory tax rate of 29% has been applied to the unaudited pro forma depreciation and amortization adjustment of $11 million, as these expenses are expected to be incurred both in and outside of the United States. This rate was derived based upon Solutia’s first quarter 2012 split of U.S. and foreign pre-tax earnings, with the U.S. pre-tax amount increased for Solutia’s historical interest expense, which resulted in a pre-tax income split of approximately 41% and 59%, respectively. Solutia’s first quarter 2012 blended federal and state statutory tax rate of 37% was applied to the adjusted U.S. pre-tax amount and its foreign statutory tax rate of approximately 23% was applied to the foreign pre-tax amount, resulting in a total blended rate of 29%.

To calculate the pro forma adjustment to income tax expense due to additional depreciation and amortization for the year ended December 31, 2011, Solutia’s 2011 blended global statutory tax rate of 27% has been applied to the unaudited pro forma depreciation and amortization adjustment of $47 million, as these expenses are expected to be incurred both in and outside of the United States. This rate was derived based upon Solutia’s 2011 split of U.S. and foreign pre-tax earnings, with the U.S. pre-tax amount increased for Solutia’s historical interest expense, which resulted in a pre-tax income split of approximately 55% and 45%, respectively. Solutia’s 2011 blended federal and state statutory tax rate of 37% was applied to the adjusted U.S. pre-tax amount and its foreign statutory tax rate of approximately 16% was applied to the foreign pre-tax amount, resulting in a total blended rate of 27%.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

To calculate the pro forma adjustment to income tax expense due to additional interest expense, Solutia’s first quarter 2012 and full year 2011 combined U.S. federal and state statutory tax rate of 37% has been applied to the pro forma interest expense adjustment of $2 million and $3 million, respectively, because the additional interest expense resulting from the merger is expected to be incurred in the United States. This rate was also applied to the $4 million elimination of 2011 early debt extinguishment costs to determine the related unaudited pro forma tax expense adjustment.

Transaction related expenses recognized by Eastman and Solutia during first quarter 2012 and their related tax effects have been eliminated from the Pro Forma Income Statement for the three months ended March 31, 2012, as these items are directly attributable to the merger and will not have an ongoing impact. The pro forma adjustment to income tax expense for first quarter 2012 reflects the elimination of a $1 million tax benefit from previously recognized transaction related expenses. See Note 4(b).

In addition, net benefits of $12 million and $49 million to the first quarter 2012 and full year 2011 income tax provision reported by Solutia for changes in valuation allowances have been eliminated, as such benefits will not be available to Eastman after the completion of the merger based upon the assumptions under which these unaudited pro forma adjustments have been prepared. See Note 4(j) for more information about the release of Solutia’s valuation reserve against its deferred tax assets related to net operating losses and foreign tax credit carryforwards.

(e) Shares outstanding

The unaudited pro forma adjustment to shares outstanding used in the calculation of basic and diluted earnings per share is calculated as follows (in millions of shares):

 

     Three Months Ended
March 31, 2012
    Year Ended
December 31, 2011
 
       Basic         Diluted         Basic         Diluted    

Elimination of all outstanding shares of Solutia common stock

     (121.2     (122.6     (119.8     (121.3

Issuance of Eastman common stock

     14.7        14.7        14.7        14.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustment

     (106.5     (107.9     (105.1     (106.6
  

 

 

   

 

 

   

 

 

   

 

 

 

As all outstanding shares of Solutia common stock will be eliminated in the merger, the unaudited pro forma weighted average number of basic shares outstanding is calculated by adding Eastman’s weighted average number of basic shares outstanding for the period and the number of shares of Eastman common stock expected to be issued to Solutia stockholders in the merger. Similarly, the unaudited pro forma weighted average number of diluted shares outstanding is calculated by adding Eastman’s weighted average number of diluted shares outstanding for the period and the number of shares of Eastman common stock expected to be issued in the merger. As each outstanding option to acquire shares of Solutia common stock issued under any of the Solutia Equity Plans, whether or not then vested or exercisable, will be cancelled and terminated at the effective time of the merger in exchange for the right to receive cash, such options were excluded from this calculation. In addition, approximately 0.5 million shares issuable under Solutia warrants to be converted into warrants to purchase Eastman common stock as provided for in the merger agreement were excluded as antidilutive to earnings per share. See Note 1 for more information about treatment of share-based compensation and warrants under the provisions of the merger agreement.

(f) Early debt extinguishment costs

Existing Solutia debt is expected to be refinanced in connection with completion of the merger. As such, related early debt extinguishment costs of $4 million for the year ended December 31, 2011 have been eliminated.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

There were no material early debt extinguishment costs for Solutia during first quarter 2012. See Note 4(p) for additional detail concerning estimated long-term debt.

In addition to the foregoing adjustments to the Pro Forma Income Statement, the following remaining expected estimated costs directly attributable to the merger, which are in addition to those discussed in Note 4(b) above, represent nonrecurring items that are excluded from Earnings from continuing operations before nonrecurring items (in millions):

 

     Estimated
Bridge
Loan Fees
    Estimated
Advisory
Costs
    Estimated
Total
 

Gross expense

   $ (12   $ (40   $ (52

Tax benefit (1)

     4        5        9   
  

 

 

   

 

 

   

 

 

 

Net adjustment

   $ (8   $ (35   $ (43
  

 

 

   

 

 

   

 

 

 
(1) Estimated tax benefit from tax deductible portion of costs. See Note 4(o) for additional detail concerning tax effects of one-time costs.

Adjustments to Unaudited Pro Forma Condensed Combined Statement of Financial Position

(g) Cash and short-term time deposits

The unaudited pro forma adjustment represents a net decrease in cash on hand of $747 million and short-term time deposits of $80 million. The unaudited pro forma adjustment to cash is calculated as follows (in millions):

 

Proceeds from additional indebtedness

   $ 3,500   

Cash portion of merger consideration

     (2,722

Repayment of Solutia debt at fair value

     (1,443

Financing fees

     (19

Advisory costs

     (45

Costs to settle Solutia’s interest rate hedging contracts

     (18
  

 

 

 

Total adjustment

     (747

Liquidation of short-term time deposits

     80   
  

 

 

 

Total adjustment to cash and cash equivalents

   $ (667
  

 

 

 

Components of the adjustment include an increase in cash resulting from new debt expected to be incurred in connection with the merger and a decrease in cash resulting from payment of the cash component of the merger consideration, the expected refinancing of existing Solutia debt at fair market value, and estimated transaction related costs of $83 million, including settlement of Solutia’s interest rate hedging net liability, financing fees, and advisory costs. The cash adjustment for financing fees reflects total estimated financing fees of $35 million less amounts paid by Eastman during first quarter 2012 of $16 million. The cash adjustment for advisory costs reflects total estimated costs of $60 million, less amounts paid during first quarter 2012 by Eastman and Solutia of $6 million and $9 million, respectively.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Due to change-in-control provisions of certain existing interest rate hedging contracts of Solutia, such contracts are expected to be settled shortly after the completion of the merger. Net cash